Thursday, May 26, 2011

Proof That Strategic Planning Works

It is hard enough to do great strategic planning work when everyone is committed to the idea. Trying to do it in a place where the idea of strategic planning is not well respected is virtually impossible. Yes, we’ve talked in the past about stealth strategy, a way to get people talking about strategy in place where the concept of “strategy” is not well accepted (look here, here, here, and here). But the best results come from strong commitment to the strategic process.

If you want proof, look to Caterpillar. There was a great article about Caterpillar in the 2011 edition of the Fortune 500 issue of Fortune magazine. Please read the article, which can be found by clicking here.

Caterpillar has been one of the best performing companies in the entire world over the past couple of years. This article explains why. The reason for their success can be explained in three words: great strategic planning.

In October of 2009, Caterpillar announced that CEO Jim Owens would retire in April of the following year and that he would be replaced by Doug Oberhelman. In those six months between being announced as the replacement and taking over as CEO, Oberhelmen spent virtually 100% of that time on strategy. He even enlisted 16 others to help him on this six month strategic journey. They dug deep and fully dissected the company until they had a clear picture of who they were and what worked.

According to Oberhelman, “We put everything on the table—good, bad, and ugly. We've gone into a lot of different businesses over the last 20 years. We said, ‘What really is our business model, and how do we want to make money?’”

This clarity allowed Caterpillar to know what to focus on, where to invest, and how to operate.

How many CEOs do you know who have dedicated 6 consecutive months to strategy? How many CEOs have a deep, deep understanding of their business model and which triggers are most critical to success? If you don’t do the preparation homework in advance like Caterpillar, then you will not have the foundation to allow you to act quickly as opportunities and events arise.

This is similar to an example in the late 1950s when Harry Cunningham found out he was going to be running the S.S. Kresge variety store chain in about a year. He spent nearly all of that time prior to taking over thinking about strategy. His conclusion was that Kresge needed to abandon its old variety store business model and invent an entirely new one—the discount department store model. As a result, he converted Kresge into Kmart, which became one of the most successful companies of his era.

Before jumping into action, take the time to gain a deep understanding. This provides two benefits—a knowledge of what actions to take, and the ability to act quickly when opportunities arise, since you already know which action do and don’t fit with success.

Back in 2005, the economy was pretty strong and Caterpillar was doing fairly well. Although things were going pretty well, Caterpillar thought this to be the perfect time to prepare for the absolute worst. They called this the “trough strategy”—what do you do if suddenly 80% of your sales go away?

Every division needed to create a strategic plan to maintain cash flow and protect the balance sheet under such a dire scenario.

Guess what? At the end of 2008, such a crisis scenario came to pass. Because the hard work of developing a trough strategy had already been done, Caterpillar could quickly execute the strategy, which allowed them to come out of the great recession with strong cash flow and a strong balance sheet.

How prepared is your company for various scenarios? If an unexpected scenario came to pass, how long would it take your company to react and adjust? How much valuable time would be wasted because you were not prepared?

Having a strategy for various scenarios is not of much use if you do not know when to use them. Therefore, Caterpillar searched for leading indicator triggers of change. They then monitored these leading indicators to make sure they had as much advance notice as necessary of impending change.

These leading indicators warned Caterpillar of the coming great recession as early as the fall of 2007. This early awareness made it easier to shift strategic gears when the crisis came a year later.

How aware is your company of impending change?

Having plans is one thing. Executing them is another. Not only did Caterpillar devote the necessary time and energy to implementing the trough strategy well during the recession, they also executed well on the post-recession strategy. Because of what Oberhelman learned in his six months of strategic preparedness, he knew exactly what needed to be done after the recession. Coming out of the recession, Caterpillar quickly made a number of key acquisitions which just made their strengths even stronger.

They acted quickly and aggressively because they had the confidence which comes from a deep understanding of what needs to be done to succeed under their business model.

How confident is your team about knowing the types of actions which will improve your strategic position?

If you want proof of the importance of Strategic Planning to corporate success, look to the example of Caterpillar. They are one of the most successful companies on the planet today because of their strong commitment to strategic planning. This commitment gave the company the understanding, preparation, awareness and execution necessary to produce this success. If you want a similar level of success, consider having a similar level of commitment to strategic planning.

Monday, May 23, 2011

Strategic Planning Analogy #394: Leaky Roof

As I look out my window at today’s rain, I am reminded of a house I used to live in. It had a leaky roof. Whenever it rained, there would be water dripping from the ceiling in the house near the front door.

While it was raining, there was not much I could do about fixing the leaky roof. I would tell myself that after the rain stopped and everything was dry, I would go and see about fixing the leak. Of course, by then I had forgotten about the leak. I would not be reminded of the leak again until the next time it rained (when once again it was too wet to fix it).

This went on for awhile until the leak caused a slight water stain on the ceiling. Now that I could see everyday, so it reminded me to finally get the leak fixed when everything was dry.

Businesses can be like that house. They may be based on business models which don’t work as well as they used to and money (or market share) is leaking out. If not taken care of, eventually that small leak will lead to a larger one and the entire business model will be totally destroyed.

At first, the leaks in the business model may only show up during crisis situations, when the business model is being stretched to its limits. During the crisis, you are so busy just trying to survive that you don’t have time to experiment with tweaking the business model. You tell yourself that you’ll re-evaluate the business model once things settle down.

Unfortunately, when better times return, the business model (though still broken) seems to be functioning reasonably well. Other, more immediate issues grab your attention and you forget about that defect in your business model. It isn’t until the next crisis comes that you are reminded again of the need to repair the business model (and again are too busy to address it).

And the longer you wait to repair the business model, the more broken the business model becomes. Eventually tweaking may no longer be enough. You may need to abandon the strategy altogether.

The principle here is that strategies are best modified when times are good. However, during the good times, there is little pressure to motivate us to want to change our strategy. After all, why try to fix something when it does not appear to be broken?

The problem is that while the business model may not “appear” to be broken during the good times, a serious flaw may still exist. Like that leaky roof I had, you may only see the leak when it rains, but that doesn’t mean that the structural defect goes away when the weather is dry. The cause of the leak still exists—even when the weather is dry. And the structural defect may be getting worse during the dry times due to the shifting of the house as it settles over time. Then, when the next rains come the leak is a lot worse than before. The whole house might collapse.

Why Modify Strategies When Times Are Good
There are several reasons why strategies are best modified during the good times:

1) This is when you are most loved and trusted by your customers. This love and trust will make them more accepting of the change. By contrast, if you wait until your customers are already upset with you, then they will be more suspicious of your motives. And if they were so upset that they had already switched to a competitor, they may not notice or care that you improved things.

2) This is when you have the most resources available to address the problem. During the good times, there tends to be a greater luxury of money, time and manpower. You can apply these resources to analyzing your strategy, developing alternatives, and implementing change. Conversely, if you wait until times turn bad, you will be under extreme pressure to act quickly with more limited resources. The analysis may not be as thorough and you may not have enough resources to adequately implement the change.

3) This is when you have better strategic options. Just as it is easier to fix a leaky roof when the leak is small, it is easier to fix a broken strategy when the break is small. All you may need to do is create a one-year strategic initiative to shore up that small weakness. Then you are back on track to move forward in strength. When in a position of strength, there can be many strategic options for leveraging that strength. You can leverage that strength into new markets, new customer segments, new products, and so on. If the problem deteriorates until you fall into a position of weakness, there is little one can do. “Survival” is not much of a strategic alternative, but it may be all that’s left at that point.

4) This is when clearer heads prevail. During a time of crisis, the pressure can be quite intense. Panic can set it. Rash moves may be taken. By contrast, during the good times one can take the time to thoroughly think through all the alternatives. Thoughtful discussions can occur. Differing points of view can be tolerated and addressed. Unintended consequences can be evaluated. A better outcome can occur, one which encompasses a broader perspective and longer time frame.

5) This is when you have time to create meaningful change. Meaningful, game-changing change takes time. It takes time for R&D to pay off. It takes time to create a new infrastructure, a wholly different approach to business. If things are already broken, then one loses that luxury of time. Rather than reinventing the rules of the industry in your favor, all you have time for is incremental improvement. This is like quickly putting a small patch on the leaky roof during the storm rather than really repairing it for good when times are dry. That patch is only a temporary fix at best. It doesn’t make the problem go away. It only delays the inevitable.

So How Do We Get Companies Motivated to Change While Times Are Good?
If good times are the best times for strategic change, how can we convince others to change when times are good? How do we get beyond the attitude of “Don’t fix what isn’t broken”?

One way is to convince them that things really are broken, even if you cannot see it now. You need something like that water stain on my ceiling, which reminded me that even when nothing was leaking, I still had a roof problem. One way is by doing tracking studies which watch leading indicators.

For example, I worked with a retailer whose sales trend looked relatively stable. However, my tracking studies showed that for more than three years, the retailer had been losing store traffic and that the remaining customers were buying fewer items per visit. These are leading indicators of bad times. The only reason why the sales trend didn’t look worse right now was because the company had been hiding the unit declines by raising prices. A shrinking customer base and rising prices is not typically a recipe for good times ahead. Every chance I had, I would show off these charts to any executive who would listen. I wanted them to know that the business model was broken and we needed to fix it NOW, before more customers defected. It was like that stain on my ceiling, a constant reminder that the business model isn’t as strong as you think. There are severe, underlying issues which must be addressed right away.

The second approach is to get the company excited about a better future. Even if the company appears comfortable with the status quo, you may be able to excite them to change if you can paint a picture of an even better future when one changes. I used this approach at another retailer to convince them that they could do much better than the status quo if they changed their strategy. The executives started salivating when they saw how much greater things could be, so they changed the company strategy in order to reach that greater vision.

Just because right now things on the surface may appear okay does not automatically mean that everything is fine. The business model may still be seriously broken. You just can’t see the beak now because it is covered up by good times. And once the good times go away, it may be too late to fix what is broken. Therefore, the best time to adjust a strategy is when the times are still good. To get companies motivated to change during the good times, it helps to either: a) constantly point out the underlying breaks beneath the surface and/or b) show an even brighter future if change is enacted now.

Many times, I have seen companies enter bad times and then watch the executives come up with all kinds of excuses as for why they couldn’t turn the company around. And some of the excuses have merit. After all, if you wait until the house is almost completely broken, it is true that it may be almost impossible to repair. However, smart executives don’t wait until the house is completely broken before starting home improvements. They successfully navigate a path to a brighter future because they start the journey while still in a position of strength.

Wednesday, May 18, 2011

Strategic Planning Analogy #393: Laziness is Not Necessarily a Bad Thing

There are a lot of old fables and adages about the benefits of being active/industrious versus the pitfalls of being lazy. Aesop talks about this many times in his fables. And in the Bible, wise King Solomon said, “Lazy hands make a man poor, but diligent hands bring wealth.” (Proverbs 10:4)

However, consider this. We tend to praise the industriousness of the worker bee. It is held up as something to be admired. Yet, the average worker bee lives only about one to four months. Similarly, the Mayfly is a very busy insect. Yet it only lives one day as an adult. It is a very busy no-nonsense day, full of a lot of flying around and mating, but it lasts only one day—then it dies.

By contrast, the three toed tree sloth is considered to be a rather slow and lazy animal. Yet it lives for about 30 to 40 years. The giant tortoise is also known for being rather slow and lazy. Yet it has lived up to 177 years in captivity.

In fact, the general rule in the animal kingdom is that the faster you live, the shorter you live. You can see this with the rate of metabolism in mammals. Generally, the faster the metabolism, the shorter the life. That is why squirrel-like rodents live about two to three times longer than mouse-like rodents. The squirrel-like rodents have a slower metabolism.

So maybe laziness isn’t such a bad thing after all.

Many strategies are built around trying to go after the heavy user segment. Heavy users tend to be what I call “active” customers. They love (or are highly interested in) the category. It is important to them. They love to talk about it and think about it. They may consider themselves experts in the category. And most importantly, they tend to buy a lot of the products in the category, moreso than anyone else. Isn’t it a good thing to have customers who enjoy buying large amounts of what you have to sell?

Not necessarily. There are many reasons why capturing customers who are active in the marketplace buying a lot of product may be a terrible thing for a business’ profitability. Because they are really active in the marketplace and are highly interested in the product, active customers pay more attention to what is going on.

As a result, these active, involved customers may be giving us a lot of business because they have figured out how to beat our system. They know how to only buy our loss leaders. They only buy when on deep discount (and then buy a lot). In other words, they may provide us with a lot of sales volume, but volume without any margin.

Second, high active customers can also often be very demanding customers. They tend to be more involved in the negotiations. They may ask for additional services, special orders, return privileges, free delivery, volume discounts, customization, etc. All of the added costs to meet these demands can wipe out any profitability.

Third, because they are so demanding of discounts and added services, they may be quick to leave us when a competitor provides even more discounts and services. Their active involvement makes them more aware of competing offers and more prone to switch. Because of the large volumes they purchase, small differential benefits add up quickly. Therefore, they actively seek out better alternatives. This starts a downward spiral where we keep making our offer increasingly less profitable in an attempt to keep this customer “loyal.”

This is starting to sound like the animal kingdom. Just as active animals tend to live shorter lives, highly active, heavy user customers may have shorter loyalty. Their lives as a customer dedicated to us may be very short indeed if they find another who offers them more.

Compare that to the lazy customer. They may not consume as much as the active shopper. They may be a lot less interested in what we are selling. Yet, at the same time, they tend to be far less demanding and far less likely to seek out alternatives. Their life as a customer of ours may last a lot longer (and be a lot more profitable).

Therefore, instead of trying to create loyalty among the active heavy users, we may want to consider a strategy aimed at the lazy customer. The top line sales might be lower, but the bottom line return could be very high. And the lifetime value can be very large, because they stick around longer (a longer life).

The principle here is not to confuse activity with profitability. Lots of sales from heavy users may just be increasing our losses faster. In fact, lazy customers may be preferable to active, high volume customers. Customers who are slow to move are slow to move away. And because they demand less, they are usually more profitable to serve.

HBS Article
I was reminded of this when reading an article published on the Harvard Business School Working Knowledge web site. The article, published May 16, 2011, looked at loyalty among bank customers. What they learned was that:

1) Banks focusing on offering high levels of service to high-end customers were most vulnerable to losing their clients to competition.

2) Banks rated lower on service were pretty much immune when new challengers entered the marketplace (especially new challengers entering on the high service side).

The Harvard researchers appeared a bit shocked by the results. They said, “Customers you might expect to be the most 'stuck' are the ones who are disproportionately vulnerable to service competition.”

I was not shocked at all. High-end banking customers tend to be “active” customers. Banking is an important part of their life and they are highly interested in it. They like getting involved in the banking process. Because they tend to be highly demanding, they are drawn to those banks specializing in high levels of service catered to them.

Of course, because they are active, high end banking customers will also be most aware of what is going on in the competitive space. And because this is important to them and they want the best, they will be among the first to see the benefits of switching when they find something better.

By contrast, low service banks tend to cater to more of the “lazy” customer. Banking is not their passion—just a necessary evil. They want to think about it as little as possible. They don’t want to be coddled—they want just get their banking business done and over with, with the least amount of hassle.

As a result, they are not actively looking for a better banking experience. Switching is a lot of work and a hassle to them—it makes them have to think more about their banking. As a result, they tend to stay put and not leave the comforts of the old routine.

Other Examples
This point also seems to be behind recent moves at the Kroger supermarket company. Kroger is quietly phasing out their practice of double-couponing—where Kroger would discount the retail price by double the value of the manufacturer’s coupon (at Kroger’s expense). Double-couponing appeals most to the active grocery shopper. These are the people who enjoy the challenge of trying to “Beat the System” and win at the game of getting the absolute lowest prices on their food. Of course, when these active shoppers “win,” the retailer typically loses, since there is little to no profit margin in the transaction.

All the blogs dedicated to active grocery shoppers are angry at Kroger for doing this. But Kroger’s job is not to help active customers beat the system. It is to make money.

Kroger’s new emphasis is on emphasizing having the shortest check-out lines. They are claiming leadership in helping you get your shopping trip done faster than anywhere else. This is an appeal to the lazy shopper. The lazy shopper doesn’t see grocery shopping as a game where you try to beat the system. No, to them it is an awful chore—to be minimized as much as possible. Nothing would make them happier than to get out faster—so they will love the shorter checkouts.

And since lazy shoppers are less into cutting the coupons and reading the ads and all that other active-shopping stuff, their purchases tend to have higher profit margins. And they are less likely to switch.

There are lots of business opportunities in the lazy shopper space. Just find people who view a category as a necessary evil and help them avoid having to deal with it. For example, there are people who hate shopping and are willing to pay lots of money to have someone else be their personal shopper. There are people who hate having anything to do with paying taxes and will gladly turn it all over (at a healthy profit) to someone else. There are people who hate having anything to do with maintaining their house (either inside or outside). It just isn’t important to them. They will outsource it to others without blinking an eye.

In all of these cases, the lazy customers are far less demanding than those highly interested in the topic, which usually makes the lazy customer more profitable to serve. And they are less likely to leave, because leaving is too much work.

This also works in the industrial space. A manufacturer may be highly interested in the procurement of a few key components in the process, but much less interested in some of the minor components. This could cause the manufacturer to get actively involved on procuring the key components (aggressively trying to extract they lowest possible price), but gladly outsource procurement of the minor components to someone who will take all of the hassle off their hands. Hence, a manufacturing supplier might make more money serving the minor needs than the major needs.

Heavy users are not necessarily your best customers. Heavy users tend to be active customers in that segment. Their activity tends to make them more demanding and more likely to leave. This can make them less profitable, in spite of their large volume. By contrast, the lazy customer may buy less, but be more profitable to serve and less likely to leave. So when developing your strategy, consider the appeal to the lazy customer.

Rather than admiring the busy worker bee, maybe we should be admiring the lazy tree sloth.

Friday, May 13, 2011

Strategic Planning Analogy #392: Sunday Best, Part 2

In our last blog, we talked about some of the problems which occur when companies label a function as either an “everyday task” or a “strategic task.” By labeling a particular task as either one or the other we end up sub-optimizing because there tends to be both a strategic and everyday aspect to everything we do. If strategic thinking doesn’t impact the everyday activities of what a company does (and how it does it), then the strategy is rather irrelevant. Conversely, if we cannot translate great strategic, transformational thinking into a future everyday activity, then the great ideas provide no financial benefit.

By labeling an area as only being one or the other (strategic or everyday), we make the everyday less strategic and the strategic less relevant to the everyday. This is the opposite of what is needed. It is only when we see tasks as requiring both a strategic as well as an everyday approach that we get the best of both worlds.

In the last blog, we focused on the problems which occur when a task is labeled as “strategic,” where we used the example of growth. In this blog, we will look at the problems which occur when we label a task as “everyday.” We will use the example of cost reduction.

Controlling costs is a key part of nearly every business. When annual budgets and compensation measures are put into place, it is very common to see some emphasis placed on lowering costs versus the prior year. It is so common, in fact, that cost control is seen as being a part of “everyday” business. It no longer feels like a separate strategic activity. It is just a part of the daily grind.

However, by labeling cost reduction as an “everyday” task, we are severely limiting how much we can really reduce.

Efficiency vs. Effectiveness
The big problem with placing cost reductions in the “everyday” category is that the process becomes siloed. Every department acts independently on their own span of control. As part of a particular department’s everyday work, the task of cutting department costs becomes nobody else’s work but that particular department’s.

For example, the annual goal may be to cut 10% of your controllable costs. With this goal, you are not responsible for cutting the costs outside your control, since that is not a part of your everyday work.

At first, this seems logical…only hold people responsible for that which they can control. And because they can control it, and because action in this area can directly impact their bonus, they are both motivated and capable (empowered) to make the cost reductions a reality. What more could you ask for?

Actually, you could ask for a lot more. The problem with this approach is that the task of cost reduction becomes little more than doing basically what you have always done, only a little more efficiently. In other words, the idea is to keep doing your same old everyday work, but with a little less waste and a little more productivity. This approach may make you a little more efficient. However, it may not make your company any more effective. And you may be missing out on the really big, game-changing cost reduction opportunities.

Radical improvements in costs typically require radical changes in the ways things are done. These radical changes usually transcend any particular department. Total reengineering may be necessary—requiring significant cross-departmental reorganization. In the end, entire departments and entire tasks might no longer exist. The product mix may be altered. What becomes the new “everyday” may look nothing at all like the former “everyday.”

These types of changes will never occur in an environment where each department separately works on their own cost problems as part of their everyday activities. Instead, these solutions only occur when cost control is approached from a more global, strategic basis.

I recently witnessed this situation first hand. This company changed its approach to cost-cutting, to take a broader, more strategic approach. A cross-functional team was put in place that was not bounded by the way things used to be done. Nothing was sacred—any everyday task could be radically reinvented. As a result, departments were eliminated, tasks changed, and big reductions in costs were produced—more than what would have otherwise occurred.

Selfish vs. Selfless
And then there is the problem of the multiple hats. Sometimes we need to wear our “department hat” and look out for the best interests of our department. Other times, we need to wear our “corporate hat” and look out for the best interests of the entire company. If cost cutting is labeled as being just an “everyday” activity, then we will only be wearing our department hat when approaching cost reductions.

This can lead to less than optimal results. For example, one way to lower a department’s costs is by pushing those costs onto another department. This may make your department look better, but it doesn’t help the overall company. Another way to lower costs is by reducing the service you provide. But if your lowered service hurts the effectiveness of other departments, then you really haven’t improved the company.

And of course, it is difficult in such an environment for someone to volunteer that his or her area gets eliminated or outsourced for the sake of the whole. Who wants to volunteer to lose their job? Who wants to volunteer to weaken their base of power? Unless there are shared risks across the entire company, nobody will want to take any risk which jeopardizes their individual area.

As a result, an everyday-only approach to problems tends to only nibble at the situation. If you want to make more monumental change, you need to add a strategic component. This is something which needs to transcend what any individual department can accomplish on its own.

When we label particular activities as being solely either “everyday” or “strategic,” we are short-changing our ability to succeed. All activities have both a strategic and an everyday aspect to them. To ignore one of these aspects is to miss many of the benefits available to us. For example, when the strategic aspect is ignored, we miss all of the benefits which lie outside the complete control of particular department. The cross-functional, non-traditional options are missed. One ends up with small, incremental improvements instead of large, transformational change.

Just because all tasks require both an everyday and a strategic approach, this does not mean that the approaches should be intermingled and done together. Each approach is very different and requires a different type of mindset. Therefore, it is usually more productive to rotate one’s focus—to take a strategic approach for awhile and then switch to an everyday approach for awhile.

Wednesday, May 11, 2011

Strategic Planning Analogy #392: Sunday Best, Part 1

Back when I was a child, I had two types of clothes in my closet. There were the “Sunday Best” clothes, which were only worn to church on Sunday, and the “Everyday” clothes, which were worn the rest of the time.

I didn’t care much for the Sunday Best clothes. I had to button the shirt tight around my neck so that I could put on an uncomfortable tie (something no young boy wants to do). In addition, since I wore the clothes infrequently, they didn’t get replaced as often. That meant that as I grew, the clothes would become ill-fitting and uncomfortable. The shoes were stiff and hard. And then I had to be extra careful not to get the Sunday Best clothes dirty or messed up.

I much preferred the everyday clothes. They fit well and were comfortable. And I didn’t have to worry about them.

Just as the clothes in my closet were separated into two categories, businesses often separate tasks into two categories—Everyday Tasks and Strategic Tasks. Everyday tasks are like the everyday clothes I wore as a child. These are the tasks you do most frequently and where you feel most comfortable. They fit well with your area of expertise. It’s the place you feel most comfortable.

Strategic Tasks, on the other hand, are more like my Sunday Best clothes. These tasks are done less frequently. The Strategic Tasks feel less comfortable because they tend to stretch beyond your comfort zone or area of expertise. Strategic Tasks tend to involve more cross-functional teams where people feel less in charge what they are doing (another source of discomfort). And strategic tasks seem to have less impact on how you are judged for raises and bonuses—so uncomfortable work seems to have little reward.

In addition, there is usually more interference and supervision from corporate headquarters on strategic tasks, which feels choking like that tie I wore to church. This also means you have to be more careful about not messing up, because Corporate is watching. And some of the strategic forms they want you to fill out feel as hard and stiff as those Sunday Best shoes.

It is no wonder, then, why so many people in a company dread working on strategic tasks. They’d much rather work on everyday tasks.

The principle here is that if you want effective strategic activity in your company, you need to avoid creating such a large separation between everyday tasks and strategic tasks. As we will see later, this large separation of how we approach these tasks leads to both sub-optimal strategic work and sub-optimal everyday work.

Instead, strategic tasks need to feel more like everyday tasks and everyday tasks need to become more strategic. You shouldn’t feel like you have to change clothes in order to switch from one to the other. It should blend together more.

I will try to illustrate this principle by looking at two tasks which tend to get separated. The goal of finding higher levels of growth beyond historical organic growth tends to be placed in the “Strategic Tasks” category. The goal of lowering expenses tends to be placed in the “Everyday Tasks” category. By labeling them this way and treating them differently in the organization, we sub-optimize. Growth is less than it could be and costs are higher than they could be, because this separation gets in the way of effectiveness. In today’s blog, we will look at the growth issue. In the next blog, we will look at the cost issue.

Growth Ignores the Core
Studies have shown that successful growth tends to be more difficult the further one moves away from one’s core strengths. Yet, when we place the growth mandate outside the realm of everyday tasks, we are almost by definition forcing the task further away from the core.

It tends to work like this. People in the everyday world of the core businesses don’t want all that uncomfortable outside process (called strategy) to get in the way of doing their business. So they wall off their organic business growth from that strategic uncomfortableness and say that this kind of growth is “everyday” work (and should be treated as any other everyday task). That way, they can be left more alone to handle it as they please.

I’ve had several experiences in my career where the operators have done everything possible to try to block my ability to add a more strategic approach to looking at their business growth. They claim that they are the “experts” and that my “interference” into their everyday work will only make matters worse. In their mind “strategic tasks” have no place in their “everyday” work world.

As a result of issues like these, the only uncontested space where the strategic work can usually take place is outside the everyday. The strategic focus for growth then looks mostly at diversifying. It can be a diversification into new products, new customer segments, new channels of distribution, new businesses, or some combination of the above. These are areas where the company is more likely to fail, because their expertise in assessing the risks and/or implementing the diversification may be lacking. Again, as I said earlier, the further you get from the core, the more problematic things usually become.

Worse yet, since “strategic” tasks tend to be less linked to compensation, you may not be getting people’s best effort on these projects. You may only get the time left over after the “everyday” tasks are first completed. There may even be attempts to sabotage some of this new growth if it is seen as a threat to someone’s core business (and the bonuses it produces) or a threat to their position of power in the current structure. Less than full dedication in an area with less than full expertise does not sound like a recipe to optimize your growth options.

The Handoff from Strategy to Everyday
And then comes the problem of implementation. Eventually all of this activity to create new growth has to become a new part of the core business. In other words, it eventually has to be a new form of everyday work. If all of the process to create the diversification was done outside of the everyday, then there eventually needs to be a time of hand-off when the work is transferred from being a “strategic” task to being an “everyday” task.

The more separation there is between these tasks, the more difficult the handoff will be. If the eventual operators of the business (the one’s charged with everyday work) are mostly left out of the loop when the business creation occurs (strategy work), they may not feel as bound to the strategic emphasis behind the startup. They could destroy all that initial effort by taking the handoff in the wrong direction.

I have personally seen this happen over and over and over again. Bad handoffs are virtually a given if the two groups only interact at the time of the handoff. Think about acquisitions (a key way to get into diversification). Most acquisitions fail. And a primary source of that failure is a bad handoff. All those great synergies and growth never happen because the integration of the acquisition into an everyday part of the company fails. The transition goes too slow, not enough cuts are made, and not enough integration occurs.

Why such a bad handoff? It is because those doing the acquiring are rarely the same people who end up running the acquisition (because they are seen as different types of tasks). The separation of tasks hurt the handoff. When you look at companies which are more successful at acquisitions, you tend to see more blending of the tasks, with the everyday people getting input into the process earlier and the strategy people sticking around later. It is shared work, not segregated work.

Making Core Growth Strategic
By contrast to task separation, consider what would happen if the walls were taken down protecting the core businesses from a more strategic approach. You could combine the expert in the area with a fresh set of strategic eyes. Innovative approaches could arise that the everyday person wouldn’t have otherwise seen, because that person may be too close to the trees to see the whole forest. Bad ideas wouldn’t get very far, because the everyday expert would provide a reality check.

Because this type of approach to growth is closer to where people are compensated, one is likely to get more intense effort. And because it is closer to the core, it is more likely to succeed. And because the business is more comfortable here, they are probably going to do a better job of implementing what it takes to create the new growth near the core.

Companies tend to separate tasks into two piles—the everyday and the strategic. Then each pile is treated differently. By doing so, the everyday becomes less strategic and the strategic becomes less relevant to the everyday. And this is a mistake. To get more value out of each task, the areas need to be better integrated.

Strategy isn’t something that happens way out there away from the everyday. Remember that who you are is just a sum of what you do. Your true position is not what was written on an easel at an off-site planning meeting. No, your true position is what the customers think of you, and most of that thinking comes based on their experience with your brand and what you do. Great strategy doesn’t separate the everyday and the strategic. It realizes that the two need to be greatly intertwined.

Thursday, May 5, 2011

Strategic Planning Analogy #391: Warts and All

Oliver Cromwell (1599-1658) is a famous figure in English history. Cromwell was a military leader on the winning side of the English Civil War. A few years after the execution of King Charles I in 1649, the monarchy was abolished and the Commonwealth of England was born. Cromwell held the top position as 1st Lord Protector of the Commonwealth of England, Scotland and Ireland from 1653 until his death in 1658.

During that time, many wanted to crown Cromwell as King. But since he fought so hard against the monarchy, he refused the offer. However, after he died, the monarchy was restored.

As befitting of a person of his stature, Cromwell was to sit for an official portrait, to be painted by the talented Sir Peter Lely. During this period, artists were expected to take some liberties with their painting—portraying their subject as more distinguished and handsome than they really were. As a result, Lely was prepared to do the same for Cromwell and make him appear more flattering than reality.

Cromwell, however, would have nothing to do with this. He was a devout Puritan who was opposed to all forms of personal vanity. He wanted a realistic portrait.

Legend has it that he told Lely the following, “Mr. Lely, I desire you would use all your skill to paint my picture truly like me, and not flatter me at all; but remark all these roughnesses, pimples, warts and everything as you see me, otherwise I will never pay a farthing for it.” Later legend shortened Cromwell’s response to be “Paint me as I am, warts and all!”

And as you can see from a comparison of the painting to his death mask (in the picture above), Lely did indeed paint him warts and all.

Part of the strategic planning process deals with understanding the current state of who you are as a company, business or brand. What is your current position? What is your current image? What are your competitive strengths and weaknesses?

When answering these questions, one can fall into the habits of Peter Lely. You can be so used to portraying everything in its most favorable light that it becomes second nature. Lely didn’t let reality get in the way of his painting of portraits. He was used to painting something better than reality. He didn’t ask for permission to enhance his portraits. It was just expected.

In the world of business, this “cloud of favorability” can become so habitual that you don’t even realize that some reality has been lost in your strategic assessment of current positions, images and strengths/weaknesses.

And of course, if you have a distorted point of view for your starting point, you will likely have an unrealistic goal and unrealistic plan to get there.

If you really want a realistic goal and strategic path to get there, then you need a realistic understanding of your starting point. You need to paint the picture of your current state “warts and all.”

The principle here is that assessments of one’s current state should be more like an un-retouched photograph than an enhanced painting. We need a critical eye to discern the complete picture of reality—the good, the bad and the ugly—warts and all.

The Problems With Most Favorable Light
Here are some of the problems which could occur when building a strategy off an assessment whose starting point is more favorable than reality.

1. You may mistakenly choose a position or goal where you stand no chance of winning (because you are not strong enough to achieve it or own it).

2. Not enough effort will be made to shore up weaknesses (causing a further erosion of your business).

3. Competition will be under-estimated.

4. Execution plans will fail because too much was expected from current resources.

5. Customers will not act as expected because they do not love you as much as you think.

6. Too much money will be spent on expansions and acquisitions which fail to deliver on promises due to unrealistic expectations.

7. The stock will eventually plummet once people realize that you have a reputation for execution disappointments due to unrealistic expectations.

In other words, a bad starting point can lead you to the wrong goals and make you ill prepared to achieve the path to get there. From where I sit, this is not a good thing. Underachieving on a path to an unattainable goal is not a good strategic plan.

That is why you need a starting point that includes warts and all. It will help you pick goals where you can truly win and paths that ensure success.

The Problem with Warts and All
The problem is that company leaders often do not always like to hear bad news. Talking about weaknesses and vulnerabilities can sometimes be a “career-limiting” move. Leaders don’t like to hear that something “can’t be done.” There is the fear that the leaders will “kill the messenger” of bad news. Therefore, everything is shown in its most favorable light, like a Lely painting.

So this leaves one with a dilemma. Either tell the truth and lose the ability to influence management or tell a lie and influence management to create a disaster. Not a good set of alternatives.

The Solution
Fortunately, there is a solution to this dilemma. Here are four steps to being able to expose the “warts and all” and still have influence to make a positive difference in creating an appropriate strategy.

Step #1: Anchor Your Discussion on Facts
You will never win the battle of opinions with “warts and all” because:

a) The leader’s opinion carries more weight than yours (the leader gets more votes).
b) The leader’s opinion is usually more favorable and more optimistic (and will reject the warts).
c) Opinions cannot be proven.

The only chance you have is to start with facts from accepted sources. If the irrefutable facts show the warts, then it is harder to ignore them.

And don’t stack the deck or bias the commentary around the facts. Show a balanced approach without emotion. Otherwise you will lose credibility. Let the facts tell the story by themselves. Let them come to the conclusion on their own. This will create greater “ownership” of the conclusions by management.

Step #2: Use Other Voices
It is one thing for you, as an insider, to point out the warts. It is quite another thing if you can have customers, suppliers and partners pointing out the warts. Their voices carry more weight. It is hard to maintain an opinion of invincibility when your own customers are telling you about all of your warts.

I was reminded of this when looking at a recent piece of consumer research by Harris Interactive. According to this study, 77% of the public says that Corporate America’s reputation is bad. I’m sure that this is a lower opinion than the opinions of the leaders of Corporate America.

Go to Google and enter your company or brand name along with the word “sucks.” Usually this search will lead to all sorts of negative commentary about your company. In a world of Twitter, Facebook and other such sites, there are ample ways to track what people are really thinking about you. And if you want to get a bit more scientific about it, you can do surveys.

Remember, the most important opinion about your image is the image held by customer, since that is the opinion which determines your success. Listen to what they have to say. They won’t ignore the warts.

Step #3: Play the Court Jester.
In medieval times, the only one who could get away with giving bad news to the King was the Court Jester. He could get away with it because:

a) It was done in a light-hearted, humorous, entertaining way.
b) The jester was not seen as a threat to the throne.
c) It was an accepted role of the position.

I worked with someone who was quite good at assuming the role of court jester. He was entertaining and appeared non-threatening (in a political power sense). It became accepted that he could speak about all the bad news without fear of reprisal. This approach was quite effective.

I have used a similar approach of positioning myself as the “eccentric genius.” Eccentric geniuses are usually well respected without appearing as a political threat. It allowed me to successfully be the bearer of bad news.

Step #4: Supply a Desirable Alternative
Often times, management embraces a distorted point of view because it is the only way they can see a bright future. However, if you can show them an alternative future which is still bright and desirable, yet includes the warts and all, then they are more likely to accept the more realistic starting point.

In the end, people want a good outcome. It is still possible to have good outcomes when starting form a position full of warts. You just have to look a little harder for it. Once you get leaders salivating over a good outcome and show that it can be achieved even if we are a little weaker than we think, then it has a good chance of being accepted.

So link the bad news about today to some good news about how this can be turned into something great. For example, you may not be good enough to own the whole market, but you may be good enough to own a desirable niche if you focus on it. And that niche may be more profitable than owning the mass position.

Unrealistic starting points lead to plans that usually fail. If you want success, you need to start with a realistic understanding of who you are—warts and all. In order to successfully portray a less than favorable point of view, it helps if you a) Anchor Around Facts, b) Use Other Voices (Like Customers), c) Play the Court Jester, and d) Supply a Desirable Alternative.

Don’t be afraid of the truth. It can be your friend if you follow the advice above.