Thursday, June 30, 2011

Strategic Planning Analogy #400: Don’t Eat The Whole Fish

There is a Japanese seafood delicacy called fugu. We call it the blowfish. Although many rave about the taste and texture of the fugu, the fish has a serious drawback—eating it can kill you.

Fugu contains tetrodotoxin, an extremely potent neurotoxin that paralyzes its victims while they are still conscious. In other words, you are fully aware as your throat closes, your lungs deflate and you drift slowly into death. Even extremely small doses of tetrodotoxin can kill. There is no known antidote.

This toxin permeates large portions of the fish. Therefore, if you want to eat the fish and survive, you must only eat the particular portions not containing the toxin. That is why only chefs who are properly trained and certified in fugu preparation are allowed to sell fugu in Japan.

Even though the chefs are certified, I think I’ll pass on fugu.

Just because the gourmet crowd loves fugu, that doesn’t mean they devour the whole fish. These people are smart enough to know that only a portion of the fish is edible. They are careful to avoid the poison within the fish.

Unfortunately, this is often not the way businesses operate. Leaders may become enamored with a particular company or a strategy, just like the gourmet love the fugu. For example, a leader may say they admire the success of a particular company like GE or Google or Apple or Berkshire Hathaway. Then, wanting to make their company more like the company they admire, these leaders start to imitate EVERYTHING which the company they admire does. In other words, these leaders do not discriminate and decide to “eat the whole fish” of the company they admire.

And just like the poison in the bad parts of the fugu can kill, the bad parts in the admired company can kill your company.

The principle here is that just because a company enjoys success, that does not mean that everything they do contributed to that success. In addition, many of the things which “work” in their company could be toxic if applied in another company. Therefore, we need to be discriminating and only borrow concepts from others which are appropriate to our situation. Instead of eating the whole fish, we need to first cut away the dangerous and inappropriate.

There are three reasons why borrowing something indiscriminately from an admired company can become poison to our own company.

1. It Wasn’t A Part of Their Success
Even great companies can do stupid things. At one time, many people thought Enron was a great company. In February 2001, Fortune magazine's ranking of America's most admired companies listed Enron as No. 1 for "innovativeness" and No. 2 for "quality of management."

And, yes, Enron did do some remarkably creative things. Unfortunately, they also did some stupid things. The stupid things eventually destroyed Enron. By the fall of 2001, Enron fell apart.

What ultimately killed Enron was its highly leveraged reward structure on a quarterly basis. It caused employees to do bad things in order to reap the outlandish quarterly rewards. This was their poison in the fish.

Had someone in early 2001 decided that Enron was a great company, they might have indiscriminately done anything that Enron did. They might have copied the compensation structure which was the poison in the fish. After all, it was a “great” company, so isn’t everything they do great?

No, great companies can do lots of things that have nothing to do with their greatness. In fact, great companies can be so successful that the success overcomes a lot of poison. A weak company cannot afford to do too many stupid things and stay alive. Strong companies can. So there can actually be more poison in a strong company than a weak company.

Therefore, when admiring a company, first try to figure out which parts of the company are most highly correlated to their success. Then focus your attention on how you may incorporate that particular concept into your own business. Don’t just try to copy anything they do. You may end up copying their poison.

2. It Won’t Work in All Environments
Another company which used to be on most admired lists (for many decades) was GE. When companies got into trouble, they often wanted to replace their leaders with executives from GE. The idea was that GE leaders were a part of what made GE great, so if I get one of their leaders, it will make my company great.

Unfortunately, when many of those GE leaders went to other companies, they were not as successful as they had been at GE. Does this mean that the leaders suddenly become less competent? Of course not.

The problem was that the leaders often found themselves in a different environment than they had at GE. The corporate culture may have been different, the competitive situation different, the place in the lifecycle different, and so on. This could make the success formula at GE inappropriate or irrelevant in the new environment.

Of all the things GE did right in their glory years, one of the most important ones was their knack of knowing how to manage portfolios. They knew when to get out of old businesses and when to get into new businesses. They knew what to fund and what not to fund. If you move that portfolio knowledge to a one-business company operating in an area GE would have exited, then that knowledge isn’t very useful.

Remember, in the environment of the fubu fish, the tetrodotoxin is not poisonous. It is only poisonous when moved into the environment of the one eating it. The same is true in business. When the environment is different, the success factors can be very different. What works in one place can be poisonous somewhere else.

Right now, companies like Apple and Google tend to be highly admired. These companies are in a particular environment where there is high obsolescence and an extreme dependence upon gifted engineers and programmers, for which there is a severe shortage. That is why these companies tend to have some unusual perks to keep their engineers and programmers happy, like free gourmet meals.

If you try to apply the lessons of Apple and Google to a mature business with low obsolescence and little dependency on scarce talent, these tactics may not provide nearly as much benefit. They may just be money pits that decrease your profits—perhaps to the point of poisoning your ability to compete.

Therefore, consider the impact of the environment (yours and theirs) before adopting ideas and strategies from other companies.

3. It Won’t Work Alone
Often times success is not due to a single factor, but to a highly integrated system. By just copying one portion of the system, you may not reap its benefits, because the benefits require the entire interrelated system.

Take Wal-Mart, for example. One of the keys to its success is its low prices. Therefore, one could try to emulate the success of Wal-Mart by also offering extremely low prices. The problem is that if all you do is try to underprice Wal-Mart, you make quickly go bankrupt. It will become your poison.

Wal-Mart can afford to offer low prices because of its integrated system to lower costs. It has world-class logistics, global sourcing, a culture of frugality and a lot of other factors in place to allow it to profitably have low prices. If you copy the prices without copying the rest of the system, you will not have success.

Usually the connection is not as obvious as in the Wal-Mart example. Therefore, it may take more effort to determine how the complete system works. Then, you can determine if you want to copy the entire interrelated system.

Just because you may admire a particular company does not mean that you should indiscriminately copy anything which that company does. If you do, you may be adding poison to your company rather than success.

This principle also works in reverse. Just because you have a low regard for a company doesn’t mean that everything they do is wrong. I know of a leader who would refuse to hire anyone who came from a company with a smaller market share than his own. His reasoning was that if a company had lower market share, then everything and everyone associated with that company must be inferior. But just as there can be poison in a “great” company, there can be nuggets of gold in a “bad” company.

Friday, June 24, 2011

Strategic Planning Analogy #399: The Most Important Question

I was talking one time with the president of a retail company. This company had just chosen a new strategic direction. In essence, they had decided to imitate a strategy which had been very successful for another retailer with whom they competed. Puzzled by the choice of strategy, I asked this president a few questions.

“Will you have lower prices than this competitor?” “Not really,” he replied. “Our prices will be about the same.”

“Will you offer a better assortment than this competitor?” “No,” he replied. “The assortment will be similar.”

“Well I know the competitor has superior store locations. So, I’m wondering…what is it about your strategy that will cause customers to prefer you over this competitor?” He didn’t have an answer.

It wasn’t too long after this conversation that this individual was no longer president of that retail company.

In the story, the president chose a strategy which had been very successful for a competitor. My guess is that the president concluded that since the strategy made his competitor successful, then it must be a good strategy. And if it is a good strategy, then it will work for his company as well.

Unfortunately, that’s not the way strategies work. In general, a strategy is not intrinsically good or bad on its own. It’s value is based on the context of the particular company using the strategy and the competitive landscape. In other words, a strategy is only good if it is good for you.

For example, a low price strategy may be excellent for the lowest cost operator, but a disaster for a high cost operator. So is the “Low Priced Strategy” a good strategy? It depends. And if you don’t have a good understanding of yourself and your marketplace, you may come to the wrong conclusion.

To help figure out if a strategic option is the best strategy for you, it is often a good idea to develop a process where you ask a lot of questions, as I was doing with this president. And one of the best questions you can ask yourself is this: What is it about your strategy which will cause customers to prefer you over the alternatives? In the story, the president did not have an answer to this question. And as a result, his strategy failed and he lost his job

The principle here has to do with the concept of superiority. Great strategies enable a particular company to achieve a position of superiority in the marketplace. And this superiority is only relevant if a meaningful percentage of the marketplace desires it. And one of the best ways to determine if you have achieved this relevant point of superiority is to ask the question: What is it about your strategy which will cause customers to prefer you over the alternatives?

No Reason To Prefer = No Reason To Exist
This is a critical area to spend time on, because preference is directly related to relevance. In other words, if consumers have no reason to prefer you, then you have no reason for existing.

A lot of businesses struggle to survive. I believe that most of these firms struggle because they never established a reason for why customers would need them to survive. They have never established a rationale for why someone should clearly prefer them over the alternatives. There is no clear superiority.

These struggling companies may say that they have good products/services at competitive prices. But so do nearly all the alternatives. Just look in the phone book or do a search on the web. There are lots and lots of alternatives. And most of them are pretty good. Just being as good as everyone else is not enough. That does not provide a reason for people to choose you. Mediocrity is not a viable strategy.

In an earlier blog, we asked about what would happen if your company ceased to exist. Would anyone care? Could they easily find a substitute and move on with their lives as if nothing happened? If that is the case, then you do not have a worthwhile strategy.

If you want to exist, then you need give people a reason for wanting you to exist—a point of superiority.

If You Know Why Consumers Should Prefer You, Then You Pretty Much Know Your Strategy
The real beauty to this question is that, once you know why consumers should prefer you, then the rest of the strategic process becomes relatively straightforward. It boils down to four words: Strengthen, Protect, Declare, and Leverage.

Strengthen: Keep strengthening your point of preference so that your level of superiority becomes even greater. This is where a disproportionate amount of your resources need to be applied. This is the “offense” part of the strategy.

Protect: This is the “defense” part of the strategy. This is where you monitor the competition and do what you can to keep them from catching up or surpassing you in superiority.

Declare: It does no good to have superiority if the customers are unaware of it. Have a plan in place to make sure your customer segment is fully aware and fully appreciates your point of superiority.

Leverage: A point of superiority opens up numerous profitable opportunities. The point of superiority needs to be exploited by leveraging it into as many profit opportunities as you (and your customers) can handle. This could mean adding new products/services, expanding into new countries, etc. As long as these actions take advantage of your point of superiority, they can successfully grow your business exponentially.

So, if you were Apple, you know that your superiority centers around having the coolest technology. So what is the strategy? Strengthen the coolness by continually improving the products. Don’t let anyone come up with anything cooler. Leverage your coolness into an expanding array of products: iMac, iPod, iPhone, iPad, etc. Surround them with cool stores and cool apps that exclude the competition. And tell the world about your coolness through cool media campaigns.

If you are Wal-Mart, your superiority centers around low prices. So what is the strategy? Do what you can on the cost side so as to strengthen your ability to afford to sell at even lower prices. Protect yourself from others who could get a price advantage. For example, when Wal-Mart discovered that supercenters could get a price advantage over discount stores, they pretty much abandoned the discount store strategy and started building supercenters. Leverage your strength by going international (which has the secondary benefit of increasing economies of scale and enabling even lover prices).

Even Knowing You Have No Point Of Leveage Makes Strategy Easier
Let’s say you find that there is no reason why customers should prefer you. Just knowing that makes the rest of the strategic process easy. You have four options: Create, Bribe, Intercept, or Exit.

Option #1 - Create: Choose a point of superiority (which you don’t own today) and make it a reality.

Option #2 – Bribe: Add something tangential to your mediocre offering which will create temporary excitement and preference. This usually takes the form of either a big price reduction or some sort of “gift”/“bonus” with purchase. It’s like a legal bribe. Since your offering alone isn’t good enough to stand out, you need to sweeten the deal with something extra.

Option #3 – Intercept: If you can’t get the customer to go out of their way to prefer you, then you need to go out of your way so that they cannot avoid you. Intercept them before they have the chance to find someone else. For example, if you are no better than anyone else, then the best way to increase your chance of being chosen may be to use an SEO strategy to make sure you show up on the top of the first page of a Google search. If you are a retailer, put your store in the busiest location or closest to the customer, so that it is a bigger struggle for them to go elsewhere. Have more aggressive salespeople than the competition.

Option #4 – Exit: If you have no reason to exist, then perhaps the best thing to do is to find a strategy to stop existing—as profitably as possible. Selling or shutting down is often the most prudent thing to do.

The most important question one can ask one’s self when doing strategy is this: What is it about your strategy which will cause customers to prefer you over the alternatives? Once you answer this question, the rest of the process becomes rather obvious and straightforward. The next steps become much clearer. If you have a point of superiority, the next steps are to Strengthen, Protect, Declare, and Leverage that point of superiority. If you do not have a point of superiority, then you need to either create one, “bribe” the customer, intercept the customer, or exit the business.

Following the leader will never get you in the front for the race to the customer. Instead of chasing behind the competition, find a race where you have the superiority to win.

Wednesday, June 22, 2011

Strategic Planning Analogy #398: Strategy Trees

Back in the 1960s, the Smothers Brothers had a comedy show on TV. On one episode, they were talking about the problems of a population explosion. Dick Smothers was lamenting the fact that the global population was growing too quickly and was causing all sorts of problems.

Tom Smothers said he didn’t even think there was as population explosion. When Dick asked why he believed this, Tom replied with the following logic:

I am one person. I have two parents, four grandparents, eight great-grandparents, and so on. As you go back in time, my family tree keeps expanding. So, as you can see, my family population is actually shrinking from what it used to be. Therefore, the population isn’t exploding. If anything, it is shrinking.

Tom Smothers had faulty logic when looking at his family tree. Because he did not understand the complete picture, he came to an inaccurate conclusion.

Family trees are a lot like corporate organization charts. We need to make sure that we understand the complete picture of how the organization chart works. Otherwise, we may be like Tom Smothers and reach the wrong conclusion.

In particular, as strategists, we need to understand how strategy filters through an organization. Just as Tom Smothers mistakenly thought that population was shrinking as one moved down the family tree, we can mistakenly believe that a strategy’s relevance shrinks as we move down the organization chart.

Just keep in mind that the people further down in the organization chart are often closer to where the customers are and where the production is and where transactions take place. And if a strategy isn’t relevant where the customers are and where the production/transactions take place, then is it really relevant at all?

The principle here is that strategy needs to be seen as a key role for everyone in the organization, from top to bottom. It is not just a play thing for leaders at the top.

Linked In Discussion
I was reminded of this when looking at a discussion thread on Linked In. The discussion topic was about why it is so difficult to convert strategy ideas into execution. I posted a comment which referred to an earlier blog. In this blog, I compared strategy to a basketball game.

In basketball, you win by scoring more points than the opposition. This becomes the over-arching strategy. However, if all you do as a basketball coach is yell at the players to “go get more points than the opposition” you really haven’t done much.

No, basketball games are won based on the types of plays executed by the players. Although the scoreboard may tell you whether or not you won, it is the game plan—those Xs and Os drawn on the clipboard—which create the ability to win. So, if you want great execution of your strategy, quit focusing so much on the scoreboard and spend more time focusing on the clipboard.

The response I got on the Linked In discussion surprised me. I was told that the clipboard is mere tactics. This response implied that strategists should be concerned with strategy execution, not tactical execution. Therefore my comment was useless.

At this point, the thought going through my head was this: If tactics are not relevant to strategy execution, then why are you doing those tactics? No wonder these people were having trouble executing a strategy—they are disconnecting them from tactics. Just as yelling at a scoreboard does not change the score, yelling about the overarching strategy does not tell people how to make the strategy real.

Actions Have Many Roles
In a family tree, an individual may have many roles, depending on who is looking at them. For example, an individual can be seen as a Father, a Son, a Brother, an Uncle, a Nephew, and so on, depending upon who is looking at them. The same thing can happen for business activities within an organization chart. At the top of the organization, a particular action may appear to be a tactic. However, further down in the organization, that same action appears to them to be a strategy.

I learned this lesson a long time ago. I asked people about strategy & tactics and this was the typical response: “Strategy is what I do. Tactics are what the people below me do. And I’m not always sure what the people above me do.” And it didn’t seem to matter where the individual was in the organization chart. Those near the top and those in the middle had the same comment. (And in great companies, this translates all the way to the bottom.)

I’ll illustrate this with an example. At the top of a corporation, the senior executives may voice their strategy as shifting the business portfolio from declining business sectors to growing business sectors. The tactic would be to take the cash flow from declining “Division X” and give it to growing “Division Y”.

Now if you are in charge of declining Division X, you now see your strategy as maximizing near-term cash flow (in this way, the tactic from the corporation is translated into the strategy of the division). At the Division X level, key tactics to increase cash flow might be to reduce headcount and capital investments.

The head of operations in Division X would now see his strategy as finding a way to reducing labor expenses without spending a lot of money to do so (meaning the tactic at the top of the division is now the strategy in the middle of the division). The head of division operations creates a tactic of eliminating the third shift and giving more overtime to the second shift.

Now, to the head of production scheduling, that tactic becomes his/her strategy. And so goes the process all the way down the organization. One person’s tactic becomes the next person’s strategy.

Therefore, if a strategist wants to ensure that an overarching strategy gets executed, here’s what needs to get done.

1) Make sure that the overarching strategy from the top gets broken down into 1st level tactics.

2) Make sure the second level in the organization knows their role in those 1st level tactics, so they can craft their strategy appropriately.

3) Help the 2nd level of the organization develop their tactics (the 2nd level tactics).

4) Help the third level of the organization translate the 2nd level tactics into their strategy.

And so on…

Strategy is not just for the folks at the top. Everyone should be operating under a strategy. The scope of the strategy may contract as you go down the organization chart. But for each level, they need to think strategically about that which is within their scope. And that strategy needs to be linked to the tactics one level above them.

By doing this you gain two benefits—everyone is thinking strategically about their job and all the actions are linked together towards achieving the over-arching strategy.

If you want to make sure that a company’s over-arching strategy is executed properly, then you need to make sure that strategies in the lower levels of the organization are linked to the tactics of the level above them.

At first, the idea of loading up an organization chart with “good soldiers” (who are good at following orders) sounds great. You’ll get things done, because “good soldiers” obey without question. However, you might get better things done if your people take personal responsibility for developing the strategy at their level (instead of just blindly following orders). Help your people to take responsibility for the strategy at their level in a manner which supports the tactics one level up. This should make them “better soldiers.”

Tuesday, June 14, 2011

Strategic Planning Analogy #397: When a “Best” Strategy Isn’t

There is an interesting story in the June 6, 2011 edition of Strategy+Business concerning the coffee business. About the time when Starbucks was beginning its rapid growth phase, the activity caught the attention of Folgers, the massively huge coffee brand then owned by Procter & Gamble.

The Folgers brand managers were concerned enough about the potential threat of Starbucks that they conducted independent taste tests. The tests results were reassuring for the gang at Folgers — most people preferred the Folgers taste to the more bitter Starbucks. Not only that, but Folgers cost a lot less than Starbucks—you could get a large can of Folgers coffee grounds for about the price of one serving of Starbucks.

With proof that Folgers tasted better and cost less, the Folgers managers relaxed under the assumption that Starbucks was a passing fad. Of course, history has shown their complacency to have been misguided; between 1993 and 2008, revenues at Starbucks grew from less than $200 million to $8 billion, a 40-fold increase. And Proctor & Gamble gave up on the Folgers brand and sold it.

Folgers fully embraced the philosophy of Procter & Gamble at that time. This philosophy believed that the best performing product typically wins. That is why Procter & Gamble spent so much money to ensure that its portfolio of products had technological advantages. By having products with superior performance, Procter & Gamble expected superior sales and market share.

Unfortunately, this “best features” approach lead Folgers into disaster. The worst-tasting, more expensive coffee won the day.

As it turns out, a lot of companies base their strategies on a similar assumption. The The results of Folgers versus Starbucks is enough to make one question the validity of this strategy.

In reality, striving to be the best is still a good strategy. The problem is in how one defines what they are trying to achieve this superiority in. If you choose the wrong thing to be best at, you will lose to a supposedly inferior competitor. So before embarking on a “best at” strategy, ask yourself these questions.

1) Better for Whom?
If you ask a company who they are trying to make a product or service better for, the typical initial answer would be for the customer. After all, the customer is the one using it, so their opinion of what is best is most important. Right?

Well not necessarily. Many people in the supply chain have a stake in the success of a product. If it is not “best” for them, it may never get to the consumer. For example, a new premium liquor introduction is rarely successful unless it receives a lot of bartender recommendations at the prestige bars and nightclubs. If you don’t find a way to make it the best liquor for them to recommend, the customer will never even get to taste it; and without the recommendation the customer will lose a key reason to perceive the liquor as superior.

Supermarkets are asked by vendors to stock more items than their shelves can hold. If you want to get on their shelf, you have to convince them that it is the best item for them to put there. Otherwise, the customer will never see it.

In the case of VHS vs. Beta, or Blu-Ray vs. HD-DVD, there are many players to please—the studios, the distributors, the retailers, the playback device manufacturers, etc. All of these players start to take sides depending on which option appears best for their particular self-interests. If you do not actively and aggressively manage all these players in your strategy, the appeal to the customer will be irrelevant.

And the medical field is probably the trickiest. You need to please doctors, hospitals, insurance companies, governments, and so on, before a customer ever has a chance at access to what you are selling. If you don’t convince all these parties that you are the best, then winning the consumer’s opinion is of little value.

In your business, all the players may not be this obvious, but consider them all before embarking on a “best at” strategy. Otherwise, you may be targeting your efforts at the wrong audience and focusing on the wrong features to emphasize.

2) Better at What?
In the attempt to be best, one needs to ask what one should try to be best at. The easy answer is to tackle attributes which can be easily measured, where one can easily show superiority, and something tangibly related to functionality of how the customer uses the product/service. Unfortunately, this is not always the best choice.

Customers are both rational and emotional beings—even business customers. Often, the softer emotional issues of prestige, status, acceptance, risk-aversion, and self-worth are more important determinants of choice than rational, functional attributes. Starbuck’s success wasn’t based primarily on rational features like taste and price. It won on emotional appeals to social factors, status and prestige. The “experience” of Starbucks transcended beyond mere coffee. This was an experience not to be found in a can of Folgers bought at the supermarket.

How much attention are you spending on the softer, emotional attributes?

3) How Much Better Do I Need to Be?
Before a customer switches from one product to another, they often need to consider the cost of switching. For example, if I decide to switch from one technology source to another, I have impacted a host of other issues:

• I have to give up a comfortable relationship with one vendor representative who I like and who understands me and form a new relationship with a stranger.

• I have to convert all my old files to the new technology…will they still work? Will I lose data?

• I have to throw away all the supplies and replacement parts I kept in stock to maintain the old technology and buy a whole new set for the new technology.

• There will be unproductive time as I adjust to the new technology.

Even if a new solution is superior to the old, it doesn’t automatically mean I will switch. To switch, I need to be convinced that the superiority is so great that it overcomes the costs of switching. Depending on how entrenched the status quo is and how much it costs to switch, you may not be able to create enough superiority to cause the switch to occur.

For example, there are people who are fully attached (rationally and emotionally) to products and services offered by Apple. Everything is all connected; they have access to all the apps at the app store, the status of owning Apple products, etc. How much superior to Apple would you need to be to get them to switch and lose all of that? Is it even possible to become that much superior to Apple?

4) What is the Context?
People are not always looking for the same type of attributes all the time. Depending on the circumstances, people’s preferences may change. For example, the attributes one looks for in the type of beer they drink at home alone may be different than the attributes they look for in a beer they drink in public with people they are trying to impress. The “best” beer for each situation may be entirely different because you are looking for something different.

If you don’t understand the context, you may choose the wrong attributes to become best at. Purchases are not made in a vacuum. They are made within a context. Does your strategy manage both your product and the context you desire for that product? If you don’t actively manage the context, it may not end up being the context you desired, thereby making your choice of attributes to be best at incorrect.

A strategy of just being better is not enough. You need to be better in the right way. You are more likely to be better at the right things in the right amount if you consider a) a broader list of “customers” within the supply chain; b) a list of both rational and emotional attributes; c) switching costs; and d) the context surrounding the use of the product/service. If you ignore these issues, you may find yourself with a superior product with inferior performance.

Sometimes, consumer research is used to determine what attributes to emphasize. Unfortunately, that research can often lead one astray, particularly if all you are doing is asking for opinions. Customers like to appear rational, so they may overestimate the rational attributes and underestimate the emotional. Consumers like to appear helpful and supportive, so they often underestimate the switching costs when asked how likely they would switch. Questionnaires are often asked in a different context then how the product will be used. As a result, be careful at taking opinion research at face value. Behavioral research is a much better indicator of how a product would really perform.

Wednesday, June 8, 2011

Strategic Planning Analogy #396: Short Timer

I knew a man who spent his career in retail operations. To advance your career in that field, you have to move around a lot from city to city. First, you are an assistant manager in one store…then you move to be store manager in another city…then you move to become a district manager, then a regional manager, and so on. These people move more often than a career military person.

My friend said that for a large part of his career, he moved on average about every two years. When you move every two years, you become an expert in how to move. This is what he learned:

1) Always buy a “starter” (entry level) home. They are the quickest and easiest to resell when you have to move again.

2) Buy a home where everything is already fixed up to perfection (no “fixer-uppers”). Why? First, you won’t have time in two years to do all the necessary repairs. Second, a home in great shape now will probably still be in great shape two years later when you sell it. This way, my friend never had to bother with painting walls or repairing roofs and still had a great looking house that would be very easy to sell.

By following these rules, my friend made moving in and out as easy and effortless as possible.

When you know you are only going to be somewhere for a short time, you act differently. Before going into the situation you already have a plan for getting out quickly and easily. You make choices that a long-timer would not make.

In the case of my friend, he didn’t get emotionally attached to his homes. He just wanted something easy to buy and easy to sell. He didn’t want the responsibility of investing a lot of time, money and energy in fixing them up. They were just a place to temporarily sleep until he moved to the next temporary location.

A similar situation can occur when people chose where and how they will work. If employees (or even leaders) expect to be with the company for only a short period of time, they will make different choices. They will choose different types of jobs and companies go in with. They will look for places with a relatively easy and effortless way to get out. They will not get emotionally attached. In other words, they will treat the company just like my friend treated his houses.

For example, why try to tackle a difficult strategic repositioning if you only expect to be in the job for a little while (especially if you are a leader)? After all, repositionings are difficult work. And all that effort usually reduces near-term earnings. By the time the new strategy kicks in and financials rebound, the short-time leader will have already planned to move on.
So a short-timers will ask themselves: why put up with the difficult work and get blamed for the temporary downturn, just so the successor can get credit for the rebound? No, short-timers would rather choose a situation where things are humming along just fine and nothing serious needs fixing. They will avoid fixer-uppers…just like my short-timer friend and his houses.

The principle here is that long-range strategic plans are difficult to implement in a culture with a short-term orientation. The commitment needed to transform a business long-term just isn’t there when people plan to move on before the task is completed. Consider the fact that for many C-level positions, the average tenure is only three years or less (about the length of time my friend stayed in his home). That doesn’t provide much incentive for aggressiveness on implementing five-year plans.

In these cases, short-term people instead look for the easy, immediate return—something that will bear fruit while they are still around. Unfortunately, near term gains are usually fleeting. Often, they aren’t even true gains—they are merely borrowing from the future.

Remember all those government incentives during the great recession, like “cash for clunkers?” These incentives temporarily increased the sales of cars, appliances and houses, but when the incentives ended, the sales plummeted. As it turns out, that sales bump was not additional sales. It was merely future sales made earlier. A similar situation often occurs when businesses seek a short-term stimulus.

If you want large, transformational improvements which will last, you need to go beyond minor tweaks to the status quo. You need to implement transformational strategic initiatives. And that takes time.

Therefore, strategic planning cannot be satisfied with merely dreaming up a great vision of the future. The plans also need to address the barriers which can get in the way of implementation. And one of those barriers can be a short-term culture.

Here are some suggestions about how to overcome this barrier.

1) Hire Well
When hiring, look for people who not pre-planning their departure as a short-timer. Look for people with longer-term commitments, people who become more emotionally invested in the company. I know that lifetime commitments are a thing of the past, but at least you can weed out the worst short-term offenders.

I have seen this at high profile companies which look good on a resume. They are places people like to say they are from. They are a great step to somewhere else. If the only reason people want to be with you is so that they can use it on their resume to go somewhere else, then you shouldn’t want them on your team. They are merely mercenaries. Avoid them, as I have spoke about in earlier blogs (here and here).

2) Create Bridges to Larger Issues
If you want emotional commitment, give people a reason to get emotional. Create visions which transcend merely making money and embrace larger agendas and causes. Younger employees in particular are concerned about the impact the places they work for have on the greater society. If you link up to these causes, you can get greater commitment to achieve your long-term objectives. Even if they don’t have much emotional commitment to your firm, you can still tap into the emotion around causes that are meaningful to them, no matter where they work. Google has embraced “do no evil.” Wal-Mart has embraced “sustainability.” It can be done.

I spoke more about this topic in an earlier blog.

3) Change incentives
People tend to act based on the way they are rewarded. If you want to encourage long-term commitment, then create incentives which reward long-term gains. Bonuses can be stretched out over time. Rewards can be based on future stock prices. Payouts can be determined in part by outcomes which take place even after a person has moved on. Penalties can be placed on gains which are merely shifting sales forward. Perhaps long-term efforts can be diced up into a series of smaller steps, where achievement of smaller steps are rewarded.

I know these can be tricky to implement, but there are ways to at least put some rewards into a long-term pool which only pays out when long-term goals are achieved. That way, even if people aren’t there for the whole journey, they have a stake in helping make the journey occur.

Truly transformational strategies take time to implement. In a world where many employees (and their leaders) don’t plan on being around very long, trying to get effort around implementing the transformation can be difficult. Therefore, a portion of the strategic plan needs to address these barriers and find ways to encourage commitment to longer-term efforts.

I worked with a CEO who was close to retiring and did not want to take on major transformational efforts in his final years. Fortunately, the internal person who succeeded him as CEO had been listening and he implemented the strategy once he took over. What I learned from this was that sometimes you have to shift your strategic appeal from the current leaders to the next generation of leaders. After all, the next generation has more at stake in the long-term. So when you are going through the strategic process, make sure you include the future leaders in the discussion. They can be some of your best allies.

Wednesday, June 1, 2011

Strategic Planning Analogy #395: Strategic Trajectories

Back in the early 1970s, National Lampoon magazine did a parody of detective stories. In the parody, the detective was a genius mathematician.

At one point in the story, a bad person was about to shoot the detective with a gun. The detective told the bad person to put away the gun because trying to shoot him was a waste of time. The mathematical detective’s explanation went something like this:

Before the bullet could travel from the gun to the detective, it would first have to travel half that distance. And before the bullet could travel half the distance, it would have to travel one-fourth the distance. Continuing this logic, you could keep dividing in half the distance the bullet would need to travel an infinite number of times. That creates an infinite number of distances the bullet would need to travel to reach the detective. And, of course, anything having to travel an infinite distance would never reach its destination. Therefore, mathematics proves that the bullet would never reach the detective.

It sounds mighty impressive. Too bad it is not true. Just ask anyone who’s shot a gun. I’ll trust their actual experience over the mathematical theory.

Once a bullet leaves the chamber of a gun, it travels along a trajectory. It is nearly impossible to alter the direction of the trajectory of the bullet after the gun has been shot. It’s too late. The direction is already set in place at the point when the gun is shot. The bullet will continue on that trajectory all the way to the end. It is a foregone conclusion.

If your body is at the endpoint of that trajectory, like that detective, you may wish this were not so. You may want to believe that there are mysterious forces holding back the inevitable—perhaps for an infinite amount of time. But this is a false hope. The bullet will follow the trajectory and kill the intended target.

Bullets aren’t the only thing which follows a trajectory. Businesses also tend to follow a trajectory. Based on the way a business is introduced and managed, a path is determined. Sometimes the trajectory is upwards towards great success. Other times, the trajectory for the business is headed towards rapid tragedy and destruction.

In the latter case, the operators of the business may want to deny the inevitability of the rapid destruction. They may work up all sorts of mathematical spreadsheets and analyses to show how the “inevitable” can be stopped. They will use this math to show how the trajectory can be redirected to a better conclusion.

At first, all of that mathematical logic may seem plausible, just like in the National Lampoon story. But, in most cases, the forces behind the original business trajectory are too powerful and too fast. You cannot respond quickly enough or strongly enough to change the trajectory. Despite all that effort to avoid failure, failure occurs anyway.

The principle here is that strategic plans designed to significantly alter the trajectory of a business already in motion have a high rate of failure. The original forces are just too strong and the time is too short to create a successful change.

For example, if a product is introduced with a lousy positioning, the product is quickly labeled by the market as having a “loser” position. Once that label is stuck on a product, it is extremely difficult to reposition it as a “winner.” Just think of the many products introduced to compete against Apple. Apple’s position is to be the “cool” product desired by “cool” people. Almost by definition, this positions the imitating competition as “uncool” and the owners of the competition as “uncool.” No customer wants to think of themselves as uncool, so they buy the Apple product.

Even if you can find a small morsel of mathematics to “prove” how your product excels in some way over the Apple version, it is too late. The “uncool” trajectory has already been set. And that trajectory is pointed towards failure. Microsoft has tried numerous times to reposition the Zune to win against the iPod, but the original trajectory was too strong, so Zune cannot avoid the inevitable failure.

Even if you can find a viable way to reposition for success, there is usually not enough time to fully implement it. Getting consumers to abandon an old, bad impression of a product and accept a new, superior impression takes a lot of time and money. Either the time or the money runs out before the process can be completed. And so much money needs to be spent to alter the trajectory that, even if the trajectory can be altered, rarely will the return ever justify all the cost it took to alter the trajectory. Based on return on investment, a quick death is usually the least bad alternative in these circumstances.

Yet, in spite of all the evidence against trying to alter a bad trajectory, it is a very common strategic approach. Years are wasted trying to stop the inevitable. Better financial targets may be set each year for the annual reposition (supported by mathematics), but the improvements fail to occur—year after year after year.

If trying to alter the trajectory has such a high failure rate, then what are the alternatives?

1) Set a Better Initial Trajectory By Aiming Better
Many business ventures fail because they were never designed to win in the first place. Either the business model is flawed or the position desired is unattainable (often because someone else has already locked up the position). If a winning trajectory is not part of the original design, then don’t be surprised when the launch takes a lesser path.

If you have a business on a losing trajectory, ask yourself this question: if my product disappeared, would anyone really care? Could customers easily adapt and move on without me? Usually, the answer will be yes, because losing trajectories accompany products which have not been positioned to be indispensible. I spoke more about this concept in an earlier blog.

A winning trajectory comes from initial strategies specifically designed from the start to win—to make your product uniquely indispensible. If you cannot adequately answer the eight questions asked in this other prior blog, then you are probably setting yourself on a trajectory to fail.

The extra effort spent up-front to engineer success at the beginning will put you on a better trajectory and save yourself a lot of grief later.

2) Shoot Another Bullet
Once it has been determined that your business is on a bad trajectory, often the best course is to stop the attempt to alter the old trajectory through incremental change and instead turn to a radically new approach.

For example, if you shoot a bullet at a target and realize that the bullet is moving way off course, don’t try to convince the bullet to go a different direction. Instead, aim better and shoot a second bullet. The same is true in business.

Apple’s original trajectory with its personal computer business was going in a bad direction. Its market share against the Microsoft-based PC business was small and getting smaller. Although mathematics might show some areas of superiority, the Apple computer business was on a losing trajectory. Apple could have wasted a lot of time and money to change that trajectory, but it did not. Instead it used its computer knowledge to shoot another bullet—the iPod. The iPod, iPhone and iPad are essentially computing devices. But they were built on entirely different business models and business positions. It was a model where Apple could win. It made Apple such a winner that it provided the time, money and image boost to allow the computer business to recover.

Although the temptation is strong to try to alter the path of a poorly performing product by incrementally tinkering with the strategy, this is usually a futile exercise. The downward trajectory is already set. A better bet is to either spend more time up-front getting the initial trajectory right, or to cut your losses and re-start with a radically new approach.

It used to be a tradition in Detroit that citizens would celebrate the coming of New Year’s Day by shooting guns straight up into the air at midnight. Unfortunately, gravity causes all those bullets that went up to eventually come down. Sometimes, the bullets would cause damage, injury or death as they came down. The city had to spend money to convince people that it was not safe to shoot up because you couldn’t control where the bullets came down.

The same is true in business. Even if you have a business with a wonderful upward trajectory, eventually its lifecycle will end and the trajectory will start to come down. It is a futile effort to try to totally prevent the end of the lifecycle. It is better to look for the next big thing that will grow to replace that which is dying.