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.

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