Monday, February 27, 2012

Strategic Planning Analogy #440: Mechanic or Designer

Once there was Juan, an owner of a trucking delivery business. Juan took great pride in how efficiently his trucks ran. Whenever there was a lull in his business, Juan would open up a hood and work to make the truck engine was operating as efficiently as possible. He had the heart of a mechanic and saw his mechanical skills as a key to his success. Juan had the best running trucks in the business.

Lately, however, Juan’s business had been seeing a lot more lulls than it used to. In fact, business was virtually non-existent. He popped his head out from under the hood to find out why business was so bad.

Juan discovered that his key customers had stopped shipping their products by truck. They had digitized their product and now sold it exclusively over the internet via downloads. There was no way Juan could operate his trucks faster or cheaper than an internet download.

Maybe if Juan had kept his head out from under the hood of the truck and spent more time looking at the environment, he would have seen this coming and been prepared. Now it was too late. Juan soon went bankrupt.

Based on my observations over the years, it seems that most business leaders tend to have one of two tendencies. Either they have the heart of a mechanic or the heart of a designer.

The “mechanic” business leader is always trying to tweak the business, to improve the status quo. I’ve referred to this in the past as the “More-Better” approach—always looking for ways to make the status quo do more or do it better than before. Like a mechanic, this type of manager focuses on the inner workings of the business (what’s “under the hood”). It’s all about being the best at running the current business model. Juan was this type of leader.

The “designer” business leader takes a different approach. This leader is focused on trying to invent or design the next business model. Their focus is more external. Rather than starting with today’s model and trying to improve it, they start with the marketplace and look for new ways to serve it. Rather than making incremental improvements, the designer leader looks to reinvent the market to their advantage. Steve Jobs was more like this type of leader.

The problem with the mechanic approach is that eventually the status quo becomes obsolete. It doesn’t matter how well you can tweak an obsolete engine. The best-running obsolete engine is still obsolete. Juan’s best truck could never out-deliver a digital download.

And guess who makes the mechanic obsolete? It’s the designer.

If your strategic planning is dominated by a “mechanic” approach, you will be like Juan and have your head under the hood—focused on incremental internal improvements and blind to what is happening around you to reinvent the status quo. Although that approach can work for a period of time, it will eventually lead a company to obsolescence.

The problem is that most business leaders are caught in a mechanic’s mind set, because the engine of their current business model keeps breaking down. The pressures of the immediate crisis force them to focus on an immediate fix. These fixes revolve around making the status quo work better. After all, production lines are breaking down, customers are yelling about late deliveries, key employees are threatening to leave, and suppliers are raising prices. Under this near-term pressure, the thinking goes like this, “If I can only get this process to work a lot better and more efficiently, then all these pressures will go away.”

As a result, the tendency is to act like a mechanic and keep one’s head under the hood, looking for ways to make all these current crises go away.

The Problem When Leaders Are Merely Mechanics
Now it is true that crises cannot be ignored. Problems in the business need to be fixed. That’s why such a large percentage of employees work in business operations. You need lots of “mechanics” on the payroll.

The problem is when your top executives still think of themselves as mechanics. In the story, Juan was running a trucking company, yet he still wanted to spend his time as a mechanic. He was ignoring what leaders need to do—lead their companies into the future.

Leaders need to become less of a mechanic and more of a designer. And this may be a tough mindset to change, since solving near-term crises by tweaking the status quo (mechanic work) is probably what got the person promoted to a leadership position in the first place.

How can you tell when a leader is too much of a mechanic? When times really get tough, a mechanic wants to double down and spend even more effort on trying to fix the status quo so that “it works again.”

Unfortunately, the reason why the engine of your business isn’t working may be because it has become the wrong engine—it has become obsolete. The best response at this point is not to spend more time trying to fix the status quo, but to move on to the next business model. And you won’t find it by staring under the hood. You will only find the next big thing if you have a leader who is leading the charge to find it.

The Necessity of Strategic Planning to Break the Mindset
Helping leaders spend more time thinking like designers is probably the biggest benefit of practicing the discipline of strategic planning. It helps leaders take time out from working under the hood to see the bigger picture. It forces them to question the status quo. It helps them think like a designer.
In particular, there are two principles that strategic planners can use to help create a designer mindset.

1. Change is Usually Not Incremental
Industries rarely evolve along a steady, gradual line. No, it is often interrupted with great upheaval as one business model is rejected and another replaces it. And no amount of tinkering with the old will get you to the new.

Kodak could never incrementally improve analog film to make it turn into digital imaging. No amount of improvements to manufacturing a gas tank will get you to battery-powered automobiles. A more efficient printing press will not save newspapers from the upheaval of digital media.

Change tends to be radical and requires a radical response. Radical responses need to be designed. You won’t find the answer by tweaking the engine under the hood.

Strategists provide a great benefit when they remind people of how industries radically shift (and why tinkering won’t help you bridge the shift). They provide even more value when they help point the way to where the shift is occurring and how to reinvent the model to stay on top.

2. Even Designers Can Fall Into the Trap of Evolving into Mere Mechanics
Usually, it is an outside firm which upsets the status quo. Because they have no vested interest in the status quo, they can boldly attack the status quo with the next big thing and win.

The problem is that, eventually, the radical new thing of today becomes the status quo of tomorrow. And then something radically different upsets the “newer” status quo. The cycle never stops.

Computers used to be the hot new thing. Now they are kind of quaint, with iPads, smartphones, and Kindles taking over. And the hot new things did not come from the leading computer manufacturers. No, they came from places like Amazon (Kindle), Google (via Android), and Apple (a minor also-ran in computing).

The problem is that the new company’s success came from pursuing the new business model. Therefore, they get overly attached to that new model. When it comes time to move on to an even newer model, there is a tendency to stay back and act like a mechanic—trying to fix the old new thing instead of designing the next new thing.

Strategists provide a great benefit when they remind people of how the cycle of business model innovation never ends (making your new design eventually become as obsolete as the old design it replaced). They provide even more value when they help point the way to when the cycle is about to turn again and how to turn to stay on top.

Every company needs “mechanics” to help keep the current business running. But when senior leaders are overly focused on being mechanics, the company stagnates. They are left behind perfecting the obsolete while the rest of the world is moving forward to the next business model. That is why the strategic planning process is so vital. It helps leaders get a broader perspective, in order to:

a) Perceive in advance when it is time for radical reinvention;
b) Figure out how to reinvent the model in order to stay on top.

You can’t stop change. Therefore, take advantage of the change. After all, that’s when the biggest changes in market share occur in an industry. If you take advantage of the change, then your market share will skyrocket. If you ignore change your market share will plummet.

Friday, February 24, 2012

Strategic Planning Analogy #439: The Certainty Within Uncertainty

Every so often, I’ll check out some of the online discussion boards on the topic of strategy. A common discussion topic is about whether long term planning is useful anymore.

The line of reasoning usually goes something like this: There is so much uncertainty in the world that the future is completely unknowable. Therefore, any projections into the future are worthless.

What I find interesting is this: These people seem so certain that the future is uncertain. So doesn’t that make “uncertainty” a certainty? And if that is the case, then there is a measure of certainty to the future (certainty about uncertainty), so that you can make long-range plans.

The connection between what happens in those discussion boards and what happens in corporations is fairly straightforward. If you have a defeatist attitude towards the viability of planning, then you will not take planning very seriously. However, if you take a more positive approach, you can still extract significant value from the discipline.

Planning takes place within a context. You plan to win within the future marketplace (your context). Yes, it is true that nobody ever knows 100% of what that future will look like. But that is no excuse to abandon planning. There are still many certainties embedded in that uncertainty—enough so that smart people can take advantage of them in their planning.

And even knowing in advance that uncertainties will rule is knowledge you can use to develop your context. The “certainty of uncertainty” lets you know a lot about the type of world you are trying to win in. Just having that knowledge can make long range planning viable.

The principle here is that there is a way to do effective planning in a world of uncertainty. Long range strategic planning can still put your company at a competitive advantage when the world is full of uncertainty. You are still better off doing the strategic planning than not.

1) Regardless of Infinite Causes, there are Finite Outcomes
Uncertainty means that a lot of different things may or may not happen. There are an almost infinite number of unknown situations that could occur. Since one cannot realistically create an infinite number of plans, this knowledge of near infinite unknowns can be intimidating to a planner.

But it needn’t be. Fortunately for the planner, even if there are an infinite number of unknown factors causing change in the world, there are a relatively small finite number of effects which these factors cause.

The most important thing is usually not the cause, but the effect, because the effect is what effects your ability to win.

For example, regardless of the cause, most of the effects fall into a few simple categories like:

a) Markets Open or Markets Close
b) Competitors Get Stronger or Weaker
c) The Economy Gets Better or Worse
d) The Current Business Model Becomes Obsolete (a Better Model or a Different Technology Comes Along)
e) The Supply Chain is Disrupted
f) Government Regulations Change the Rules

Since the effects make up a much smaller list, you can manage them from a planning perspective. For example, in a previous blog we looked at how Caterpillar built a strategic plan in advance for what to do when an economy suddenly turns bad (regardless of why). When the economic crisis occurred in 2008, they pulled out that plan and weathered the great recession better than they would have otherwise.

Similarly, when the automakers in Japan were hit in 2011 by the Tsunami in Northern Japan followed closely by the flooding in Thailand, supply chains were severely disrupted. It pointed out the flaw in the close-knit just-in-time supply strategy. A more flexible strategic approach to the supply chain would have been beneficial regardless of what caused supply chain disruption.

2) Not Everything in the World Can Change Suddenly
If uncertainties act slowly enough, there is time to make these unknowables “knowable” before it is too late. Things like world dependence on oil and climate change can change, but the transition will be over decades, so there is time to build strategic plans around them.

And then there are knowables like the age of a population. Aging is tied to the chronological year. People cannot suddenly age faster or slower than the pace of the calendar. Therefore, age-related strategies can rely on a relatively stable and knowable environment.

Similarly, future adult population growth depends upon births which have already occurred. This adds some level of certainty to market-sizing of adults.

And finally, many core attitudes don’t change much. Maslow’s hierarchy of needs stays constant over time. Regardless of what is going on around them, people want to feel loved, they want to feel a sense of self-worth, they want to eliminate guilt, and so on. Although the manifestations may change, the underlying motivations are fairly constant and can be counted on.

3)There Are Still Things Completely Under Your Control
Yes, there many things outside our control. But there still many things under our control. The question is how we should act regarding those things under our control. We have options and alternatives regarding those decisions. Some of those options and actions would create better long-term outcomes than others. Strategic planning can help determine which alternatives to take.

For example, we have control over where we spend much of our company’s time and money, where to invest our efforts. Companies do not have enough resources to do everything. Therefore, they have to make choices, make trade-offs.

In particular, we can choose which position we want to own in the marketplace. We can choose which attributes we want to win on. We can choose who we want to target and what the message should be.

In addition, we can choose our corporate culture and management style. To a large extent, we can even choose our business model. We can also choose where to focus our R&D efforts.

In other words, businesses still have to make a lot of decisions. Choosing one path means rejecting another. In the absence of a long range strategy, these decisions will tend to be more erratic and more contradictory. Instead of reinforcing each other to build a stronger long term position in the marketplace, they become almost random—swaying back and forth in the winds of the latest fad. Everyone (customers, employees, other stakeholders) becomes confused about what you stand for, so you end up standing for nothing.

By contrast, strategic planning helps get all those decisions aligned so that they reinforce each other. You can move more quickly, because everyone knows the general direction. And being able to move quickly is important in a world of uncertainty.

We do not have to be victims of our environment. We can take control. As Peter Drucker said, “The best way to predict the future is to create the future.” Spend some time making decisions to create the future you want.

Here’s The Action Plan
Given what has been mentioned, how should we use strategic planning in a world of so-called uncertainty? There are five steps.

Step #1: Choose
Choose your position, your point of differentiation, the place where you will win in the marketplace. Choose the general direction of your trade-offs. Take command of those things under your control.

Step #2: Institutionalize Flexibility
In a world where frequent small adjustments are necessary, one needs a flexible operating structure. Make becoming flexible a part of your strategy—flexible supply chains, flexible factories, less cumbersome decision-making procedures, flexible balance sheets, etc. The certainty of uncertainty makes this essential.

Step #3: Prepare for Scenarios
From the finite list of potential effects, build a list of scenarios. Then create the proper strategic response if those scenarios are to occur. That way, like Caterpillar, you can immediately respond in a rational and proper manner when a particular scenario comes to pass.

Step #4: Encourage & Discourage
Although there are uncertainties in how the future will unfold, that does not mean that we are helpless in our ability to influence that outcome. Through efforts like lobbying, public relations, charitable giving, investing, and other such actions, we can help influence the course of history. Rather than being a victim of change, we can help mold how that change comes about. Have as part of your strategy actions to encourage a future more to your benefit and to discourage a future less to your benefit.

Step #5: Keep Monitoring the Situation
If you assume that the world is changing all the time, then keep watching it so that you know what is going on as soon as possible. Frequent change is not an excuse to ignore the environment, but to watch it ever more closely. In particular, find the key leading indicators that scenarios are changing and monitor them on a regular basis. That way, you know when to

a) Pull one of those scenario plans off the shelf; or
b) Where to place your encouraging/discouraging efforts; or
c) When and how to make adjustments in order to stay on course.

Just because there is a lot of uncertainty in the world does not mean we should abandon long-range planning. There is still a lot of certainty within that uncertainty, even if the most certain thing is the knowledge of continued uncertainty. Long range planning allows a company to rise above the seemingly random swings of change and stake out a position of strength. Rather than being a victim of the whims of change, you can take charge and even help influence how that change occurs (to your benefit).

Look at the world as being like an ocean constantly in change, and your company as a small boat. If you don’t want to be tossed around and out of control, you need an anchor. Strategic Plans can be your anchor.

Monday, February 20, 2012

Strategic Planning Analogy #438: Business Vs. Capability

One day, Bob was sitting in his garage. Suddenly, his neighbor Joe was running towards the garage. Joe quickly looked around Bob’s garage and noticed a shovel.

Panting from being out of breath, Joe said to Bob, “I’ll give you $1000 dollars for that shovel.”

Bob replied, “Are you crazy? That shovel is hardly worth $10. Why you can get a brand new one at Home Depot for less than $30.”

Joe said, “I need a shovel right now. Will you sell me yours for $1000?”

Bob answered, “Sure, Joe, you can have it for $1000.”

Before Bob could finish his sentence, Joe had tossed $1000 at Bob, grabbed the shovel and ran.

At the time, Bob thought Joe was crazy for paying so much for his shovel. But he soon forgot about it.

A week later, Bob saw Joe driving a new expensive sports car. Bob asked Joe how he could afford such an expensive automobile. Joe replied, “I used that $1000 shovel to dig up a treasure chest that was full of millions of dollars of gold and jewels. If I hadn’t had a shovel at that exact moment, I would have missed the opportunity to dig up that treasure chest.”

Suddenly, the idea of paying $1000 for that shovel didn’t seem as crazy to Bob anymore.

The value placed on an object can vary significantly between people. Bob thought his shovel was worth about $10. Joe gave it a value of 100 times that price.

Why such a big difference? Bob looked at his shovel as a standalone object. He knew that new shovels were worth about $30 and that he had an old shovel. Therefore, Bob figured that the worth of the object was about $10.

By contrast, Joe looked at the shovel as a capability tool. If used immediately, that tool would give him the capability to get a treasure chest worth millions. It was well worth paying $1000 to get access to millions.

Successful business acquisitions depend on an accurate assessment of value. And often times, the greatest value is not in the standalone business being acquired (the “shovel”), but rather the value of the capability it gives you (access to the “Treasure Chest”).

Therefore, if you want a great return on your acquisition investment, the best path can be to first have a strategy to locate treasure chests. Then acquire whatever tools are necessary to dig up that chest.

Otherwise, you can be like Bob. Sure, he paid a lot less than Joe for that shovel, but when Bob had the shovel all it did was sit in his garage. The return on that $30 investment for Bob was worse than the return Joe got with the same shovel for which he paid $1000.

The principle here has to do with capability planning. I think this is an under-emphasized part of the strategic planning process. People love to spend time talking about financial targets or market positions. These are fun topics. However, unless you have the right capabilities in place, those financial targets and market positions will never become a reality—no matter how much you talk about them.

Capabilities can cover items such as technology, patents, expertise, distribution capacity, access to raw materials, access to scarce talent, access to real estate, access to legal rights, and so on. You could have everything you need except one of these items and fail miserably—because none of the rest of it works unless you also have that missing piece. It could be something small, like a shovel, but if that missing piece keeps you from the getting the treasure, then merely knowing where the treasure is can be worthless.

The Problem With the Standalone Approach
Most acquisitions are looked at primarily as standalone business opportunities. Sure, one factors in a few synergies, like reductions in overhead and overlap, but the vast majority of the value is typically from the business itself.

But here is the problem with that approach. First, you have to pay a premium to get the business. Depending on the industry and the time in the business cycle, that premium can be on the order of 30% or more.

Second, to make that acquisition worth doing, you need a return on investment which exceeds your cost of capital. In other words, if you pay 30% more and you earn 30% more, all you have done is break even. And that is an unacceptable return. Depending on your balance sheet and the time of the business cycle, your stakeholders may require an additional 10% improvement or more.

In the end, this means that the only way that a standalone business is worth acquiring is if you can get 40% more out of it than the so-called experts who are already running the business (I spoke about this in more detail here). Remember, if it were easy to make such a large improvement, why aren’t the current owners doing so?

A few reductions in overhead or overlap rarely are enough to fill this large of a gap. And the gap may even need to be larger than 40%, because most acquisitions have some built-in dis-synergies which also need to be overcome. An example could be customers who no longer want to buy from the company after it is acquired because they don’t want to do business with you. I spoke more about these dis-synergies here and here.

The only way to assure that you can cover a 40% gap is to look outside the standalone business. You probably need to create an entirely new business to supplement the old business to cover the gap. In other words, the only way you can afford to overpay for a shovel is if you can use the shovel to obtain new treasure.

As long as you focus on positions or profits, you will look for acquisition targets that have great positions and/or produce great profits. And those are the targets which will typically have the greatest premium prices and the lowest potential for you to come in and cover the 40% (or more) gap.

The Benefit of Capability Planning
Capability planning looks at acquisitions more as a means rather than an end in themselves. The prize is not the acquired business. No, the prize is the separate hidden treasure which can only be obtained if the acquired firm is used as a tool to reach it. It is the capability value, not the operational value which makes the acquisition worth doing.

Consider the Pringles potato chip business. Proctor & Gamble has been disappointed with this piece of their portfolio for a long time. They have tried to find ways to get rid of it for literally decades. The fact that P&G could not sell it for such a long period implies that there was not enough inherent in the standalone business to ever justify paying a premium. The gap could not be covered.

But then along comes Kellogg. They see a buried treasure—international growth for their Keebler snack business. Unfortunately, Kellogg is missing a key capability—access to powerful global snack distribution. Pringles has that capability. It is the shovel that will help Kellogg get to their buried treasure. There is probably more value in Pringles as a distribution capability for Kellogg than as a snack business. Therefore, Kellogg can afford to pay for Pringles when others could not. They can cover the gap, because they have an addition treasure beyond what Pringles offers as a standalone business.

Therefore, rather than developing “Business Acquisition Strategies” focus on “Capability Acquisition Strategies.” And don’t forget that many times you can obtain access to the capability without having to buy a company (and pay the huge premium). This opens up more options, like start-ups, aggressive hiring, strategic alliances, licensing, and so on.

Acquisition is just one way to get capabilities. As long as you see acquisitions as a means, rather than an end, you can compare it to alternative means for obtaining that end. This can lead to superior strategic moves.

Most acquisitions destroy shareholder value. One of the reasons is because there is not enough of an opportunity within the core business to increase the value to cover the premium and the return on capital requirements. Therefore, if you want to create value with acquisitions, start first by looking for treasure beyond the core business. Then look for acquisitions which are a tool to get to that treasure.

There’s the old story that for the lack of a nail, a shoe was lost. For the lack of a shoe, a horse was lost. For the lack of a horse, a battle was lost. For the lack of a battle, a kingdom was lost. When you look at that big picture, it makes that nail appear pretty valuable. Strategists love planning out the big battles, but if the capability to put nails in the horseshoe is missing, it can all be for naught.

Often times the great leaps in value can come from these capability issues which at first appear minor or are often overlooked. Don’t overlook capability planning in your strategy work.

Monday, February 13, 2012

Strategic Planning Analogy #437: Eliminate Stop Signs

Shortly after receiving my driver’s license, I caused an accident. As a result, I had to go to traffic court.

In the case prior to mine, a lady was accused of refusing to obey a stop sign. She pleaded not guilty. Her defense was that she indeed made a quick stop at the stop sign before proceeding.

The court then pointed out that immediately after her “stop”, she drove into oncoming traffic and caused an accident.

The judge asked her if she looked both ways to see if it was clear before proceeding from the stop. She said no. She just stopped as the sign required and immediately drove ahead, never taking the time to see if it was okay to proceed.

Although she technically stopped, the judge found her guilty.

We live in a fast-paced world. Like the lady in traffic court, we don’t want to waste a lot of time stopping. We want to just rush down the road. As a result, stop signs do not always get the respect they deserve.

Many executives see strategic planning as similar to those stop signs. Strategists are the people seen as always saying “Stop!” They’re always talking about being at a strategic crossroad, where we need to stop and determine which path to take. Either that, or strategists are seen as the ones who want to slow down the day-to-day decisions by forcing people to take the time to first examine the long-term implications of that decision.

Out of courtesy, these executives may momentarily give a token nod to strategy. But like the lady in traffic court, they immediately resume their fast pace. And because they did not take the time to carefully examine the ramifications of their actions, these executives cause a corporate accident.

As long as strategists are viewed as stop signs, they will not get the respect they deserve…and those accidents will occur. To gain respect, and reduce the accidents, I suggest that strategists reposition themselves as expressway builders—the ones helping you to avoid stop signs.

The principle here has to do with speed. Companies want to move quickly. If you are viewed as something which slows a company down, then you are not seen favorably. However, if you viewed as one who helps the company move faster, then your image and stature improves.

Bad Assumptions About Strategic Planning
Therefore, if strategists want to make a major impact on a corporation, it helps if they are viewed as an area which helps companies move faster. However, the current image of strategy is often the opposite. The negative rap against strategy in this area usually goes something like this:

1) Building long-term strategies takes a lot of time.

2) The world is moving too fast and too unpredictably.

3) As a result of rapid change, long term plans are almost immediately obsolete (so you have to waste a lot of time constantly updating them).

4) As a result of unpredictability, you have to go with your gut and seize the opportunity of the moment. If you waste a lot of time in strategic analysis, you’ll miss out on that short window of opportunity.

5) Therefore, strategy should not be taken very seriously. It’s a bad stop sign that you want to drive through.

Good Assumptions About Strategic Planning
However, I believe this point of view can be rejected and replaced by one where strategists are seen as one’s allies in maintaining speed. The replacement line of reasoning would go something like this.

1) The world is moving fast and unpredictably.

2) The faster and more unpredictable the world is, the more often one has to adjust. The number of decisions to be made increases dramatically. Every street you drive by is potentially an opportunity to change course in a world of rapid change.

3) In the absence of context, thousands of people making thousands of rapid decisions leads to chaos. Precious time is wasted because the company is not unified and moving together down the same path.

4) Without a map, every road looks about the same. It takes longer to decide which road to take at every intersection if you have no guidance about which roads are better.

5) Strategic planning can fix all these problems by providing the context and the map. All of those decisions are easier and faster to make when you have a strategic context. The context help people focus on what is most important. They help a company understand what their winning formula is. This makes all those decisions easier. All you have to do is move in the direction which reinforces the context.

6) With a roadmap to the future, every path is not treated equally. There is a preferred path. You only need to deviate on rare occasions. If you use strategic planning to debate the whole path upfront once, you save a lot of wasted time debating what to do at every single intersection.

7) Without the context and the map, you are always reacting to what is going on around you. You are a follower, not a leader. Followers have to keep adjusting to all the changes in the rules set by the leaders. By contrast, if you are the leader setting the rules, then you are less subjected to the world around you. Instead of wasting time adjusting to the world, the world is wasting time trying to adjust to you.

As Peter Drucker put it, “The best way to predict the future is to create the future.” Building a strategy to create the future allows you to move forward quickly because you don’t waste as much time predicting or reacting.

Example: Apple
Apple has moved very quickly in a very fast paced part of the economy. My contention is that their success in moving quickly has a lot to do with their having a solid context and roadmap.

Everyone at Apple understands the context. They are to develop cool, elegant, intuitive, seamless systems in the consumer electronics space. By understanding that context, decision making could be made easier and faster. Whenever a decision needed to be made, the answer was to move in the direction which made things cooler, more elegant, more intuitive, or more seamless. And these decisions applied to the whole system—the hardware, the software, the content, the partners, the selling environment.

This context became the non-negotiable winning position for Apple. The time for debate was over. Now all the energy could be focused on moving forward to bring it alive.

The roadmap was also fairly clear. The idea was to build closed systems around aspects of a cool lifestyle. As time passed, the complexity of those systems would increase, but the intuitive elegance would remain. First music, then mobile, then pads, then clouds. Ever more useful, ever more portable, ever more powerful.

By knowing the roadmap, Apple could focus on great execution (instead of endless arguing on what to execute). They were able to take the lead and set the rules everyone else had to follow. By making the rules, they were not victims of the rules. They could move quickly by acting, rather than reacting.

Building Expressways
If strategic planners help companies develop their context and roadmaps, then they are actually eliminating stop signs. The road filled with stop signs is replaced by an expressway which has no stop signs. All of those little time-consuming decisions at each intersection can be sped by, because you already have the big decisions made (through strategic planning). The big decisions help to quickly point out the way to resolve the little decisions (go in the direction of the big decision).

If you can convince management that doing strategic planning actually saves time by getting you off the back roads an onto an expressway, then you will be able to positively influence a company and help steer them away from strategic accidents.

In a rapidly changing world, strategic planning does not become obsolete. Instead, it becomes even more critical. It provides the context and the roadmap, so that you can more easily and more quickly determine which path to take amongst all that change.

Are you focusing your efforts on things which make it easier to deal with change or harder to deal with change? The answer to this question will help determine your status and power within the organization.

Thursday, February 9, 2012

Strategic Planning Analogy #436: Distracted Driving

Today’s technology can do a lot of great things. It can entertain us, inform us and keep us connected with the ones we love. It can also cause problems if we combine all that technology with driving.

Between the technology gear we bring into the car, and the technology gear already in the dashboard of the car, we have all sorts of opportunities to become distracted from our driving. Here are a few statistics on the subject I found on a web page:

• Talking on a cell phone causes nearly 25% of car accidents.

• About 6,000 deaths and a half a million injuries are caused by distracted drivers in the US every year.

• Over 1/3 of drivers (37%) have sent or received text messages while driving, and 18% said they do it regularly.

• Forty-one percent of adult drivers have set or changed a GPS system while driving, and 21% do it “more frequently.”

• While teenagers are texting, they spend about 10 percent of the time outside the driving lane they’re supposed to be in.

• Talking on a cell phone while driving can make a young driver’s reaction time as slow as that of a 70-year-old.

• Answering a text takes away your attention for about five seconds. That is enough time to travel the length of a football field.

Yes, you can do a lot of really cool things in a car these days. The sound systems are great; the communication systems are great. The dashboards are full of interesting things to look at and play with. But for safety’s sake, perhaps we should take the wheels off the car and enjoy all this stuff while sitting still in our garage.

Better yet, let’s remember that the best screen in the car is not on your smart device or your dashboard, but the WINDSHIELD!

Cars aren’t the only places full of cool technology. So is today’s workplace. A lot of this technology can be very useful. However, like in the car, much of this technology can also be distracting.

Here are some work-related statistics:

• Nielsen’s quarterly Three Screen Report on U.S. media usage showed that approximately 44 percent of all online video is being viewed in the workplace.

• More than 21 million Americans – or 29 percent of working adults – now access adult websites from work computers.

• Some employees said they accessed their Facebook accounts as much as two hours a day on the job, with 87 percent of those surveyed admitting that they had no clear business reason for using the social network.

• An oft quoted study says that Facebook reduces office productivity by 1.5% overall.

As disturbing as this might be, I’m even more concerned with the official gadgetry produced by the company itself. Just as cars provide cool distractions on the dashboard, many companies have their own “dashboard” devices. These company dashboards are software applications which show lots of cool performance indicators. Like a car dashboard, they provide data to let you know how you are doing. And like a car dashboard, this information can be useful.

However, there is a lot more to driving than just staring at the dashboard. You need to look out the windshield and see the world you’re driving in. The same is true for strategists. It can be very dangerous if the focus at the company is too much towards the internal dashboard and not enough looking at the external world through a strategic “windshield.”

The principle here is that it is already difficult enough to get companies focused on the long term, given all the near-term distractions. Let’s not allow a preoccupation with cool gadgets and company dashboards contribute to that distraction.

Yes, company dashboards can be a useful tool, especially to keep day to day operations on track. But if a strategist’s time is distracted by focusing too much on dashboards, then their work will suffer, increasing the likelihood of a company “accident.”

One of the key strategic problems with most dashboards is that they tend to focus on performance. They are typically a tool which looks at how well a company is performing on Key Performance Indicators (KPI).

Now, at first one might think that it is good for a strategist to focus on performance and KPIs. However, I see four major problems if performance is the primary focus of a strategist.

1) Performance Focuses on the Score, Not the Game Plan
As I’ve mentioned in prior blogs (here, here, and here), outcomes are like the score of a sporting event. They can tell you if you are winning, but they are worthless at telling you how to win. Yelling at the scoreboard won’t change the score. Yelling at your people to score more points is worthless advice. If a coach stares at the scoreboard (the outcomes) during the game instead of focusing on what’s happening on the playing field, they become a fairly worthless coach.

Even if you know you are losing, that does not mean you know how to fix the problem. The score provides virtually no insight into why you are losing or how to change the score’s direction. It is just a number.

If you want to win, you need to focus on the clipboard where you write up the winning game plans. Games are won by having a superior game plan that is properly executed. That is where the strategic focus needs to be.

By the time you know the score of a game, it is too late to affect its outcome. But if, instead, you focus on the game plan, you’ll pretty much know what the score will be before the game is over, and have time to still influence the outcome with a revised game plan.

2) Performance Tends to Ignore the Real Battleground for Success
Customers act based on the way they think. Therefore, if you want them to act in a particular way, you need to first get them to think in a particular way. Hence, the key battleground for success takes place in the minds of your consumers.

Most company dashboards, if they measure customers at all, measure what they do (like “sales”), not how they think. As a result, the dashboards are ignoring the key battleground for success.

In a prior blog, we talked about the difference between “being” and “doing.” Strategic positions are about what you want to BE—how you are defined in the mind of the customer. Dashboards are about DO—what has already happened to your company.

If you want to improve strategically, you need to focus on the BE; you need to probe the consumer’s mind to find out if you are becoming properly positioned in the key battleground. This would be far better information to focus on than the outcomes of a dashboard.

3) Strategic Planning is Most Valuable at Times of Discontinuity
Dashboards are based on tracking past performance over time. The implied assumption is that the past is the best indicator of the future. Yet we all know that the world is full of change. The future often has little resemblance to the past. There is too much discontinuity.

That is why one of the chief values of strategy is to look forward—to anticipate future discontinuity and formulate a plan in advance to prepare for and take advantage of that discontinuity.

By the time a dashboard displays discontinuity, it is often too late to properly react. The change has already occurred. All the dashboard can do at that point is track precisely how quickly the discontinuity is destroying the company.

If you want to anticipate and prepare for discontinuity, you need to be looking up out the windshield rather than looking down at the dashboard gadget.

4) Performance Tends to Denigrate Strategic Planning into a Financial Scorekeeper Role
If the determination and measurement of KPIs becomes the primary responsibility of strategic planning, then the role of strategic planning becomes little more than that of a scorekeeper.

Just because a person keeps score does not mean they influence the score. In their new stadium, the Dallas Cowboys football team has one of the most sophisticated scoreboards in the world. But it hasn’t helped them win more games or get to a championship.

There has been a trend to redefine strategic planning as “Financial Planning & Analysis” and make it a small sub-department in Finance. The role is little more than that of a scorekeeper, with the dashboard being their scoreboard.

You don’t make great strategic leaps into the future by keeping track of the past. Great insights come from looking ahead and looking beyond today’s results. But if the new objective for strategists is to look for KPI performance variances (instead of looking ahead), then they are no longer doing true strategic work. By redefining the role, this great value is being taken away.

It is hard to get companies to focus long term, because the “tyranny of the immediate” pressures executives to focus on the crisis of the day. That is why strategic planners are so valuable…they provide a longer term balance. However, if the strategists are primarily focused on measuring KPIs, then they get caught up in the tyranny of the immediate as well. The balance is lost; and much of their value is lost. And the company suffers.

The irony is that if you want better future outcomes, the best methodology is to not focus on prior outcomes. Instead, focus on the factors which influence the future. And those are rarely found on dashboards.

A strategist looking down at a dashboard is like a teen looking at a text while driving. Do I hear a crash?

Friday, February 3, 2012

Strategic Planning Analogy #435: We’re In This Together

Back between December 3, 2006 and March 6, 2007, Menu Foods was manufacturing dog and cat food using imported wheat gluten from China. This wheat gluten was a thickening agent used in the manufacturing of the gravy for the dog and cat food.

Unfortunately, this wheat gluten was not pure wheat gluten. It included melamine, a chemical to make the gluten appear to have more protein. It also included cyanuric acid, a disinfectant. This tainted gluten started causing dogs and cats to die from kidney failure.

As a result, Menu Foods needed to issue a recall on these cat and dog food products. Since Menu Foods was a contract manufacturer for other brands, they had to list all of those brands in their recall notice.

As it turns out, Menu Foods was manufacturing pet food products for nearly every private label (store) brand in North America, including Wal-Mart, Kroger and Safeway. In fact, 17 of the top 20 retailers were selling their store brand pet product using items made by Menu Foods.

Some of the premier name-brand manufactures also put their labels on products made by Menu Foods, including Iams, Eukanuba, and Nutro. In total, the recall encompassed dog food products under 51 brand names and cat food under 42 brand names.

Many consumers were shocked to discover that the majority of the brands of pet food they had to choose from were coming out of the same factory. People started asking themselves, “Why should I care about what brand of pet food I choose if most of the brands come from the same factory?” Many switched to the few brands which did not use Menu Foods and they never went back.

And what about the brand “Menu Foods”? If you go on the internet, you’ll find that its brand name is now “Simmons Foods.” Menu Foods is never mentioned. I guess that Menu Foods was a brand name that lost its value. Apparently, people still cared about that brand (and not favorably).

We live in a world where outsourcing is a way of life. It seems like there is nothing immune from outsourcing. The story talks about outsourcing of manufacturing. But companies also outsource functions like distribution, sales, customer service, installation, human resources, payroll and just about anything else.

Outsourcing can look great on a computer spreadsheet full of numbers. However, the more of your business you outsource, the less control you have over all the inputs to that spreadsheet. If one of your partners fails to deliver as desired, your carefully created spreadsheet becomes worthless. All it took was a poor choice in outsourcing of wheat gluten at Menu Foods to create a public relations disaster for dozens of pet food brands who outsourced to Menu.

Outsourcing increases our dependence upon the decisions of others. Yet in most companies, strategic planning focuses almost exclusively on one’s own company’s actions. Unless our planning takes a broader perspective to include those in our outsourcing family, we will not be properly planning for our future. We will be increasing the likelihood of falling victim to a Menu Foods type of disaster.

The question then becomes, “How do I properly conduct strategic planning in an outsourced world?” The principles basically come down to three words—control, communication, and contingencies.

1. Control
In an outsourced world, you no longer own very much of the process. However, just because you do not “own” the process does not mean you cannot “control” the process. The beauty is that as long as you have control, you do not need to own.

Look at Apple. Apple does not own the manufacturer of the ipod, but it tightly controls the design and the expectations around the output from the manufacturer. Apple does not own the rights to the music, but it tightly controls how the music is presented, how it is accessed, and what the prices will be. Apple made sure that each part of the entire music system worked exactly how it wanted to work, whether it owned it or not. As a result, the strategy worked brilliantly.

In developing a strategic plan in an outsourced world, one of the most important tasks is to determine the key elements of success. What is the position you are trying to own in the marketplace? What is your point of distinction/superiority which will cause people to prefer you over the alternatives? Which elements reinforce this position?

Once you make that determination, the next step is to build into your strategic plan a way to control those elements throughout your entire network, whether you own them or not. For example, if quality is important, then find ways to control the quality throughout the entire network.

Control can be achieved in a number of ways. You can place high expectations in the contracts with your partners on these critical elements with severe penalties if not met. You can demand the ability to inspect their premises for compliance. You can limit your choice of partners only to those with a shared vision (rather than just basing the decision on lowest price).

For example, Sears wanted its Kenmore appliances to be known for innovation. Therefore, Sears set up its contractual arrangement with Whirlpool (who makes a large percentage of Kenmore’s appliances) as follows: Any new innovation developed by Whirlpool must be exclusive to Kenmore for a period of time before it can appear on a Whirlpool appliance. This helped Sears to control its innovation reputation, even when it did not create the innovation.

2. Communication
If you want all of your outsourced partners to support your strategy, then it would help to let your partners in on what that strategy is. These are not just partners in your business, they are partners in your strategy. Therefore, they need to be a part of your strategy communication.

Who do you invite to your strategy sessions? How many of your outsourced partners are present? Are they part of the discussion? Do they get to participate on any of the implementation teams?

Once the strategy is formulated, do you communicate it with your partners? Do they know what is most critical to your success?

A lot of business decisions revolve around making trade-offs. You cannot do it all, so you have to decide what you will focus less on in order to be able to focus more on something else. Your partners make trade-off decisions all the time. If they do not know what is most critical to your strategy, then they might make the wrong trade-offs.

For example, Eukanuba and Iams base their reputation on high quality and health for their pet foods. They associate themselves with veterinarians in order to show how concerned they are with health. They are able to charge a premium price because of that reputation. Menu Foods made a trade-off away from quality and health in order to get the lowest price on wheat gluten. This was the wrong trade-off for Eukanuba and Iams.

The more you communicate with your partners, the more likely everyone will make decisions which support, rather than harm, your strategy.

3. Contingencies
If the automotive industry learned anything from 2011’s tsunami in Japan and flooding in Thailand, it was the need for contingencies. Too much of the outsourcing system rested in just a handful of suppliers. When the tsunami and the flooding wiped out those few suppliers, the whole automotive network came to a screeching halt.

For example, Xirallic is the additive in automotive paint which gives the paint a metallic shimmer. All the major automotive companies use this additive in some of their paints. However, there was only one factory in the world which made this additive. And that factory was wiped out by the Japanese tsunami. It was estimated that car production worldwide was reduced by 600,000 vehicles shortly after the tsunami just because of a lack of Xirallic.

To keep these network shutdowns from happening, one needs to incorporate contingencies into the strategic plan. For example, I worked with a retailer who built about 90% of its stores with fixturing from one company and 10% with fixturing from another company. Why? Just in case anything happened to that company who supplied the 90%, there was a relationship and a plan with an alternative—a built in contingency that was part of the plan.

And if you are the supplier, you may want to consider a plan to diversify some of your manufacturing to multiple locations in order have an alternative if major disasters strike.

Yes, just-in-time and lean manufacturing have benefits, but in the extreme this plan can hurt in times of emergency. Incorporate a little more flexibility into the plan to help avoid the disasters felt by the auto industry in 2011.

Outsourcing can provide many benefits. It can give you access to better expertise, greater speed and lower costs than if you tried to do everything yourself. However, the more one outsources, the less direct control one has over the outcomes of the network. Therefore, if one wants to achieve strategic success in an outsourced world, one needs to proactively consider the entire network as part of its planning process. In particular, strategic plans should consider:

a) How to increase control over the critical elements throughout the network.
b) How to communicate with the partners so that everyone understands the plan and how they fit into the plan (and what is expected).
c) How to place contingencies into the plan to help avoid disaster when partners cannot live up to their expectations.

Many automakers (particularly those based in Japan) posted severe profit drops in 2011 because of the impact of the tsunami and the flood. If all you do in your negotiations with outsource partners is beat them up to get the absolute lowest price, you may save a tiny bit of money, but turn around and lose all of that (and more) when the network falls apart. Take a broader, more strategic approach with your network. It can save you from big losses (like in the automotive industry) or big embarrassments (like in the pet food industry).