Thursday, April 28, 2011

Strategic Planning Analogy #390: Hide the Scores

Imagine you are an athlete and they changed the rules of the game you play. The first change is that the place where points are scored cannot be seen by the players. It is obscured from their view. For example, if you play hockey or soccer, you cannot see anything that happens near the goal area. Once the ball or puck enters the goal area, you cannot see where it went. Similarly, if you play basketball, you cannot see anything that happens near the hoop. Once you shoot the ball, you cannot see if it went into the hoop or not. Scoring becomes a mystery.

The second rule change would be that the referees, who are the only ones who can see the scoring, have up to five years to determine if any scoring occurred.

As a result of these changes, the athletes would have no immediate feedback. They would have no idea if their actions were successful. Player statistics would be virtually non-existent. Worse yet, the players might have to wait up to five years to find out if they even won the game. With the way players switch teams today, they more than likely would have switched to a new team before they even know if they were successful on the prior team. And, of course, without up-to-date statistics, it would be difficult for the players to negotiate salaries. No, I don’t think the athletes would like these rule changes.

The fans wouldn’t like the situation, either. It’s hard to get excited about going to watch a game where you don’t know the score and won’t know the results until five years after watching it.

These rules would be hated so much that I can assure you that they would never be enacted.

Unfortunately, as bad as these rules are, they are very similar to the rules executives face every day in the game of business. For many of the tough decisions that CEOs and strategists make, there is no immediate feedback. They cannot see if it was successful right away. It can take up to five years before one knows whether that tough decision was made correctly or not.

For example, Cisco’s decision to use the Flip camera as part of a push to diversify into consumer electronics initially looked very promising. The Flip camera was loved by the market when introduced and when purchased by Cisco in March 2009. Initial sales were very promising. It wasn’t until years later that the ultimate results of that diversification decision were in. The decision to diversify into consumer electronics was a complete failure for Cisco. They couldn’t even find a buyer for the Flip camera business and just shut it down two years after purchasing the business. And, of course, the decision to diversify was made well before making the purchase of Flip, making this around a three year feedback cycle.

And this three years was a relatively quick feedback (best case scenario). Consumer electronics tends to reward winners and losers much faster than most other industries. And most companies probably would have waited a couple of years longer than Cisco for even more feedback before pulling the plug.

Given that the average tenure for a CEO or strategist is less than 5 years, executives can move to a new company before knowing whether they were ultimately successful at the prior company. Trying to put together any kind of up-to-date statistics on CEO performance can be fairly meaningless, because it can take many years before the full impact of the really big decisions can be seen. That is why it is so difficult to determine what fair compensation for top executives should be.

Like the athletes in the story, CEOs tend to hate this condition of uncertainty. And like the fans, stock analysts and stock traders also hate this uncertainty. It’s hard to recommend or buy stocks when you won’t know the complete score for past actions for up to five years.

Yet, even though it may be hated, this is reality.

The principle here is that successful CEOs and strategists need to resist the temptation to act based solely on immediate feedback. Instead, they need to focus a significant part of their time pursuing long-term visions, even when it is difficult at the time to know how those decisions will turn out.

There is a tendency to try to avoid these uncertainty issues and try to make business rules more like sports rules. Compensation packages look for ways to immediately score a leader’s performance. Stock analysts find all sorts of near-term scoring to look at in order to rate a company. As a result, you get companies so focused on the next quarter’s performance that critical long-term decisions get pushed aside.

Decisions are made to increase near-term statistics rather than to win the long-term game.

HBS Study
I was reminded of this situation by a recent study reported by the Harvard Business School. The study was trying to correlate the day to day activities of a CEO with company performance. The scoring mechanism used by the study was productivity. What they found out was that:

1. The more hours a CEO was at work, the higher the productivity

2. If most of that CEO working time was focused internally on employees, productivity went up.

3. If most of that CEO working time was focused externally on customers or the marketplace, there was no impact on productivity.

Hence, one might conclude from this study that CEOs should spend a lot of time in the office dealing with employees.

Wrong Focus
However, I see a major problem with this conclusion. In particular, the scoring methodology is all wrong. We’re measuring productivity in this study, not long-term success.

Isn’t productivity more the responsibility of the COO (Chief Operations Officer), not the CEO? Naturally, if all you want is greater productivity, spend a lot of time pushing your employees. But there’s a big problem with this approach. You can end up having the most productive process for an obsolete solution.

Kodak spent a lot of time perfecting productivity on analog film and totally missed the transition to digital imaging. Blockbuster perfected productivity on moving DVDs through stores and missed out on winning the transition to receiving movies via direct mail and digital streaming.

Focusing on getting better and better at doing an old task gets you nowhere when that task is no longer needed. And trust me, all business models eventually become obsolete. That is why efficiency (doing things well) is not enough. You also need effectiveness (doing the right things).

That’s why CEOs and strategists should spend considerable time looking beyond the tasks of today. They need to look for where the company needs to be tomorrow. Time should be spent addressing issues like:

1) What needs to be added to the portfolio?
2) What needs to be deleted from the portfolio?
3) What will make our current business model obsolete?
4) What will be the next big thing to threaten our core?
5) Where are the gaps in our competencies when transitioning to the business model of the future?

These questions won’t get answered by spending all day in the office putting pressure on your employees. To answer these questions requires getting away from the daily grind and spending time alone in thought. It requires getting out into the field to talk to customers and see what is going on. It requires broadening your horizons. It requires putting up blinders around those near-term measures, so that you are not fixated on them all the time. It requires making bold moves, even though you may not know the outcome of those moves for a long time. It requires ignoring the results of that HBS research.

In other words, it requires resisting the temptation to focus only on an instant score like an athlete. Instead, it requires taking responsibility for those actions which only CEOs and strategists can answer—what do we need to transition to and how to we make that transition.

Successful CEOs and strategists need to break away from the temptation to fixate on near-term measurements and instead spend a considerable amount of their time making decisions about key factors where the results of those decisions may not be known for another five years. Otherwise, they may find themselves perfecting the obsolete.

Yes, CEOs cannot completely ignore the tyranny of the immediate—the fires which need to be put out right away. But one cannot ignore the long-term either. Most experts seem to feel that CEOs should spend about a third of their time on long-term issues. Yet most studies show that CEOs spend far, far less time than that on long-term issues. The only way to increase the time is to back away from such a strong focus on near-term scoring.

1 comment:

  1. Gerald Nanninga,

    I basically concur with your conclusion. We need to focus on short-term results as well as long-term possibilities. I resemble that to my eye-glasses: one lens is for short-sightedness; the other for long sightedness. The short one affects the long-term one and vise versa. If a company is weak on either then the risk high is the other dimension will be negatively affected. It is not the short-term or the long-term: it is both.