Tuesday, August 23, 2011

Strategic Planning Analogy #409: Turbulence!

Earlier this week I flew to Kansas City. We started to fly into some turbulence and the plane began to bounce around. The pilot’s voice came on the intercom to say that there was a major storm ahead in Kansas City. He hoped to change the flight path in order to get us into Kansas City and avoid most of the storm.

A little while later, the pilot’s voice came on the intercom again. This time he said that the plane did not have enough fuel to circle Kansas City until it would be safe to land. Therefore, the plane would be diverted to Omaha for refueling.

This was a little disconcerting to me, because I was doing a one-day trip to Kansas City (in and out in the same day without spending the night). If I missed my meeting in Kansas City, then the whole day would be a waste of time.

Fortunately, with a little bit of rescheduling, everything worked out just fine.

Turbulence doesn’t just cause problems for the paths of airplanes. Turbulence can also cause problems for businesses traveling along strategic paths.

Whereas airplane turbulence comes primarily from storms, strategic turbulence can come from significant changes to any of Porter’s five forces—changes in the competitive mix, changes to suppliers or customers, new technology, or a change in the environment. If any of these changes are large enough, they can make your strategic journey a bumpy ride.

When the strategic turbulence appears, there may be a clamoring among your executives to immediately abandon the current strategy and start all over again with a new one. “THINGS HAVE CHANGED!” they may shout. “WE NEED TO CHANGE THE STRATEGY!”

This would be like airplanes changing their destination every time they hit a little turbulence. Anyone who has flown a lot knows that in the vast majority of cases, planes find a way to safely deal with the turbulence and still reach their intended destination. Most of the time, there is no need to change the destination.

And that’s a good thing. Do you have any idea what kind of chaos would incur if every plane kept changing its destination for every instance of turbulence? The negative ripple effects would be huge. People and planes would end up in the wrong places. Connections would be missed. Costs would skyrocket. It’s not a good approach for airline turbulence or for strategic turbulence.

Another reaction of executives to strategic turbulence might be to say, “Look! Things never go exactly as planned. Situations keep changing. Therefore, planning is worthless. We should stop doing it.”

Of course, that would be like airlines saying that because turbulence occasionally occurs, the airlines should abandon the idea of scheduled flights and stop filing flight plans. They should just leave the airports when convenient and decide on where they are going once they are in the air. Again, another bad idea for both airlines and businesses.

Yes, sometimes turbulence gets so bad that airlines need to change the destination (as they did for me this week). But that is the rare exception. And it should be the same for strategic turbulence.

The point here is that there are a lot of ways to deal with strategic turbulence. Immediately changing the entire strategy or abandoning strategic planning altogether are usually among your worst options.

Don’t Rush to Abandon Strategies at the First Sign of a Storm
Just as most weather-related turbulence is not sufficiently strong enough to justify an airplane abandoning its destination, most changes to Porter’s Five Forces are not sufficient to cause one to completely abandon a strategy (provided you had a great strategy to begin with). We will illustrate this by assuming we are a company with a successful luxury strategy who has entered some strategic turbulence in the form of an economic recession.

A recession will cause some near-term rocky times for a luxury strategy. Spending will go down. Profits may take a big dip. But does that mean one should abandon the luxury strategy position? A lot of time and effort and money has gone into building that luxury position. To walk away from that position would be to abandon all that effort and start over. The old customer segment would be confused and the new segment would be suspicious. During the transition from the established position to the new position, the position in the marketplace would be weakened.

And then, when the recession is over, and you want to go back to the old luxury position, you may not be able to do so because of your repositioning during the recession. It’s hard to regain a luxury image once it is lost.

Frequent strategic upheavals and change have about the same impact as having no strategy at all. All that change confuses the marketplace as to what you stand for. As a result, you end up standing for nothing.

Unless you believe that the recession will be so long and so severe that the luxury segment will utterly disappear for many, many years and never return with any significance, then one must conclude that over the long run a luxury position is viable. And if you already are successful in that segment, it is unlikely you will find a better position which justifies all the costs involved in switching.

This is not to say that you should do nothing when turbulence comes about. Turbulence probably requires a modification of tactics. But those modifications should not be random. They need to stay within the context of the greater strategy.

Yes, the airlines make some changes to get through a storm. But those tactical changes are designed to find a better way to reach the old destination (given the new near-term situation). The same idea applies to business. Rather than immediately changing the strategic destination, look for ways to adapt your tactics so that the old destination works best while in the turbulence.

Changing Altitude
One thing planes tend to do when they confront turbulence is to change their altitude. In other words, instead of flying directly into the heart of the storm, they try to go above or below the worst of it.

A similar tactical change for business would be to basically stay the course but adjust the magnitude of activity in a given area—going either higher or lower in intensity. For example, the luxury company in the recession can change the magnitude of a number of factors to help avoid the worst of the impact of the recession.

The levels of production might be lowered. Payroll might be cut. Marketing expenses might rise to try to gain a larger share of the temporarily smaller pie. The idea is to essentially do similar things, but at a different level more appropriate for the times.

Changing Path
If changing altitude is not enough, planes will alter the path. They still are trying to reach the same destination, but taking a slightly different flight path to get there. The equivalent approach for businesses would be to make more substantial tactical changes than merely changing the magnitude.

For example, the luxury company may conclude that lower end of their customer mix (those aspiring to become wealthy) is most severely impacted by the recession. Therefore, the mix is modified to shrink the aspirational products and focus more on the upper end (where the recession has less of an impact).

Or maybe the luxury products are temporarily redesigned so that they require less expensive inputs of labor or material. Maybe the luxury clothing uses slightly fewer embellishments or emphasizes a less costly fabric (while still maintaining a luxury look and quality level). Or maybe the latest designs in luxury art-glass use a little bit less of the expensive glass. The idea is to adapt to the recession by doing different things that make it easier to get through the recession without destroying the essence of the core strategy.

Take the Bumps
Sometimes the best alternative for the plane is to just go through the storm and accept the fact that it will be very bumpy for awhile. That can also be true for businesses. If there is a multi-year aging process involved (as with some luxury liquors), there may be little you can do to production levels in the short run. If quality labor is in short supply, you may not want to alienate them through temporary layoffs. If you have important contractual arrangements with key, irreplaceable players, you may not have much flexibility to make short–term adjustments. Hence, to support the overall strategy there might not be much you can change in the short-term. You just have to ride out the storm.

Turbulence should not be used as an excuse to abandon strategic planning or to hastily make random radical changes to strategic direction. Most turbulence is temporary or not sufficient enough to make a strong position obsolete. Usually the best course is to maintain the same strategic destination, but merely make tactical adjustments. This could be by changing the levels of magnitude in your current tactics, or in doing different tactics altogether. The key is ensuring that these changes reinforce one’s overall strategy rather than weaken it.

Of course, as I learned when my flight was diverted from Kansas City to Omaha, some turbulence is large enough to require a total reset of strategy. For example, if you are the leader in analog photography when the world is switching to digital imaging, there is little you can do to keep your business model relevant. The change is too great. A new destination is needed. Therefore, it is important to accurately assess the magnitude of the turbulence before making any decisions about what to do. And it is better if you start that work early, before you enter the storm.

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