Tuesday, November 29, 2011
Strategic Planning Analogy #424: Matching Up
Recently, I was talking to someone who was divorced. After the divorce, she had been using a number of internet dating sites to find a new partner. Her ex-husband was also using a number of internet dating sites at this time to find a new partner.
What was interesting was that these internet dating sites kept making suggestions that these two formerly married people should start dating each other. Given the nature of the negative emotions surrounding their divorce, I can assure you that the idea of getting them back to dating each other is a very, very bad idea.
One of the secrets to a good marriage is a good match between the people getting married. And although computer dating services may help reduce the risk of a bad match, they are not foolproof. As seen in the story, some of their suggestions can be disastrous. That is why extra effort needs to applied to ensure the match is truly good.
The same idea applies to strategies. Like marriages, strategies require good matches between the people involved. After all, strategies are only good if they are effectively implemented. Implementation requires the actions of a number of stakeholders. If these stakeholders are not well matched up with the essence of the strategy, they will stray from the strategic intent. Implementation will suffer.
Yes, there are computer programs and internet sites to help us find the right strategic stakeholders, be that strategic partners, acquisition targets, employees, customers, lenders, equity holders, etc. However, these tools are not foolproof. Extra effort is needed to ensure that all the parties match up well with the thrust of the strategic intent. If we are not diligent and vigilant in making sure we have good strategic matches, we will end up with the equivalent of a strategic divorce…and that is rarely the desirable way to implement a strategy.
The principle here has to do with strategic fit. Strategic fit based on how well stakeholders match up with the strategy. Typically, the better the fit, the better the strategic execution.
The logic behind this idea seems pretty obvious. For example, if your employees are strongly opposed to what the strategy is trying to accomplish, then they will rebel and resist. Implementation will suffer (I have witnessed this firsthand). However, if the employees are in strong agreement with the strategy, then they will more heartily implement it properly.
Anyone who has had an activist investor who wanted to move the company in a different direction than the management has also seen how such a mis-match can stall strategic implementation. The worst case scenario is that the two sides (management and equity investor) will get into a nasty fight and neither strategic option will be strongly embraced. The company suffers greatly.
Or ask Netflix about how well their strategy to split the company went after they announced it and found out that it was a major mis-match for their consumers. Customers rebelled, subscriptions dropped dramatically, and the stock price dropped equally dramatically. Netflix had to abandon the original strategy to split the company.
So it would seem to be a no-brainer that companies need to cultivate a strong strategic fit with all their stakeholders—be it employees, investors, customers, or whomever is important to the success of strategy implementation. Yet, like with Netflix, there are so many examples where companies have not been diligent and vigilant in maintaining strategic fit with these stakeholders (and have suffered the consequences).
So what causes companies to stray from this basic principal? To put it bluntly, it usually boils down to either greed or laziness.
Greed and Overreach
Greed can ruin strategic fit in two ways. First, greed can lead to strategic overreach. A great strategy is typically based upon owning a strong position. For example, a position may be based on superiority in delivery an attribute, like quality, speed or service. By definition, these positions tend to be limiting. To strongly own one of these attributes, one typically has to make trade-offs against other attributes. For example, for Apple to truly own coolness, elegance and ease of use, it has had to trade away from low cost/low price.
Limiting can initially sound bad, but it can actually be very good. It is easier to find strategic fit with customers if you stick to your point of uniqueness. Your customers became your customers because they also wanted that point of uniqueness. There was a fit.
But greed can set in. Management may want to expand beyond their point of uniqueness. They want to become much more. As a result, they overreach and destroy strategic fit with their customers.
For example, every time Wal-Mart has tried to expand beyond their low cost/low price position and try to become known for fashion, it has failed. It is a mis-match with how Wal-Mart is perceived by those who want low cost/low price and those who want fashion.
When exclusive high fashion brands let greed cause them to overreach and try to be more relevant to the masses, it leads to long-term disaster. The old customer who loved the exclusivity will walk away quickly. The new masses will eventually walk away as well, because a lot of the appeal to them was in emulating the exclusive customer (who is no longer associated with the brand). Not only is there now a mis-fit with the customer, but also their supply chain. Once the fashion brand appeals to the masses, the exclusive retail outlets will drop the brand because it no longer fits with their strategy.
Or how about Toyota? Toyota had a strong position in producing dependable cars. However, Toyota got greedy and wanted to make all kinds of cars at all kinds of prices. The trade-offs which used to lead to superior dependability started to fade away. Quality and dependability dropped to levels which hurt the credibility of the old position. People were no longer willing to pay a high premium to get the “dependability” of a Toyota, because it no longer seemed worth it.
Greed and Cheapening
Another outcome of greed may be in underinvesting in the core position in order to cut costs and make more money. To own a position, you have to invest in it. Choke off investment in the strategy (in the name of greed), and your actions no longer fit the strategy. For example, another part of Toyota’s problem was that they underinvested in the quality levels needed to create dependability (in order to increase the profits needed to invest in overreach). This lead to less dependability in the cars and a mis-fit with the customers.
In this economy, companies are finding they can get away with paying their employees less. In the long run, however, this is creating a mis-fit between employees and the company. The good employees leave as soon as they can. They ones who can’t leave get angry and become less committed to putting in any extra effort behind the strategy.
If you cheapen your approach enough (in labor, parts or whatever), execution will eventually suffer to the point where you lose the right to own that position. Then your strategy is lost. Greed for short-term bottom-line gains eventually leads to far lower long-term profits.
Sometimes it isn’t overt acts like overreach or cheapening which ruin strategic fit. Sometimes it is just a lack of effort to keep fit from eroding away. We can get lazy in our vigilance to maintain fit. For example, we may let mis-fitting employees creep into the business because we do not police that characteristic close enough in the hiring process. We hire them because they have superstar status and forget to do the due diligence into whether they are the right fit for the culture and strategy. When the fit is wrong, they can poison the culture of a company and ruin the strategy.
Many of the Silicon Valley firms like Google, Apple and Facebook realize how important engineering excellence is to their core strategy. As a result, they are not lazy in their approach to getting the best engineers. They do whatever it takes in terms of pay, perks and image to gather this important resource for their company the best they can.
Another place laziness in fit-seeking can occur is when looking for investment capital. We may take equity investment money from someone just because they want to invest in us and not take the effort to ensure that there is a strategic fit between their objectives and ours (and regret it later when they challenge our strategy due to a mis-match). Or we can acquire a company because the financial models look good, but not do additional due diligence into strategic fit. That lack of strategic fit can make the acquisition a disaster. In fact, poor fit is one of the leading causes of acquisition failure.
As we have seen, strategic fit cannot be assumed to be a given. Fit can fade away due to greed or laziness. Therefore, we need to become proactive in aggressively cultivating strategic fit with all our key stakeholders—investors, employees, customers, partners, supply chain, etc. We need to make fit a high enough priority to overcome the impulses of greed and laziness.
Whenever a decision is being made which impacts a stakeholder, we need to ask this question: Will this move strengthen or weaken strategic fit?
Cultivating fit needs to become integral to the strategy itself. We need to seek out investors who agree with our approach. We need to seek out employees who believe in the strategy. We need to find distributors where supporting our strategy is in their best interests. We need to aggressively seek out those customers who are looking for what we are offering. We need to only aggressively go after acquisitions with a strong fit. It cannot be taken for granted. It must be sought out.
Strategic implementation is strongest when all the stakeholders to the strategy are well-matched to the strategy. Without a strong fit across the board, the strategy suffers. There are many forces (like greed and laziness) which can naturally work against strategic fit. Therefore, we need to be proactive at seeking out and protecting strategic fit.
Sure, not everyone is a good fit for our company. But that doesn’t mean we should give up looking for them. They are out there. We just need to take the effort to seek them out.