Thursday, December 29, 2011

Strategic Planning Analogy #429: Musical Chairs

When I went to parties as a child, we played a game called Musical Chairs. The game used a circle of chairs. There would be one less chair than the number of children playing.

As music played in the background, the children would walk around the circle of chairs. When the music stopped, everyone would try to sit in a chair. Since there was one less chair than children, one child would not get a chair. That person was called “out” and was no longer allowed to play the game.

Then, one of the chairs would be removed and the music would start again. The process would be repeated until only one child was left sitting in the one chair that was left. That child was declared the winner.

Sometimes the game would get very active when two children would fight over a single chair. Although both would try to claim rights to that chair, one of them would lose out. After all, the rules stated that only one person could sit in a given chair. Since there were fewer chairs than children, by definition someone would lose out in each round.

The chairs in Musical Chairs can be thought of as being like business opportunities. And the children can be thought of as being like companies who want to take advantage of those business opportunities.

Like in the game, there are more companies trying to take advantage of the opportunity than there are opportunities. As a result, companies lose out and can no longer play the game in that arena.

You can see this happening all the time in business. Whenever there is a “hot” business space, there will be tons of businesses trying to exploit it. Unfortunately, there are too many companies chasing these “hot” spaces. As a result, most companies do not successfully exploit the opportunity. “When the music stops,” and the companies rush for a seat at the business, not all will find one.

Look at the recent “hot” spaces like Solar Panels, Social Media Couponing, iPad imitations, etc. Companies are quickly exiting the businesses or going bankrupt. Yes, the business space may be “hot” but most of the businesses trying to exploit the opportunity fail. There are not enough chairs to satisfy all who want to play.

The principle here is that merely finding a good place for your company to play is not sufficient. So-called “good places” attract too much interest relative to the opportunity. As a result, these “good places” quickly become “bad places” for those who cannot quickly secure a solid ownership of share in that space. Like in the game of Musical Chairs, most players are asked to leave the game because they could not find a chair for their business to occupy.

Therefore, strategies require two elements—a viable space, and a way to aggressively fight to win a place within that space.

Best Buy Example
I was reminded of this principle while reading the book “Becoming the Best” by Dick Schulze, the founder of Best Buy. The book talks about the history of the development of the massive Best Buy retail chain. There were several times in the early years when Best Buy was on the verge of bankruptcy. Best Buy could have very easily become one of those companies who could not secure a chair and been told by the marketplace to leave the game.

Yet, Best Buy endured to become the last national consumer electronics retail chain left in America. It won the game of musical chairs in the consumer electronics space. Why? Part of the answer can be seen in the sub-title of the book: “A Journey of Passion, Purpose, and Perseverance.”

Dick Schulze did not just “show up” at the game. He was quick, aggressive, and persevering. He understood that business is a race and that you have to run aggressively, with purpose and endurance, in order to win that race.

A great example was back in the late 1980s when a large competitor, called Highland Appliance, decided to enter Best Buy’s territory in order to drive the smaller Best Buy into bankruptcy. Realizing what was going on, Best Buy reacted quickly and aggressively. First, Best Buy acted quickly to grab market share in markets where Highland was committed to grow, but moving slower.

Second, Best Buy was the first to realize that the old commissioned sales model (which Highland, Best Buy and everyone else was using) was becoming obsolete. Therefore, Best Buy quickly changed its approach and became the first in the industry to own the superior business model which was an approach more like a supermarket (no commissioned salespeople). They called the new business model “Concept II.” Because of these quick and aggressive tactics, Best Buy survived and it was Highland Appliance who soon went bankrupt.

In other words, with Concept II Best Buy developed a superior position where they could win (a great space) and then quickly and aggressively did whatever it took to own that space before anyone else could get there (a great race). By doing both tasks, Best Buy won the game of musical chairs in its industry and reaped the rewards of being the leader of consumer electronics when all the money was being spent to convert from the analog to the digital era.

Sure, everyone knew that there were great rewards to be had if you were in the digital space when that conversion from analog to digital took place. But not everyone who wanted to take advantage of this opportunity succeeded. Best Buy succeeded when others failed because it worked faster, harder and smarter at securing the right position in the space (Concept II) and then did whatever it took to make sure nobody took it away from them. They found a chair to sit in and never let anyone push them out of the chair.

General Motors Example
An example in the opposite direction would be General Motors. In recent years, it was becoming apparent that the old automotive business model of owning a huge portfolio with lots of different brands was no longer the best place to be. The wise business move would be to sell off some the weaker brands and concentrate more effort on the stronger brands.

General Motors understood this, but they were slow in the race to execute the strategy. Compare their speed and aggressiveness in execution versus Ford. Ford acted quickly to sell off its Land Rover brand, which was going out of favor due to its focus on large, gas guzzling vehicles. As a result of acting quickly, Ford was able to exit the business while also getting some cash from the sale of the division.

By contrast, General Motors was slower in reacting with its large gas guzzling Hummer brand. By waiting longer, that gas guzzling segment became even less desirable. And Ford had already sold its Land Rover division to the best potential buyer for such a brand. As a result, General Motors could not find a buyer for Hummer and had to shut it down at a huge loss.

A similar situation happened with their northern European brands. Ford acted quickly and found a buyer for Volvo. General Motors was much slower and more timid in reacting and could not secure a buyer for its Saab division. GM had to shut it down for a loss.

Both Ford and General Motors saw the same good strategy of shrinking their portfolio. Both tried to execute that same “good” strategy. But because Ford was quicker and more aggressive, it was able to execute the strategy far more successfully than General Motors. Same strategy, but different results due to differences in speed and aggressiveness. Just as it takes speed and aggressiveness to secure a chair in Musical Chairs, it takes those same qualities to win in business.

Strategic planning needs to be more than just identifying places where money can be made. It needs to also develop a path whereby its company can out-hustle the competition and survive the race to become one of the survivors. Great opportunities cause a large rush of firms who try to exploit it. Most of these firms will not benefit from the opportunity because they lose the race to become one of the few firms which can secure a “chair” in the industry. Slow imitators rarely achieve benefits as large as the quick and aggressive innovators. So it you want to win, not only find the right space, but find a way to win the race.

Musical Chairs requires many rounds before a winner can be declared. Just because you survive any early round does not mean that you will survive later rounds. The same is true in business. Don’t get complacent because of early success. This is an endurance race. You have to keep running.

Saturday, December 24, 2011

Strategic Planning Analogy #428: Changing Tires

Let’s assume there are two people driving along in a car. One is the manager and the other is his subordinate.

As they are driving along, the car suddenly gets a flat tire. After pulling off to the side of the road, the two of them just sit in the car doing nothing.

Finally, the manager says, “Well don’t look at me to change that tire. I like the current tire. It successfully got me everywhere I wanted for the last five years. I see no reason to give up on that tire and change it just because it had one little setback.”

The subordinate says, “Well don’t expect ME to change that tire. It’s not in my job description. It’s not a part of my bonus calculation. I’ll file a complaint if you force me to change it.”

So the two of them sat there by the side of the road for hours with that flat tire, even though there was a spare tire and jack in the trunk.

When a tire goes flat, you need to change it. Similarly, when a company’s current business model goes flat (stops working), you need to change it. Therefore, one might think that all one needs to do when business models go bad is to discover a new business model and a migration path and you’re done. Right?

Wrong. In the story, they had the equivalent of the new business model (the spare tire) and the migration path (the jack). Yet those parts just sat in the trunk not being used.

Why? Because nobody was adequately motivated to use the jack to put on the spare. The manager did not see the need for change and the subordinate did not feel personally responsible for making the change. If nobody wants to do the work, then having the parts is worthless. You’re stuck on the side of the road while the other companies pass you by.

Are companies really as silly about change as those people were with the flat tire? Well, consider research by McKinsey and Co. Scott Keller and Colin Price of McKinsey recently wrote a book entitled Beyond Performance. The book is based on research into thousands of executives at hundreds of companies. Here is what they found.

First, about 70% of change programs fail. In other words, most of those flat tires don’t get adequately fixed. That’s not good news.

Second, the primary reason why those change programs failed is not due to a lack of resources or plans. In other words, it wasn’t for a lack of spare tires and jacks that these change programs failed.

Instead, 72% of the failure could be traced to the people in the organization—nearly half of this amount to management failure to support the change and the rest due to employees resisting the change. In other words, most companies are very much like those people in the story. They sit by the side of the road in failure because management won’t support the change and employees resist the change activity.

The principle here is that “change” is an activity, not a concept. You can have the concepts of a new vision or a new strategy or a new business model. You can also have the concept of a plan to make that change a reality. But if equal effort is not also placed behind motivating people to act, you will almost surely fail.

Therefore, a strategist’s job is not done when the business model and migration path are devised. It is only done after equal effort is spent creating an internal environment capable of vigorously acting to bring about that change—quickly and fully. Otherwise, all you have done is put a spare tire and jack into the trunk and left the company sitting by the side of the road unwilling to use the tools you provided.

Getting Management Support
So how do you get management to embrace the need for change? There are several approaches.

First, you can try to get them to see that the status quo is truly broken and cannot be brought back to its former glory. In the story, the manager thought the flat was just a temporary setback for the formerly successful tire and that it would eventually bounce back up on its own like before. Therefore, he was not motivated to change that tire. Similarly, you need to show people that the flat is a major change in the condition of that tire. It will not return to its former glory on its own. It must be replaced.

Second, you can try to convince them that even if they liked that old tire, they’ll like a new tire even more. In other words, if you cannot convince them the old model has gone bad, then convince them that the new business model is so much better that it is worthy to change to get the improvement.

Third, you can appeal to their personal motivators. Most managers have something which drives them to reach the top. For some it is greed for money, for others it is greed for power, for others it is leaving a legacy, and for some it is leaving a mark which makes the world a better place. Whatever the motivator, tie it to the change. Tell them that if they make the change, they will get more money, more power or more whatever, than they had before. It’s sorta like telling a guy with a flat tire ,“If a guy puts slick new tires on his car, all the cute girls will want to ride with him.”

I’ve talked about ideas like this in more detail here and here.

Getting Employees to Make the Extra Effort
In addition to getting the managers motivated, you need to properly motivate the employees. It’s one thing for employees to do the minimum required for their position. But if you want to succeed in the transition for change, employees typically need to put in a much stronger than normal effort.

Keeler and Price refer to this as going beyond merely motivating through normal incentives to tap into “employees’ sense of meaning and identity to harness extraordinary effort.” This is effort which comes from deep in the heart.

This means transforming the change agenda from being “additional work” on top of the day-to-day to becoming “the greater work” which gives meaning to all of one’s efforts.

I’ve spoken about this topic in more detail in several other blogs, including this one.

A large part of strategic planning has to do with enacting change within the organization. The key roles typically given to strategists are to:

a) Help determine what to change into; and
b) Help determine the best path to get there.

However, research has shown that if that is all that is done, there is a high likelihood of failure. To ensure success, one must do more. One must also make sure that:

a) Management believes in promoting the change; and that
b) Employees are deeply motivated to give an extra effort to make it a reality.

Strategists need to help with these issues as well.

Changing a tire is not a glamorous job. You have to get your hands dirty. But the car won’t get moving again unless you change the tire. In business change, not all tasks are glamorous, either. But if you keep the big picture in mind, you can see that the messy jobs are essential if you want the big prize. So don’t shy away from getting your hands dirty by working on getting the implementation done.

Tuesday, December 13, 2011

Strategic Planning Analogy #427: Reporting Documents Vs. Managing Documents

Back when I was in college, I was a DJ on the college radio station. Near the end of one year, there was a student who suddenly realized she was about to graduate without any marketable skills. She decided to put in some time on the radio station to get some free experience.

The only position she could get on short notice was to announce sports news. Unfortunately, she knew absolutely NOTHING about sports (her passion was classical music). Before going on the air, she would ask me questions, like which sport did a particular team play, or what was the name of a sports team in a particular city. She literally knew NOTHING about sports.

As a result, her sports reports were the worst I ever heard. All she would do is state the name of a city and its score. One after another after another after another after another, with no commentary, no insights, no additional statistics, no excitement. It was painful to listen to.

Sports scores are important. They tell you who won and who lost. But that’s about it.

They really don’t give you a feel for how the game was played. You don’t know what happened to create the score. You don’t know how many near-scores were prevented by great defense. You have no idea what any of the players did. You don’t know the team strategy. If all you have are the scores, you are missing a lot. And as a result, that woman’s sport’s report was missing a lot—which made it a terrible report.

The same is true in the business world. There are financial metrics which can tell you the results of how well a company did, like Net Earnings or Earnings per Share (EPS). These types of metrics are like the final scores in a sporting event. They are important to know, but they really don’t tell you a lot.

For example, did EPS go up because earnings went up or because outstanding shares went down? Did earnings go up because of increased volume, decreased expenses, or a one-time accounting adjustment? Are the results repeatable, or based on unusual one-time circumstances? None of this can be discerned from just looking at earnings.

What if you had a sport team coach who never watched the game he was coaching and only looked at the score? He wouldn’t be able to coach well, because he would not have any knowledge of what was happening on the field of play. He wouldn’t know how well individual players were playing or how effective particular plays were.

Similarly, how can you expect business managers to execute well if all they do is look at final results? They have no idea of what’s happening out in the marketplace. They don’t know who is performing well. They don’t know which tactics are working. Worse yet, they may be satisfied with final results, not realizing that they were obtained illegally, unethically, or by means of tactics which will destroy long-term performance.

You wouldn’t expect a coach or a sports announcer to only look at final results. Yet, so often we tolerate this in the business world.

The principle here is that, by definition, “results” are the result of something which occurred in advance. Results are merely outcomes produced by prior actions. Earnings don’t magically appear by themselves. They are the result of a lot of prior activities. Therefore, if you want to impact results, you have to manage those prior activities.

As we saw in a prior blog, if all a coach does is yell at his players to “Make a higher score,” he has not provided any insight into how to get a higher score. His yelling is fairly worthless. If you want better results (a higher score), you need to dig deeper into how the game is played.

Similarly, if all we tell an employee is to “Get higher sales,” we have not provided any helpful insights. If you want higher sales, you need to dig deeper into how sales are made.

Reporting Tools are Not the Best Management Tools
Part of the problem is that businesses often use the same metrics to manage reported results (outcomes) as they do to manage operations (inputs).

“Results Reports” are the scoreboards of business. They are typically income statements, balance sheets, cash flow statements, or some variation of these. They tell the external stakeholders how well you did. They let the shareholders, debt holders, and government agencies “know the score.”

These are great reports. However, their focus is primarily on the outcome, not what caused the outcome. They let you know the score, but not what created the score.

Sports scores may be great for telling the external world how the team did, but they are not the best tools for helping the team improve that performance. To do that, they look at different data, like who is making errors, how successful are particular plays being executed, are people playing with the proper form, do they know what to do, are they cooperating as a team, and so on. You won’t find those answers in the final score. That’s why sports teams use tools other than the scoreboard to improve results.

Similarly, the reported results in an income statement or balance sheet won’t give an adequate enough picture to know how to improve those results for a business. They tell you the “what” but don’t tell you the “why.”

Therefore, businesses should be more like sports—use one tool to report results and another report to manage the process to get those results.

We can see this in the example of a retailer. One of the key results a retailer wants is sales. Yet, as we saw earlier, just wishing for sales or yelling at employees to get sales will not create sales. Sales are the result of prior activity.

What are the prior activities which create retail sales? The formula looks something like this:

SALES = (# of customers) X (# of trips to the store) X (# of items bought per trip) X (the average price per item purchased)

In other words, if you want to increase sales, you need to do a combination of the following:

a) Get more customers;
b) Get the customers to come more often;
c) Get the customers to buy more items; and
d) Get the customers to buy more expensive items.

You can measure these items by looking at:

a) Customer Counts
b) Customer Frequency (which is easier to measure now that customers have loyalty cards).
c) Size and Composition of the Average Transaction (in units and currency)

Then you can design tactics to improve these activities. And then you can measure your success with these types of metrics.

However, none of these metrics can be found on an income statement. The first line on the income statement is “sales.” The sales are already assumed to exist and are reported as a done deal. It gives the “sales” score, but no insight on how to improve it. The income statement is a miserable way to manage sales. Instead of using that results report mechanism, one needs a management report with these other measures.

How Did We Get Here?
Although it may now seem obvious that different tools are needed to manage a business than to report results, many businesses tend to use results documents for both. Budgets are usually based on result metrics. Bonuses are based on result metrics. Management meetings focus on result metrics. It’s as if everyone is yelling about the size of the sales without ever bringing up the measures which truly impact sales.

How did we get to this situation? I think a lot of it has to do with the tight connection between the accounting function and the strategic analysis function in many companies. They are often the same people or exist in the same department.

The accounting orientation has a predisposition towards result reporting (it is what they were trained to do). In addition, it is a lot easier to report everything if everything uses the same report. Therefore, there is a temptation to force all reporting into a result-oriented template.

Yet this is not the ideal format to understand what is happening in those activities which really create those results. It is not the right tool to manage what causes those results. A different monitoring system is needed…a strategic one.

Although results reports, like income statements, are useful (particularly for external stakeholders), they are insufficient. If you truly want to manage the important internal activities which cause these results, you need a different tool. You need a tool which monitors how well people are performing on the key inputs to that performance. Otherwise, all you are doing is shouting the score without any clue as to how to improve the score.

Sports media like ESPN, Sports Illustrated, and EuroSport spend only a small percentage of their time reporting scores. Instead, they focus their time on trying to understand the performance behind the scores. Is your reporting approach more like these companies, or more like the woman I knew back at the college radio station (who didn’t have a clue as to what was behind those scores)?

Thursday, December 8, 2011

Strategic Planning Analogy #426: The Gotcha Guys (Part 2)

There’s an old saying that “absence makes the heart grow fonder.” That may be true, but absence certainly does not make the relationship easier.

My son works the day shift. His fiancée works the night shift. As a result, they do not see as much of each other as they would like and that adds difficulty to the relationship.

I can empathize with that. When I first moved to Columbus, my wife stayed back in Minneapolis for awhile (about 750 miles away). That was tough.

For a relationship to thrive, there needs to be interaction. This is not only true with marriage. It is also true with the various aspects of one’s business. In particular, I am thinking about the people in charge of long range strategic goals and the people in charge of monitoring near-term financial targets (like annual budget and bonus targets).

If these two groups are not interacting together on a regular basis, they can get out of sync with each other. It can get as dysfunctional as when married couples drift apart and no longer interact on a regular basis.

If the near-term monitors and the long-term strategists are not in regular communication, their agendas may no longer be compatible. Achieving the near-term targets may no longer move the company towards the long-term goals. They might even do the opposite and move the company further away from the long term intent.

As we saw in the previous blog, many problems can occur when the near-term monitoring of the “Gotcha Guys” loses the context of the long-term goals. The Gotcha Guys can end up rewarding bad behavior and punishing good behavior. They can also stifle the creativity needed to achieve ambitious long term goals.

In this blog, we will look at some suggestions to help avoid these problems (and keep that context in place).

The principle here is that long-term goals are only achieved if they are part of the daily discussion when near-term targets are being decided and monitored. Therefore, it is essential to have frequent interaction between the near-term Gotcha Guys and the long-term strategists. Here are some ideas to help make this a reality.

Suggestion #1: Set More Strategic Targets
Most of the near-term targets used by companies are simple financial metrics, like “sales” or “expenses.” As we saw in the last blog, it can be easy for people to “game the system” and use tricks to achieve these types of simple metrics in ways that have nothing to do with achieving strategic goals.

Some try to avoid this problem by trying to make the metrics more complex by using ratios. Then you might have metrics like “Sales per Labor Hour” or “Expenses as a Percent of Sales.” But, as we saw in an earlier blog, even ratios can be abused and lose their link to the bigger strategic picture.

Therefore, I suggest that some of the near-term targets avoid numbers altogether. Instead create some monitoring questions which are more subjective—requiring more of a yes or no type of answer.

In its roughest form, the question would be “Did this area take the desired steps to move the company closer to its strategic objectives?” Now this is probably too vague to use in this form. But if you have a well thought out strategy, you should be able to figure out what types of key activities need to take place to make it a reality. Then you can determine which areas of the business need to participate in each activity and how they can impact it. Some examples of key activities might be:

a) Adding some specific capacity where it is lacking.
b) Adding some specific capability where expertise is lacking.
c) Convincing consumers to believe in the claims of your positioning.
d) Creating superiority in a particular attribute essential to winning in the marketplace.
e) Properly resolving a key strategic issue.

By holding people accountable in the near-term for specific activities directly linked to the long-term strategy, one is more likely to get the long term strategy achieved. These types of questions are more difficult to “game” because you are more directly measuring actual long-term activities.

Now some people will take this one step further and try to create fine-tuned metrics around these activities. This is usually referred to as a balanced scorecard. Although having a balanced scorecard is better than just the simple metrics mentioned earlier, it may still be less ideal than the more vague and abstract version of the question “Did you move us closer to our goal?”

I have two reasons for saying this. First, if you keep the question more vague, it requires more interaction between the long-term folks and the Gotcha Guys in order to interpret the target and the performance. And as we said at the beginning of the blog, more interaction is a good thing.

Second, the more we try to push this into a metric rather than a question, the easier it is to sever the linkage between near- and long-term. The temptation is there to focus on just “hitting the number” rather than “doing what’s right.” Why provide that type of temptation?

Now I’m not saying that all the targets should be in this format. Just do enough so that the near-term and long-term people are forced to work together to ensure that people are rewarded on their activities in a long-term context.

Suggestion #2: Use Scenario Planning
As we said in the last blog, near-term targets can get out of sync with long-term goals when the environment changes (or we learn of a need to adjust our assumptions). One way to get around this problem is to analyze various scenarios in the beginning and think through their ramifications to the desired metrics.

Then, if the situation changes, the long-term people can tell the short-term people to shift the program to the alternative scenario and its alternative metrics. By using this process, it gives more opportunities for the two groups to work together (when setting up the scenarios and when changing scenarios). In addition, it is a quick way to keep everyone in sync when times change.

Suggestion #3: Force Interaction
Finally, if these other suggestions do not create enough interaction, then mandate it through policy.
Mandate periodic cross-functional meetings. Rotate people between the two departments. Put them on project teams together. Make increased interaction one of their goals. Have them sign-off on some of each other’s work. Do whatever it takes to ensure that the short-term Gotcha Guys are confronted with the long-term context.

It is easy for near-term targets to get out of sync with long-term goals. To help prevent this from happening, it is a good idea for the groups responsible for near-term and long-term to interact on a regular basis. Three suggestions to do this are:

1) Add some abstract action-oriented questions to the near term criteria (“Did you do what was required to get us closer to our goal?”);

2) Use Scenario Planning;

3) Force interaction through policy decisions.

If couples stop communicating altogether, they can end up getting a divorce. Let’s keep our communications frequent between the near-termers and the long-termers to prevent an ugly divorce in our business.

Tuesday, December 6, 2011

Strategic Planning Analogy #425: The Gotcha Guys (Part 1)

Many years ago, the US Postal Service ran an advertising campaign to increase the use of its priority mail service. The advertising was a tremendous success—far higher than anticipated. Usage of priority mail skyrocketed. The return on that advertising investment was phenomenal. It paid for itself many times over.

The US Postal Service employee in charge of the advertising was pleased with how well the advertising was working. He could see that each dollar spent on the ads returned high levels of profits. Therefore, he increased the spending on the ads. And the ads continued to perform well.

You’d think that the US Postal Service would be happy with these outstanding results. Instead, they fired the employee in charge of the advertising. Why? The man had overspent his allocated advertising budget. And that was considered an offense worthy of being fired.

In this story, we see two points of view. The employee felt he should be rewarded, because he had dramatically increased the profitability of the Postal Service—far more than what was expected. He saw that as a great success.

By contrast, the US Postal Service saw it as a great failure, because the expense budget allocated for advertising had been violated. Such a gross overspending needed to be severely punished.

The employee understood the “Big Picture”: He knew that the postal service needed to create demand for the more profitable Priority Mail if it was to have any long-term viability. He was fulfilling that big picture purpose. His superiors, however, were focused on the “Little Picture”: The postal service was losing money, so it needed to control each line item of costs on the income statement. By losing sight of the big picture, these superiors made a poor long-term decision regarding the advertising.

A similar situation can occur in strategic planning. Somewhere within the planning process, one usually sets some near-term targets—usually financial in nature (the Little Picture). Then there are people assigned to monitor progress against those targets. If the targets are not achieved, then this violation is brought to everyone’s attention.

I call these monitors of the Little Picture the “Gotcha Guys” because they appear to take great pleasure in catching people in the wrong. When they see a violation, they seem to want to shout “Gotcha!” because they like catching people in the act of violating the rules and want everyone to know that they caught someone. These are the types of people who would take pleasure in firing the US Postal Service employee who broke the rule on advertising spending.

Although one needs people to monitor this near-term performance, one must never forget the larger context of the Big Picture. Remember, the ultimate goal of strategic planning is to improve the long-term prospects of the business, NOT to hit every interim target exactly.

In practice, sometimes you can end up discovering a better path to long term performance which doesn’t exactly mesh with the pre-set interim targets. As long as this better path is consistent with the foundational principles of the strategy, it should not be severely punished.

The principle here is that near-term performance always needs to be evaluated within the longer-term context. Otherwise, near-term performance may never lead to the desired long-term results. This blog will briefly look at three problems which can occur when this context is ignored. In the next blog will look at ideas to help keep the context in place.

Problem #1: The Linkage Is Not Ironclad
When the near-term targets are set, there is an assumption that there is a linkage between the near-term target and the long-term goal. In other words, there is an assumption that if the targets are generally achieved, then the goal will be generally achieved.

In a rough sense, that is commonly true—there usually is some sort of linkage. The targets of where to cut and where to invest tend to be made with the idea that they will lead to the right outcomes.

The problem is that this linkage is not ironclad. One cannot assume that there is an unbreakable connection between the two.

For example, sometimes one can find ways to achieve the near term targets in a manner contrary to the long-term goals. Haven’t you ever seen managers find tricks to achieve their numbers (and get big bonuses) which are contrary to long-term intent? They cut needed investments and repairs to hit the near-term expense targets while jeopardizing long-term capabilities. Or they hit a near-term sales target by using tricks which either destroy profits or hurt future sales opportunities. These are the people who are destroying the future, but are wrongly ignored by the Gotcha Guys because they hit their targets.

Conversely, there can be ways to improve strategic outcomes which violate the near-term targets (as we saw with the postal service advertisements). These are the people who are improving the future, but get wrongly punished by the Gotcha Guys, because they missed their targets. In both cases, because the Gotcha Guys are not evaluating near-term performance within the long-term context, they are coming to the wrong conclusion.

Don’t assume an ironclad link. Evaluate each case to make sure the right long-term move was made.

Problem #2: We Learn As We Implement
When the implementation plan and near-term targets are set, we make the best choices based upon what we know at the time. However, as we start the implementation, we learn even more. Sometimes we learn that some of our assumptions weren’t as good as we thought. For example, competition may react differently than anticipated. Or, as we saw in the story, advertising may work a lot better than anticipated.

As we learn, we need to adapt. Sometimes that adapting means that the original targets need to be adjusted. I’m pretty sure that if the Postal Service had known in advance how well the advertising would work, they would have set a higher target for advertising expenses.

In other words, our good intents on target-setting may have lead to the wrong targets. As we learn this, we should adjust the targets. I’m not saying here that we should continually change our Big Picture strategy based on the latest whim. That should be relatively stable. But sometimes tactics need to be adjusted (in light of new learnings) in order to better achieve that same strategy.

The Gotcha Guys tend to ignore learnings and just zero-in their focus on monitoring performance on the original targets. This can lead to not taking advantage of the new learnings and sub-optimizing long-term performance.

Problem #3: Gotcha Guys Stifle Creativity/Innovation
One of the key buzz words these days in “Innovation.” Most of the recent literature seems to promote the idea that great strategic leaps forward require an innovative approach. We need to think “outside the box” in order to find our strategic edge.

The problem with a rigid adherence to the near-term targets is that the targets were probably set with “inside the box” thinking. A truly innovative approach may require severing the linkage between the target and the strategic goal.

If the Gotcha Guys are given too much power to force compliance with the near-term targets, they may inadvertently be stifling any creativity and innovation. Creative approaches which could lead to superior achievement of long-term goals might be abandoned, for fear of upsetting the Gotcha Guys.

Although there is a need to break down long-term strategic goals into near-term tactics, problems can arise if those near-term tactics take on a life of their own outside the context of the bigger picture. For example, tactics can be achieved using tricks that do not support the strategy. Or, tactics may become obsolete as we learn more through implementation. Or, innovative ways to improve on the big picture may be ignored because they do not fit with the original tactics. That is why compliance with near-term targets needs to be done within the context of the longer-term strategy. That way, we can assure that the right things get done—not only for now, but for the future.

The recent news from the US Postal Service is that they are near bankruptcy and that drastic changes are needed in order to survive. Perhaps if they had spent more time years ago incorporating the big picture into their decisions (rather than punishing creative initiative) they would not be in a mess as large as they are today. Learn from the mistakes of the US Postal Service.