Friday, October 7, 2011

Strategic Planning Analogy #416: Would You Build This?

There’s a story from decades ago about the Sears department store company. The company was going through some difficult times. A team of executives was put together to try to rescue the company.

Eventually, one of the executives on the team supposedly said something like this: “If we were starting from scratch, would we try to build something like Sears? If not, then why are we working so hard to preserve it?”

Most strategic planning falls into one of two broad categories. Either one is trying to extend/exploit a winning business model or trying to repair a broken business model. As we can see in the story, Sears was working on the latter approach. Its business model, a middle of the road department store, was broken.

A natural reaction when one sees something broken is to try to fix it. But eventually one of the executives at Sears decided to question that assumption. His point was that the business model was broken for a reason—it was obsolete. The middle was not the right place to be anymore—success was at the extremes. Either become a low end discount store or a high end department or a specialty store. Even if you fixed the model to become the best middle of the road department store possible, it is still not the place you want to be. So why try to be there?

Often times, I think executives rush in to fix things before taking the time to ask the question “Is this worth fixing?” A lot of wasted strategic effort could be avoided if we spent more time asking ourselves if the broken business model is worth fixing in the first place.

The principle here is that not all strategic pursuits are worth pursuing. Before spending a lot of time and effort running down a strategic path, make sure it is a path worth running on. Although this advice seems obvious—especially when working on new ventures—it can be overlooked when working with core legacy ventures. We want to preserve the core so badly that we forget to ask ourselves if the core is worth preserving.

Example of Intel
Consider the story of Intel. Back in the 1980s, Intel was trying to fix its core legacy business of memory chips. Nobody at Intel wanted to give up on the business, even though the legacy business was not doing well. Emotionally, people wanted to hang on and try to fix it. Andy Grove, COO at the time, finally went in to see President Gordon Moore and said something like this,

“What would a new management would do if we were replaced? [which was a real possibility if they couldn’t fix things] The answer is clear: They would get out of the memory business. So we go through the revolving door, come back in as if we were the new management, and just do it ourselves.” You can read more about this story here.

Andy Grove stopped to ask the tough question: Is the legacy core worth fixing? As a result, he stopped trying to fix it and moved on to building on Intel’s new strength in processing. And instead of being fired, Andy Grove eventually was made CEO of Intel.

When meeting resistance to abandoning the core, keep these principles in mind:

1) All Strategic Initiatives Eventually Fail
Sometimes strategies fail due to mistakes in execution. Other times they fail because the marketplace has changed to the point where the core strategy is no longer valid. For example, the digital era has made the core photographic film business of Kodak obsolete, no matter how well it is executed.

When you have a problem with your core, start by asking what the source of the problem is. Is it from poor execution or from obsolescence? If obsolescence, then don’t waste a lot of time trying to fix it. If poor execution, determine if it is too far gone to be salvageable before trying to salvage it.

Remember, all strategic initiatives eventually fail, because a changing environment changes what is most appropriate. There is no shame in admitting that the old core is no longer in sync with the most recent changes. It is inevitable. The real test is whether simple modifications can get it back in sync or if its time has passed and it can no longer be brought back in sync. And that should be the focus.

2) Most of Your Other Stakeholders Don’t Care About the Past
Lenders, shareholders and customers are probably nowhere near as attached to your legacy as the people inside the company. Lenders and Shareholders get their returns from future cash flows, not past cash flows. If abandoning the core leads to better cash flows, then they are usually quite okay with that. If you stick too long with a legacy that is no longer producing cash flows, then they are typically quite okay with changing the management (as Andy Grove feared). If the new management would abandon the core anyway, why not do it yourself?

Customers are typically not enamored with the past, either. They want to purchase what is the best thing to purchase right now, not what was the best thing to purchase in days gone by. If an iPhone is available today, why purchase an old rotary dial desk phone? Providing what customers used to want is not a formula for success, even if they used to want it a lot. And if your customers no longer want your offering, there isn’t much reason to try to preserve that offering.

Therefore, resistance from the outside to abandoning your core may not be as large as you fear. In fact, the outside world may cheer you on for abandoning the core.

3) The earlier you ask these questions, the better you can resolve them.
If you wait until a core business is fully obsolete before changing, you are working from a severe disadvantage. By that time, the core has no value, you have no cash flow to use for a transformation, and your reputation may already be tarnished.

It is better to consider abandoning the core earlier, when it may still have value to sell off, or at least provide enough cash flow to fund the transition to a replacement business. Transitions are always easier when moving at a time of strength. Customers are more likely to follow. Your best employees are still around. There is more money to fund the shift.

Therefore, start asking the questions early, even when the present looks good, because the future may not be a repeat of the present. Negative change may be just around the corner.

Even though there may be a strong emotional attachment to the legacy core business, that does not mean that one should always try to preserve that business. The core may no longer be relevant today, or perhaps your execution of that strategy has drifted too far to be repairable. Therefore, before embarking on a massive program to fix a broken legacy business, ask yourself these questions: If I were starting over from scratch today, is this a business worth trying to be in? If not, why work so hard to be in it?

After Eddie Lampert’s investment company (ESL Investments) bought Sears, a lot of analysts were angry because Eddie Lampert was not pouring a lot of time, effort or money into preserving its core. They wanted him to fix the core business. However, Eddie Lampert was smart enough to ask the right questions. He knew the answer was not in fixing the core. He was merely using it as a foundation to become a major force in the on-line retail space. That was where he concentrated his efforts. This was where Eddie Lampert could see the possibility of a favorable return on investment. The analysts should have been happy that he wasn’t pouring money down the drain into the core.

1 comment:

  1. Gerald Nanninga,

    This is one of your most interesting posts. The questions you throw are not only relevant to business, but to all facets of life. Is it better to fix a broken heart or give a new aspirations to the heart? Is it worth it to fix a heart towards a low-profile love? Or, is it better to start a new life all together?
    Business or not, your posts fits all. It is a smashing reading.