Friday, March 25, 2011
Back when I was a young boy, I was part of the Cub Scouts, the younger version of the Boy Scouts. One time, the leaders took a group of us young Cub Scouts to a scout campground to spend the weekend camping in tents.
One night during that weekend, a few of us boys got hungry for some popcorn, so we quietly left our tent and sneaked over to the rustic kitchen. Without any adults to supervise us, we made a big batch of popcorn. This was in the days before microwaves. I’m surprised we didn’t burn the place down.
One of the boys wanted to be in charge of salting the popcorn. He put practically an entire box of salt on the popcorn. This made the popcorn so salty that it was inedible. So we got the bright idea that if we made a second batch of popcorn and mixed it with the first, the whole thing would taste good. So we made a second batch and mixed the two. It was still too salty to eat.
So we decided to mix in a third large batch of popcorn. The end result was still extremely salty, but almost tolerable, if you only ate one handful and had a lot of water to wash down the salt.
Of course, by now we had a huge supply of popcorn—more than we could possibly eat. So we went outside and yelled that we had free popcorn for anyone who wanted it. Suddenly, all these other Cub Scouts showed up to get some popcorn. They each took only one handful, because it was too salty. But eventually that got rid of most of the popcorn.
Unfortunately, our yelling also woke up the leaders who were supposed to be supervising us. They weren’t very happy when they found out what we did.
At the campground, we had something bad—over-salted popcorn. We thought we could make it good by adding something good to the mix—unsalted popcorn. However, we kept adding more and more good and the end result was still bad. In the end, all we had was a bigger pile of bad. We would have been much better off just throwing away the first batch and starting over.
It seems like a lot of businesses act like I did at that campout. They have a bad situation on their hands—not enough growth, not enough profits, etc. And just as I tried to fix my bad popcorn by adding new popcorn to the mix, these businesses try to fix their bad business situation by adding new businesses to the mix. It could be line extensions, diversifications, or other types of new product introductions. Whatever the means, the focus is on growing the top line with new lines of business. Unfortunately, the net results are usually still below expectations. They probably would have been better off if they had focused on tossing out the bad businesses rather than adding the new businesses to the already toxic business situation.
The principle here is that our strategic goal should not be to become bigger, but to become more profitable. And many times, the most effective way to increase profits is by shrinking the scope of our business. Tossing away the elements which destroy huge amounts profitability can often provide a greater improvement than layering on more elements which are only marginally profitable.
Just as it takes a huge amount of new popcorn to overcome a small salty batch, it can take a huge amount of new business to overcome a dysfunctional business base—probably more than you can afford to undertake (either in money or manpower). Rather than adding, it may be more desirable to subtract.
Proctor & Gamble Example
Think about Procter & Gamble. Back at the beginning of the 1990s, they had 31 varieties of Head & Shoulders shampoo and 52 versions of Crest dental products. All of those were a lot of additional versions which drove up the costs of manufacturing, distribution, inventory management, marketing, management and so on. So P&G decided to cut its variety.
By the end of that decade, P&G had cut the number of its products by one-third. In hair care alone, the variety was cut in half. So how did all that cutting impact sales? Well, the market share in hair care went up nearly five points and overall P&G sales grew by one-third during the mid 1990s.
And while sales were rising, costs were dropping, because a lot of costs can be eliminated when you eliminate all of the inefficiencies from excessive variety.
And it didn’t stop there. Back in December of 2010, P&G leaders talked to analysts about the benefits from even further simplifying their business. In 2008, P&G had 500 manufacturing platforms. By 2014, they plan on having only 150. That is expected to produce savings of about a half a billion dollars.
They are also going to simplify the processes used to run the business. By moving to fewer, but stronger regional centers over the next three years, they expect annual savings of $160 million. By replacing bad inefficiencies with new technology, they anticipate annual savings of about $50 million per year, not to mention other ways to cut which will add even more.
When you add it all up, we’re talking about an annual increase to the bottom line for P&G of hundreds of millions of dollars. Just imagine how many new businesses P&G would have to add to their mix to get the same amount of net impact on the bottom line. Keep in mind that a lot of that new innovation would probably cannibalize other P&G businesses and add to the complexity costs of the company. So these new businesses would have to create even more profits than this to make up for that cannibalization and added complexity costs.
It’s like that popcorn. Rather than trying to add on layer upon layer of new business (unsalted popcorn) to the mix, P&G threw out the salt that was causing the problems in the first place (too much variety, too much overhead, too many platforms, etc.). Getting rid of the salt (bad costs of excessive complexity) got to a good flavor much faster than heaping a lot more popcorn (marginal business) on top of the bloated cost structure. Tossing away can be far more profitable than adding on.
Wilson and Perumal, in their book “Waging War on Complexity Costs” claim that a focus on cutting out complexity can reduce a typical business’ cost structure by 15 to 35%. Can you imagine how much new business innovation would have to occur to create a similar improvement to your profitability?
Pressure to Innovate
Yet the current pressure in the business world is to increase innovation and pump even more new businesses into the company’s bloated product pipeline. Everywhere you look in the business press, one sees the thrust to innovate more and create more lines of business.
Remember, innovation can be very expensive, and about 80% of new business ventures fail. And, as P&G and others have found out, added variety doesn’t necessarily lead to additional net sales. It may just spread the same sales volume across more product lines (causing less volume per line—fewer economies of scale).
Worse yet, new ventures often lead to added overall business complexity, which increases the costs for every product you sell, even the old established ones. So you may be hurting the profitability of the status quo product mix almost as fast as you are adding marginal profits from the incremental variety. In other words, your business mix will still be too salty even though you add a lot of new popcorn to the mix.
Therefore, when you are having your strategy sessions, don’t just focus on ways to grow the top line. Don’t let the current wave of innovation pressure you into seeing additional new product lines as your only strategic option.
Instead, consider spending time strategizing around the benefits of cutting out complexity and redundancy. Look for ways to simplify your processes through standardization. Consider places to eliminate the variety and scope of what you offer. In other words, look for ways to get rid of your excess saltiness.
Yes, this approach can potentially hurt top line growth rates. But, it can make your bottom line skyrocket. And, at the end of the day, if profits are growing wildly, the market will reward you very well.
When seeking to improve your business performance, don’t just look at strategic options which attempt to increase sales through new product innovation. Instead, consider ways to eliminate marginal businesses and all the needless complexities they bring. Shrinking the business and tossing away the bad can be a quicker and more powerful way to improve profits.
With all the emphasis on the word “innovation”, I figure we need another word to counteract it in the discussion. Innovation comes from the Latin—“in” for “in” and “nova” for “new”. In other words innovation is about bringing something new into the business. But what about the idea of taking something old out of the business? I fiddled around on the internet and invented my own Latin-like word: “eximotraditionalis.” This word means to remove some the stuff you traditionally have been doing. Hopefully, “eximotraditionalis” will become as popular in the business press as “innovation” (but somehow I doubt it).
Wednesday, March 23, 2011
In the last blog, we began a discussion around strategic success. We said that strategic success requires more than just having a great vision and a great plan. One also needs to have employees united around making that plan a reality.
Unfortunately, people do not always naturally unite around a plan. Due to different thoughts and agendas, there can be differences of opinion. People may not see a reason to fight for plan. In fact, some may want to sabotage the plan.
Strategies typically involve change. Not everyone sees the benefit in change. Many will resist change.
Unless you deal with these roadblocks of resistance, your strategy will die before you have a chance to implement it. Therefore, a key part of the strategic process is working to get everyone on board, to show up and be committed to the plan.
In the last blog, we looked at three areas where roadblocks can occur (Motivation, Beliefs, and Perspective). In this blog we will look at four more.
MORE POTENTIAL AREAS FOR ROADBLOCKS
In a race, people run towards the goal. If there is a disagreement about what the goal is (or should be), then everyone will be running in different directions. For a united effort in a singular direction, you need an agreement on what the goal should be. So what should that goal be?
One way to choose a goal is to say “We should do what is right.” Although this sounds good, it is actually a terrible goal. The problem is that it assumes there is only one right thing and that everything else is wrong. This causes people in a discussion to focus on trying to prove that everyone else is wrong. And of course, nobody wants to be proven wrong, so they fight back to prove you are wrong. This leads to discord rather than unity. In the end, nobody wins.
Worse yet, this assumption just isn’t true. There are a lot of divergent points of view which are all “right.” It is right that a company focus on the crisis of today. It is also right that a company focus on tomorrow. It is right that individual departments need to fight for their needs. It is also right that sometimes departments need to give up something for the good of the whole company. It is right for a company to provide financial returns today for its stakeholders. It is also right for a company to invest money for the future. And the list goes on and on.
Therefore, instead of fighting for what is right (and what is wrong), a better goal is to “do what is best.” This way, everyone can save face in the discussion, since their positions are not necessarily viewed as wrong. They are still right—but just not the best right thing to focus on at this time. Instead of attacking, people are comparing.
So how do you determine what is “best”? As I mentioned in the last blog, I am adapting many of my thoughts from the writings of Chris McGoff. McGoff suggests that groups choose between three methodologies:
a) Ends-Based: Best = What Does the Greatest Good for the Most People.
b) Rule-Based: Best = The Best Universal Standard
c) Care-Based: Best = Best Outcome for the One Most Impacted by the Decision
After choosing a methodology, the best goal tends to be rather apparent to most people.
At this point, another roadblock can appear. That is the roadblock of then assuming that you need 100% agreement on this decision (or any other decision) before moving on. An old friend of mine who used to do consumer research liked to say that if you survey a large enough population, you will always find 5% who will believe almost anything. His point was that there will always be a fringe group holding divergent views. They will never be swayed to change their mind. If you wait for 100% agreement, you will be waiting forever. That is not the path to winning in the marketplace.
Therefore, instead of having a goal of 100% agreement, strive for a goal of having 100% willing to live with and commit to the decision. If you want people willing live with and commit to a decision, McGoff suggests two principles:
a) Have a process which people agree was explicit, rational and fair.
b) Make sure everyone in the discussion was treated honorably and that their points were heard and considered. The good news is that switching the orientation from “right” to “best” tends to help with this principle.
5. Balance and Separation
As we noted above, there can be multiple truths in an organization. Many of these multiple truths appear to be bi-polar opposites:
a) Individual/Department Needs Vs. Corporate Needs
b) Near-term Concerns Vs. Long-term Concerns
c) Improving the Current Business Model Vs. Transforming to a New Business Model
d) Analysis Vs. Action
The goal is not to only do one pole and not the other. Instead, the goal is twofold:
a) Find a balance of time between the two poles. Both need an adequate share of your time. For example, if all your time is spent on Analysis, you will never get anything done (paralysis of analysis). Conversely, if you only spend time on Action, you will likely do the wrong things because there was no prior analysis.
b) Make a separation of time between the two poles. Don’t try to work on both of them at the same time. The conflicting objectives will create chaos.
If a discussion hits a roadblock, it can often be because the balance or separation is not working. Either one of the poles has been ignored for too long or the discussion is confused because both poles are being worked on at the same time. Check to make sure that the principles of balance and separation are not violated.
Not everything is bi-polar. There are some things which deserve far more time than others. For example:
a) Focus on what you can control (Empowerment) instead of what you cannot control (Victimization)
b) Focus on The Future (What we can do to improve) rather than The Past (Where we can place blame)
c) Focus on that which impacts our stakeholders rather than that which is just internal bureaucracy.
d) Focus on what advances the Vision.
e) Focus on Results.
Perhaps your roadblock can be fixed by getting more on focus.
What you tolerate becomes your culture. If you tolerate bad behavior, you will get bad behavior. The bad behavior will take over your culture. However, if bad behavior is not tolerated, then it is less likely to dominate your culture.
It is harder to reach unified commitment if people do not trust each other and there is no respect for each other. Toleration of gossiping, back-stabbing, lying, slander, and irresponsibility are a poison to any strategic discussion. You cannot discuss in good faith when you have no faith that there is any good.
If discussions are bogged down, perhaps it is because a poisonous culture has gripped your company. Remember, culture is determined by what is tolerated, not by what is on a piece of paper. Enron had a great culture on paper, but it tolerated poisonous behavior. To eliminate a poisonous culture, you need to have severe negative consequences for bad behavior (including termination). This roadblock can take awhile to fix.
To be a success, you need more than just a great strategic vision and a great plan to achieve it. You also need to have your employees united around making it a reality. If the employees don’t show up with enthusiasm to achieve this common purpose, the rest of the work is a waste of time. There are seven roadblocks to achieving this employee commitment to the plan. In today’s blog, we looked at four of them:
• Goals – Seek what is Best rather than what is Right; Seek what people can live with rather than 100% agreement.
• Balance & Separation – Balance significant time between both bi-polar truths; Focus on each pole separately (at different times).
• Focus – Focus on what you can control, the future, what advances the vision, what impacts stakeholder, and results.
• Culture – Don’t tolerate poisonous behavior.
It’s hard enough to compete in the marketplace when all your resources are put into the battle. Don’t make it worse by handcuffing your people with unnecessary roadblocks.
Tuesday, March 22, 2011
Just because you are good at moving ON the basketball court does not mean you are good at moving to get TO the basketball court. Former basketball star Isaiah Rider is one such example. Isaiah seemed to get left behind when the rest of his team (the Los Angeles Lakers) were on their way to the game.
In January 2001, he was late and missed the Lakers charter plane to their next game. Isaiah Rider had to catch a commercial flight in order to catch up to his team. In the prior November, Rider missed the team bus to get to a game in San Antonio. In December of 2000, he arrived an hour late for a home game.
For a person who had so much trouble getting to his rides, it’s ironic that his last name was Rider.
Just think of what the sporting world would be like if all the athletes had as much difficulty getting to games as Isaiah Rider. It’s impossible to perform well on the court if the team doesn’t show up. All the effort to charter planes and buses and to arrange all of the other transportation issues is a waste of time if nobody bothers to use them.
The same thing can happen in the world of strategy. You can put a great deal of effort into creating the perfect strategic position and an ideal plan to get there. But, if the employees do not show up, the plan will never succeed.
Even if the employees show up physically, if their desires and emotions are not with the plan, then the plan will probably fail.
That is why strategic planning has to deal with more than just how to win in the marketplace. It also has to deal with getting the company to accept the plan and be willing to fight for it in the marketplace. In other words, you need to sell the plan to the employees, so that they will show up willing to execute the plan to the best of their abilities.
The principle here is that the level of strategic success is often correlated to the level of buy-in that the employees have for the plan. If significant numbers of employees disagree with the plan (or are not fully committed to it), then the likelihood of success drops considerably.
I was reminded of this in looking over the work of Chris McGoff. After spending a lifetime consulting with governments and businesses, he has discovered that if you want to successfully get things done, you first need to understand how people interrelate and how groups function. After all, the work gets done by groups. If the groups are dysfunctional, then so will be their output. McGoff has summarized his learnings into 32 “Primes.” You can read about it here.
Much of his work talks about trying to knock down those roadblocks which keep a team from backing the plan. In other words, he tackles the barriers which keep people from showing up completely committed to making the plan succeed. I have reworked some of his ideas into my own list. If you have a team that cannot rally behind your plan, consider these items as areas to address in order to get the teams back on track.
I have seven points on my list. We will look at three of them today, and the remaining four in the next blog.
A good coach will tell you that a team performs better when there is greater motivation to win. Perhaps what your team needs to get on track is greater motivation. Since people are motivated in different ways, we need to use multiple methods to ensure that everyone on the team is properly motivated. This means using multiple flavors, multiple targets, and multiple communication tools.
Motivation comes in two flavors—Positive Motivation (an inspirational outcome of a great higher purpose if you succeed) and Negative Motivation (great harm and evil if you do not succeed). Positive motivation converts work from merely being a job to being a mission for greatness. An example of a positive motivation occurred back in 1983 when Steve Jobs motivated Joh Sculley to leave Pepsi and take over Apple by asking him if he wanted to “sell sugar water for the rest of your life or come with me and change the world?” We’ve talked about this concept here, and here.
Negative motivations try to show that what we are working on is extremely important. Too much is at stake to not take this seriously. It is worth the sacrifice. An example of negative motivation would be in how countries motivate people to go to war. The logic is that if we do not go to war against this great evil, it will overcome us and we will lose everything we hold dear.
These two flavors can be pointed at three targets—the head (logic), the heart (emotion) and the wallet (finances). All three need to be addressed, since some individuals are only motivated by one of these targets. To reach all, you need to address all. Use logical appeals, emotional appeals, and financial appeals.
Finally, some people think visually, some think numerically, and others think verbally. Therefore, use a variety of tools to communicate the motivation—pictures/charts, numbers, and stories.
2. Core Beliefs
In today’s political environment, it seems that people want to position the opposition as stupid. In other words, if you do not agree with me, you must be an idiot. It’s hard to resolve differences when you have no respect for the intelligence of the opposition. This same situation can happen when a business discusses strategy. Cooperation breaks down because we have trouble dealing with “idiots.”
My experience is that those opposing us are not stupid. Their conclusions are not baseless. There is sound logic behind their conclusions. It’s just that they are working from a different set of core beliefs. And until you specifically address the core beliefs, you are wasting your time arguing the outcomes of those core beliefs.
Until you understand these core beliefs, you will not know how to reach a solution which addresses those beliefs. Perhaps you can find common ground where the core beliefs overlap. Perhaps most importantly, understanding core beliefs will increase the respect people have for each other. Rather than assuming the opposition cannot think, one now can understand how they think, making it easier to work together to make the plan a reality.
So if a discussion bogs down over an issue, consider redirecting the discussion towards an understanding of the core beliefs behind people’s differing conclusions. Ask people to explain the beliefs which lead them to their conclusion. For more on this idea, go here.
We can only react to that to which we have been exposed. Different parts of the organization have been exposed to different things. Therefore, it is not surprising that each area comes to different conclusions. If you want people to come to similar conclusions, then you need to have exposure to a similar perspective of what is going on.
This is like the old story of the blind men and the elephant. One blind man was only exposed to the elephant’s leg, so he thought he was dealing with a tree (and needed a tree strategy). One blind man was only exposed to the trunk, so he thought he was dealing with a snake (and needed a snake strategy). One was only exposed to the tail and thought he needed a rope strategy. And so on.
So first of all, that requires sharing our experiences with each other—a mutual perspective from all angles. As in the story of the blind men, each blind man needs to share their perspective with the others. Similarly, the people at headquarters need to know what is going on out in the field and vice versa. For example, someone out in the field may be arguing for redirecting resources to shore up a weakness not knowing that headquarters has already decided to shore up that weakness with an acquisition, making that redirection unnecessary.
Secondly, one needs to have a large enough perspective—large enough to encompass the context needed to reach the proper conclusion. If you want an “elephant” strategy, then you need a large enough perspective to encompass the entire elephant, not just the legs. In other words, if you want people to back a big plan, then you need them to see the big picture. Take the time to show how all the pieces fit together. Otherwise, people will separately try to maximize the results in their own little areas, creating sub-optimal results for the whole of the business.
Therefore, if people are coming to different conclusions, check to make sure that everyone has a complete enough and large enough perspective on the facts relevant to the discussion. If not, fix the perspective before moving on.
To be a success, you need more than just a great strategic vision and a great plan to achieve it. You also need to have your employees united around making it a reality. If the employees don’t show up with enthusiasm to achieve this common purpose, the rest of the work is a waste of time. There are seven roadblocks to achieving this employee commitment to the plan. In today’s blog, we looked at three of them:
• Motivation – Does the team see the higher purpose; do they see what is at stake; do they feel it in their head, heart & wallet; has the communication captivated them at their point of interest (stories, pictures, numbers)?
• Core Beliefs – Does the team understand what is driving the logic behind each other’s conclusions; do they have respect for how others think; are they looking for common ground?
• Perspective – Does the team have a shared perspective, so that we all know what everyone else knows; do the team have a large enough perspective, so that they can see everything necessary to grasp the entire vision?
Woody Allen once said that “Eighty percent of success is showing up.” If you want to win the battle in the marketplace, make sure your people show up—physically, mentally and emotionally—ready to fight hard for the success of the strategy.
Wednesday, March 16, 2011
When I think of the word “suspense” I usually think of old Alfred Hitchcock movies or Stephen King movies/novels. These are people who entertain us by captivating our minds with the fear of the unknown. It’s the type of scary feeling which we enjoy.
What “suspense” does not bring to mind is accounting. Yet there is an accounting concept called suspense accounts. Suspense accounts are used as a temporary placeholder when you do not know the proper place for a journal entry. For example, let’s say your company receive some money, but you haven’t yet figured out why. You would debit cash and temporarily credit a suspense account until you know where the real credit would go.
Another example is using a suspense account to temporarily balance your balance sheet if it is out of balance and you do not know why.
Come to think of it, suspense accounts are also about experiencing the unknown, just like scary suspense movies. Unfortunately, this is not the type of scary feeling we enjoy. I’d much rather have a scary movie than a scary set of accounting books any day.
Although we may enjoy surprises and plot twists in our entertainment, most of us try to avoid that in our business performance. Investors (for both Debt and Equity) love stability and predictability. Too many surprises scare them (too much suspense). That’s why stable and predictable companies can usually borrow at a lower rate and get find more people to buy their stock at a higher price.
In addition, most employees don’t like too many surprises about their job stability. Therefore, by creating a stable environment, you may also be better able to attract and keep great employees
Strategic Plans can be a useful tool in taking a lot of the fear and suspense out of how people view a company’s future. Just that alone makes strategic planning valuable to a business.
The principle here is that strategic planning and strategic plans are great tools for minimizing suspense in business. We should use them to that end in order to reap the benefits.
There are four main ways in which strategic plans and strategic planning can help take the suspense out of business.
1. Minimizing the Unknown
One of the great benefits of a strategic planning process is that it gets people to think about the future long before that future is a reality. The more time you spend pondering the future before it arrives, the more prepared you are for it when it arrives. It is no longer a surprise.
A good strategic planning process should use some of that time to gather “facts” about the future. Although we can never understand with 100% certainty what the future holds, we can study trends and other environmental factors to better understand what the future will likely be.
Strategies are played out in the context of the future. The better we understand that context, the better we can design the strategy.
There are lots of ways to gather these “future facts.” You can purchase insights from experts in the field of futurists and trend watchers. You can have an internal strategy team conduct a lot a research (primary and secondary). You can draw from the expertise of your network of employees, customers and suppliers. You can go out to the edge of society where trendsetting typically occurs and see what they are up to. Or you can do a combination of these or other approaches.
The important thing is to get smart about the future, so that it more known and less surprising.
2. Minimizing the Uncertainty
Even after gathering a lot of “future facts”, you will still not be able to predict the future with 100% accuracy. Even so, you can still eliminate a lot of the suspense around the remaining unknown by preparing for multiple outcomes.
Through strategy tools like scenario planning or real options, companies can build multiple potential outcomes into their view of the future. By anticipating these various outcomes in advance, one can prepare the proper strategic variations for each scenario.
If you have prepared an answer in advance for each of the likely scenarios, you can have high confidence in your future performance even if you have low confidence in any particular scenario occurring. In other words, even if the future is uncertain, your strategic path can be certain if it includes answers for addressing the uncertainty of multiple scenarios. The unknown is a lot less scary if you are ready for a variety of potential “surprises.”
3. Smoothing the Bumps
Every strategic initiative has a life-cycle. There is a growth phase, a maturity phase, and a decline. The problem with many companies is that they do not adequately prepare for these transitions from one phase to the next. As a result, they end up with a trench of unstable performance—a period of strength followed by a period of decline followed by a slow ramp up to something else followed hopefully by another phase of strength (see chart).
That’s a lot of suspense. How low will the decline go? How soon will they find a replacement strategy? Will the replacement strategy succeed? If so, how long will it take? This is one of the problems Kodak is facing. They waited until analog imaging was virtually dead before becoming aggressive in digital imaging. There is much suspense over whether they will survive the trench. The company may end up dying with the death of the old analog business.
A much better approach is to anticipate the decline of the current strategic initiative and start building the replacement strategy while the current strategy is still strong. That way, by the time the old strategy starts declining, you already have a strong replacement. There is no trench of suspense in this approach. Instead, performance is relatively stable (see chart).
Best Buy has a strong history of using this approach. They aggressively go after the next new technology before the old one is obsolete, so that they can seamlessly move from strength to strength.
Strategic planning plays a role here by anticipating the future so that the trenches can be avoided. It forces the discipline of building the replacement strategies in advance.
4. Communicating Confidence
Plans should not be a kept a secret. They should be shared widely with employees and other key stakeholders. The more your employees and investors see and understand your strategy, the more confidence they will have in your future. And the more confidence they have, the less scared they will be about your future prospects. And the less scared they are, the more you will be able to achieve those benefits mentioned at the beginning of the blog. By contrast, if you are silent about your plans for the future, people will tend to think the worst and become even more afraid.
Strategic plans are a great promotional tool to ease the fears of your stakeholders and create confidence. Don’t be afraid to take advantage of this.
Suspense and fear are enemies of a company. They can increase your cost of capital and make it harder to get and retain great employees. To ease the fears and make the future less scary, use strategic planning to a) learn more about the future, b) create contingencies for the unknown, c) smooth out the bumps in strategic transitions, and d) communicate confidence in the future by having a plan for it.
Keep your suspense at the movie theater, not in your business.
Thursday, March 10, 2011
Back when my son was young, we lived next door to a city park. Many times we would walk over to that park to play a little “two-man baseball.”
In two-man baseball, you only have two positions—a pitcher and a batter. The problem occurred when the batter would hit the ball out into the outfield. Since there was nobody in the outfield to catch the ball, the pitcher would have to run out there and try to find the ball in the tall grass. And since there was nobody in the infield to throw the ball to, the pitcher would have to run the ball back to the infield.
Unfortunately, running out to the outfield and back was usually longer than the distance to run the bases. Therefore, any ball hit into the outfield usually scored a home run.
Fortunately, neither of us was all that good at hitting the ball, so that problem wasn’t as bad as it could have been. Instead, we had a different problem. We would swing the bat and usually miss. Since we didn’t have a catcher, the ball would continue to zoom past the batter.
Fortunately, there was a backstop fence behind home plate. Any ball that went past the batter would hit the backstop fence and stop, making it easy to retrieve.
What we really needed was another backstop fence behind the pitcher. The way, any ball hit towards the outfield would be intercepted by the fence and drop down by the pitcher.
The purpose of the backstop fence in baseball is to stop bad pitches and bad hits from flying away into a space where they do not belong, protecting spectators from injury. In the business world, bad things can happen as well. Therefore, businesses look for their own form of backstops—ways to minimize any negative implications when things go wrong.
A lot of research has been done lately into the science of risk. What these studies have found out is that humans tend to put a lot more weight on the negative consequences of a decision and a lot less weight on the positive upside of a decision. In other words, humans tend to make decisions more around the principle of minimizing loss than in trying to maximize gain. It takes an awful lot of positive upside to get us to accept a little bit of downside.
The mathematicians and statisticians will tell us that this is “irrational” behavior. They would say that as long as the upside is only slightly higher than the downside, a “rational” person should move forward.
But consider how risk can impact the career of a business decision maker. If the person makes a decision which turns out badly, they could lose their job. If they make a decision which turns out well, often nothing happens, since that is what was expected. Only when an outcome is outstandingly positive well beyond earlier optimistic expectations does a career get rewarded. Why take on the risk of getting fired unless there is enough upside to provide the chance for personal reward?
I think this explains why scientists find us fearful of a little loss and desiring a huge gain in order to offset the risk. But regardless of whether or not this behavior is “rational,” it is reality, so we need to work with it.
Therefore, if we want a company to embrace a strategy, we need to make sure the leaders feel comfortable about the risk. And that means that the potential downside needs to appear a lot smaller than the potential upside. And one of the key ways to do this is by putting a lot of “backstops” into your strategic plan.
The principle here is that strategy is not just about trying to move a company forward. It is also about trying to prevent a company from moving backward. If you ignore the fears of moving backward, you will never get the company to embrace your plan to move forward.
Strategies usually involve change. And with change comes the risk of something going wrong. And when something goes wrong, the negative consequences can be huge. Not only can the company move backwards, but so can people’s careers. This creates fear about adopting the strategy.
Just as backstops in baseball stop balls from taking a dangerous trajectory, strategy backstops try to stop the negative consequences when something goes wrong.while implementing strategic change. By helping to minimize negative consequences, the strategy becomes more desirable to management.
Strategy backstops tend to fall into two categories: Control (Ownership) and Controls (Exit Ramps).
1) Control (Ownership)
For a strategy to succeed, a number of things have to happen to the company’s advantage—a lot of decisions have to go your way. The more other people control those decisions, the more likely they will decide in a manner which is not in your favor. Their strategic agendas may not be the same as yours; in fact, their aims may be the opposite of yours. Therefore, if you want to minimize the risk of decisions going against you, it helps to control as many points where decision-making takes place as possible.
For example, think about access to critical supplies for your business model. If you want to ensure timely access to a sufficient amount of those supplies, you may want to exert more control over your suppliers. Perhaps you need to acquire your supplier in order to ensure that your strategic concerns are their top priority. Perhaps you need to renegotiate your supply agreement.
It appears that Apple is switching suppliers for its memory chips from Samsung to TSMC. Although there are many reasons for doing so, one reason appears to be because Samsung makes devices which directly compete with Apple devices. As a result, Samsung’s strategic goals with their chip supply may diverge at times from Apple’s. By switching to TSMC, Apple should have more control over its chip supplier.
This principle not only works upstream with suppliers but also downstream with distribution channels. Coke and Pepsi have been acquiring their bottlers. The reason is because Coke and Pepsi see the value in increasing the control over how their products are distributed. This is particularly true for the faster-growing non-traditional beverages, where Pepsi and Coke had less contractual control over the bottlers. The ownership created a backstop for strategies around these newer beverages.
Of course, the more of the process you own, the greater are your share of the losses if the process goes badly. Therefore, sometimes a good backstop is to give up some of the ownership. By not having 100% of the ownership, you do not have 100% of the losses.
This is common in Hollywood, where movie ventures are funded by multiple motion picture companies. The risk is shared amongst them. There are lots of ways to structure joint ventures and strategic alliances so that the burden of potential loss is shared, creating a backstop.
Franchising is another example. Franchisees put up the investment capital and take on the risk of the franchisee failing. Ironically, even though the franchisor is giving up ownership to the franchisee, the franchisor is in some ways actually gaining more control. Because the franchisee has a greater vested interest in making the venture a success, they are more likely to help the strategy succeed than a mere employee. So with franchising, you lower your share of any loss while simultaneously increasing the motivation of the operator to make the venture a success. Now that’s a good backstop.
2) Controls (Exit Ramps)
One big bet can look a lot riskier than a many small bets. Therefore, one way to reduce perceived risk is by dicing up one big decision into a lot of small decisions. The more opportunities you have to make decisions, the more opportunities you have to opt out or modify the approach early, before the losses get too large.
Think of it as being like two different expressways. One has exits every fifty miles; the other has exits every mile. If you accidentally find yourself going in the wrong direction on the first expressway, you have to go fifty miles before you can make a correction. On the second expressway, you are never more than a mile from being able to make a course correction. The more exit ramps you put into your strategy, the sooner you can correct course (before the losses become huge).
There are many processes to do this, such as stage gating or real options. The general principles work something like this. First, you develop key success indicators—metrics which help you tell whether or not you are on the right course. These are your controls, like a GPS on the dashboard on your car. Second, you develop a process where there are many opportunities to assess your progress. These are like building lots of exit ramps.
Then you monitor your controls. If the controls say you are off course, you make a correction at your next exit ramp.
What are examples of exit ramps? If you are a retailer, instead of signing up for a twenty year lease, you can sign up for a five year lease with three five year renewal options. That gives you more opportunities to walk away if the store is not performing. If you are in the oil drilling business, instead of buying a property where you think there may be oil, do a short lease to test for oil, with an option to buy later. Design contracts with lots of clauses for opting out if key measures are not met.
Sure, all of these exit ramps may cost you a little bit more, reducing upside potential a little. On the other hand, they reduce the downside risk by a lot. And, in the end, minimizing the downside seems to be more desirable than maximizing the upside.
If you want people to embrace your strategy, then you had better understand the psychology behind risk. In general, downside potential is weighed far more than upside potential. Therefore, people are more likely to embrace your strategy if there are lots of backstops embedded in the plan to minimize risk. Common backstops include increasing control of key decision points and increasing the number of opportunities to opt out or modify the decision (like stage gating or real options programs).
Since most decision makers want a high upside to compensate for any downside, if you cannot reduce the downside through backstops, then look for ways to increase the upside. For example, Disney tries to leverage its investments into as many selling opportunities as possible. A successful Disney movie can be leveraged into lots of toy sales, amusement park rides, Broadway plays, TV shows, licensing agreements and so on. All of these add-ons make the downside risk on that movie venture appear less threatening.
Tuesday, March 8, 2011
Baking soda has an interesting quality. It will absorb the odors around it. After awhile, the baking soda will smell like the odor of its environment. Then it is no longer useful for baking.
Strategic planning departments can be like baking soda. Just as baking soda can take on the odor of its environment, planning departments can take on the culture of their location within the organization.
For example, if you place a strategic planning department within the finance department, it will tend to take on a lot of the characteristics of finance. Planning will tend to be more data driven and concern itself more with implications to the income statement and balance sheet. Strategies will more likely be framed in terms of asset allocation and in the buying and selling of pieces of the portfolio.
If you place the strategy department somewhere else, that culture and orientation will move in bit of a different direction. Therefore, if you want the proper “odor” for your strategic planning department, it is important to consider where you place it within the organization.
The principle here is that there is no law forcing a company to place a strategic planning department into a particular silo in your organization. In theory, it can go almost anywhere. So, even though most businesses have Strategic Planning reporting either directly to the CEO or into the Finance Department, you have other options.
Strategists are supposed to think outside the box, so I am going to do that with the idea of where to locate Strategic Planning. Why can’t it report somewhere else?
Why couldn’t Strategic Planning report into marketing? After all, the chief strategist and the chief marketing officer have much in common. Both are concerned with the long-term strength of the brand/company. Strategic positioning is a lot like Brand positioning.
A good strategy needs to provide a superior solution for a consumer segment. That sounds a lot like marketing, too. Marketers usually know the customers better than anyone else, so a strategy lead by marketing would probably be consumer centric and appropriate for the marketplace.
One of the major complaints against many current strategic planning programs is that the plan is poorly communicated throughout the organization. I bet that if marketers ran strategic planning, the communication issue would be less of a problem. They’re good at communications.
I know of a retailer who recently conducted a major strategic reanalysis of the company. It was run by the marketing department and I think the process went very well.
Of course, there would also be some issues if strategic planning reported into marketing. Marketers are not known as being the most astute when it comes to containing costs. Financial issues tend not to be at the top of their priority list. So the plans might lack some of the financial or risk-based rigor which comes from a finance department.
In addition, marketers do not always understand all the nuances of the business model. As a result, they may underestimate the ramifications of their strategy on the capabilities of the organization. In other words, they might create a great strategy which is a bit out of touch with what the company can accomplish.
Why couldn’t Strategic Planning report into human resources? Lots of CEOs say that their people are their most important asset. Therefore, why not place strategy in the hands of those managing the most important asset?
Many of the complaints against how strategy is currently done talk about issues like mishandling of corporate culture, improper alignment, poor organizational structure, and poor integration of people after a merger. Aren’t these the types of things human resource departments are supposed to be good at? They could help solve all these issues.
Because human resources is not closely tied to the status quo of operations, they may be better able to push innovative, out of the box solutions (this could also apply to marketing).
I’d bet that if strategic planning reported to human resources, the plans would be better at getting alignment between people, functions and strategic issues. There would probably be more thought given to how to organize to get the strategy accomplished more efficiently and effectively.
I know of a company where the chief advocate of strategy came from human resources. It can be done.
The down side to human resources is that although they are good with processes, they are not always the best at knowing how to get business results. In other words, they may create a great “means” for doing strategy, but not have a great “end” in terms of what strategy to do.
How about having strategic planning report into research and development? Both areas are involved in research. Both areas are looking out long term. Both areas are looking for the next big thing. I think there is even a cultural fit, since strategists and R&D people both tend to be a bit nerdy.
If you want to build a plan around the art of the possible, the R&D folks are best suited for knowing what is possible. If you want innovation in your planning, this could be a great place to be.
And it also works in the opposite direction. If the strategists are closely tied to R&D, they will make sure that the R&D efforts are focused on what is needed to make the strategy a reality.
The down side is that although this approach could create some of the best ideas, it may not be the best place to create the game plan to get the rest of the company on board. It could be great on strategy conception, but not strategy implementation.
How about having strategy report into operations? Your operations people understand the details of how things get done. One of the biggest complaints about strategy is in the poor handoff from idea to implementation. If you put the responsibility for strategy in the hands of the implementers, you stand a better chance of getting it implemented. Operators would be able to easily reject ideas which are disconnected from the strength and skill-sets of the organization, because the operators are a large part of that skill-set.
Strategic objectives will probably be very realistic and doable, because it is run by the people who know how to do what needs to get done. And they will be more inclined to do it, because they would have a larger vested interest in the plan if it reported to them.
Of course, the down side is that operators are highly tied to the status quo. They will tend to resist radical changes which put their operations at risk. Your plans will tend to create only incremental improvements to the status quo. That may not be enough.
The point I’m trying to make here is that nobody has a monopoly on everything needed to create and implement great strategy. Every area in the organization has unique skills and insights which are beneficial. In addition, every area in the organization has blind spots preventing them from seeing the whole picture. Therefore, narrowly slotting strategic planning into any one department is probably a mistake (even if put in finance). You are not getting the richness of all the flavors the company has to offer.
For strategic planning to work best, it needs to be owned by everybody. That way, you get the unique insights of each area, while also having everyone’s blind spot covered by another area for whom that is not a blind spot.
So how do we accomplish this? One way is by rotating people through strategic planning. Strategic planning departments would benefit from having people from finance, marketing, human resources, R&D and operations rotate into the area for awhile. If your company is large enough, I would suggest that strategy departments have a blend of both strategy professionals and rotating experts from all these areas.
I used to run a strategy department which did this, and I thought it worked well in many ways. The strategy formation was better, because there were broader insights from all these areas of expertise. The strategy implementation was better because there were stronger ties and greater credibility with the ones outside the strategy department who have to get the work done. And once someone in rotation went back to their old part of the organization, they took a greater strategic orientation to that department.
Even if you do not rotate people through the department, you can still get some of the benefits by opening up more opportunities for the teams of strategy and elsewhere to work together throughout the year. Get strategists on the committees where decisions are being made on a regular basis.
If strategy people are hidden away for most of the year and are only exposed to the rest of the organization at some annual off-site planning meeting, then you are missing all this richness.
I’m not sure what victory smells like, but I do know that victory is more likely if you absorb the rich aromas of the entire organization.
Tuesday, March 1, 2011
Young dogs seem to think that everything outdoors is an exciting invitation for investigation. Every object, every smell, and every other animal seem to call out to their wilder nature. The young pups want to run and see it all, smell it all, chew it all or leave their mark on it. This makes taking a young, untrained dog on a walk quite a challenge.
My daughter has a young, relatively untrained dog named Stella. Stella is large enough and strong enough to make holding her back a challenge and a half. Whenever I take Stella for a walk, I am constantly fighting her urges to leave the path. She always seems to dragging me with her leash over towards something to put in her mouth—be it a paper food wrapper she finds on the ground, or an old mitten, or an abandoned toy.
Other times Stella struggles against her leash to get across the street to sniff another dog locked up in its backyard. Of course this gets the other dog all worked up and barking as well. And if Stella sees a squirrel, all bets are off. She will practically drag me down the sidewalk to get to that squirrel.
My action with the leash is not just to pull her back. Sometimes I have to drag her forward. Many of the trees and bushes have interesting smells and Stella will freeze in her tracks for what seems like forever to smell them (and to leave a smell of her own). In those cases, I have to try to use the lease to drag her away.
Although the purpose of those walks is to exercise Stella’s legs, I think my arms get even more exercise trying to control Stella with the leash.
The purpose of strategic planning is to design a path to reach a more prosperous future and help the company move up that path. Unfortunately, a lot of companies are like that dog Stella. They have trouble sticking to the path.
Sometimes companies get distracted by exciting looking opportunities off the path and they want to leave the path to pursue them (like Stella seeing a squirrel). Other times, companies resist the change of moving forward and are as hard to budge as when Stella gets busy sniffing a tree.
The only way I could get Stella under control was by aggressively using a leash. As a strategist, you need a leash to control your company as well.
The principle here is that it is not enough for a strategist to just draw the map and show how to get to the future. The strategist needs to be right alongside for the entire journey—to keep the firm moving along the path—like I needed to do with Stella. And to do that, you need a strategy leash.
What is a strategy leash? Well, just as a dog leash connected me to Stella, a strategy leash connects a strategist to strategy implementers. By being connected, one has more control over the actions on the other end of the leash.
In many companies, there is no leash connecting the strategy to the implementers. The implementers run loose like Stella would if I didn’t control her with a leash (and I know that would cause all sorts of major problems if Stella got loose).
Too Many Companies Lack a Leash
Back in October of 2005, Kaplan and Norton had an article in the Harvard Business Review, called “The Office of Strategy Management.” In this article, they discussed some statistics about the lack of connection between strategic plans and implementers:
a) 60% of companies do not link strategic priorities to the budget.
b) Two-thirds of HR and IT organizations develop strategic plans not linked to the organization’s strategy.
c) 70% of middle managers and more than 90% of front-line employees have compensation not linked to strategy.
d) The vast majority of executive teams spend less than one hour per month discussing strategy.
e) 95% of employees in most organizations to not understand their organization’s strategy.
It is no wonder that most companies are disappointed in how their strategies are executed. They’ve let the dog loose without a leash and then wonder why the dog doesn’t stay on the trail.
Here are three reasons why a strategy leash improves execution.
1. It Keeps a Firm on Focus
Just as lots of sights and smells would entice Stella to run off the path (if not on the leash), business implementers get enticed to stray off the strategic path. There is always some hot, new thing trying to grab their attention. However, not all hot new things are appropriate for your business.
Just because the new iPad is hot or Facebook is hot does not necessarily mean that your company should abandon everything it is doing and try to imitate these products. First of all, those strategies are already taken and it is unlikely you could unseat the current leaders. Second of all, the capabilities needed to succeed in that space may not have anything to do with your own internal capabilities. You my not have what it takes to win there. Third, why try to become an also-ran in a hot (but crowded) space if it means abandoning a strategy designed so that you can win?
Even though Stella wants to get loose and chase every squirrel she sees, Stella does not ever get the squirrel. They are too good at escaping up a tree. Just as the squirrel eludes Stella, most of these hot new things will elude your company if you run after them. Not only will you not catch the squirrel, you will no longer be on the path to catch your own strategy. Instead of both, you have neither.
To win, one needs a winning plan and a focus on achieving it. A firm’s limited resources need to be aimed at the strategy. If the resources get diluted into too many random decisions of the moment, there will not be enough power to win.
That is why you need a strategy leash connected to whenever meaningful decisions are being made about how to use those resources (time, people, money). You need to be there when actions are being determined so that you keep the company on the path, rather than being off in the distance, watching them hopelessly trying to run after every squirrel they see. If you only have a voice once a year during the planning cycle, then you cannot stop the firm from running around like a dog on the loose the rest of the year.
2. It Keeps Things Moving
Many people in business are reluctant to change. They do not want to move into the unknown. They resist moving forward just like when Stella refuses to stop standing still to sniff a tree. You need a strategy leash to tug on to get them moving forward.
The “tyranny of the immediate” tends to freeze people into the present and make it harder to focus on getting to the future (see here, here, and here). That is why strategists need to be connected on a regular basis to help people get beyond the tyranny of the immediate and think about long-term issues.
3. It Allows Flexibility
The goal here is not to dictate every move made by every implementer. Implementers need flexibility to use their skills in adapting the strategy to the environment. That is why, so long as Stella stays on the path, I give Stella a long leash. She is free to move around as she sees best, so long as those movements are consistent with moving forward on the path.
The same applies to business. Strategies work best when implementers are free to use their expertise as part of the implementation process. So long as they are moving down the path at a good pace, give them enough leash to add their improvements.
How to Create A Strategy Leash
So how do we create strategy leashes? One way is by making sure strategists have a voice at the places where day-to-day implementation decisions are being made on a daily/weekly/monthly basis. They need to be invited to the meetings where choices are made about what to do, even if none of it sounds very “strategic” at the moment. After all, a journey consists of all the steps one takes. Every step which leaves the path hurts the overall journey.
Second, link self-regulating tools to the strategy. People tend to act in accord with how they are rewarded, how they are reviewed, and how their budget is set up. Use budgets, reward systems and other such tools as a leash by making sure that the motivation tools motivate people to implement the strategy. Stop those awful statistics mentioned by Kaplan and Norton by making sure everyone knows the strategy and is rewarded for implementing it.
Third, Kaplan and Norton go even further to suggest forming a new Office of Strategy Management—a small team of people whose sole purpose (and only job) is to act as the strategy leash. This may or may not be appropriate for your situation. However, the general principle is sound—the more the strategy leash is seen as a valid part of a job description, the greater the chance it will be used.
To make sure strategies are properly implemented, one needs a strategy leash—a strong connection between the goals of the strategy and daily decisions about what gets done. The leash holds back company desires to stray off the path, tugs people to move forward when they want to stand still, and provides some freedom of movement when moving along the path. This can be done by getting strategists more involved in the daily decisions and by connecting motivational tools more tightly to strategic goals.
Years ago, I had a dog of my own to take on walks. Her name was Barkee. I did a good job of training her, so that eventually I could take Barkee on walks without a leash (and she still stayed near the path). If you can train your company to naturally think strategically, you might be able to loosen up on the leash as well.