Wednesday, April 25, 2012

Strategic Planning Analogy #448: Tornado Chasers

Tornado chasers are an odd bunch of people. Some would say they are crazy.

First, they spend countless hours in research looking the next possibility of a tornado attack. Most people would say that there is enough trouble coming our way on its own, so don’t look for any extra trouble. But tornado chasers are driven to proactively look for the next opportunity for danger. (Yes, to them tornados are an “opportunity”).

Second, once they find the danger, tornado chasers don’t run away from it. No, they run towards it. They try to get as close to the tornado as they can. They chase after it as fast as they can as soon as they can.

Third, the tornado chasers don’t stop after doing it once. They continue to do it year after year after year, running towards danger.

Yes, that does sound a bit crazy.

Tornados are not the only dangerous and destructive force out there. Just look at the business landscape. Large, formerly great, industry-leading companies disappear all the time. It is as if a tornado wiped them out. Nothing is left but debris. Enron; PanAm; Lehman Brothers; Kodak; Firestone; Worldcom; Montgomery Ward. and the list goes on.

Sometimes the destructive force starts from within the company. Sometimes the destructive force that destroys the company comes from the outside environment. But no matter where the force comes from, the ultimate blame for the destruction needs to fall on management. It’s their fault, because they did not come up with a strategy to deal with the destructive force.

Destruction is not inevitable. Other companies have been faced with similar destructive forces and survived. They reinvented themselves to stay on top. Like Judo, they used the dangerous force coming at them and redirected it to their advantage.

In many ways, these surviving firms are like the tornado chasers. Rather than ignore or avoid danger, they embrace it. They look for it. They run towards it to take it on before it has a chance to destroy them.

At first this approach may seem crazy, but as we will see in this blog, it is a lot safer for businesses to chase after the tornado than to just sit in their headquarters and have the tornado come and blow them away.

The principle here is that often times the best way to deal with a destructive force is not by avoiding it or by building a bigger defense. That can be the path to ruin.

As Victor Hugo put it, “There is nothing more powerful than an idea whose time has come.” It is so powerful that no defense can overcome it. When it was time for the digital revolution, there was nothing the analog world could do to prevent it. The force was too powerful. The analog firms who tried to ignore or stop the revolution lost. The firms which embraced the transformation won.

No, the best approach is often to run towards the destructive force and embrace it. We need to become more like tornado chasers.

In particular, there are four things we can learn from tornado chasers which can help our business thrive in world of destructive forces.

1. Look for Danger Before It Exists
Tornado chasers don’t wait until a tornado has touched down before taking action. No, they look for meteorological conditions where tornados MIGHT appear. In other words, they prepare for tornados before the tornado exists by examining conditions which can lead to tornados. That way, they are fully prepared in advance—in the right place at the right time when the tornado comes.

This same principle applies to business. If you wait until a danger is in full force before starting action, it is usually too late. There is not enough time to respond. You will miss your window of opportunity. The rules will already be re-written by others. You will be left out. In addition, by acting early, you still have the strong cash flow of your core to help fund the battle. The more you wait, the more cash flow you will need in the fight, and the less you will be generating (as the force increasing eats away at your core).

Think about Google and its Android platform. Android was conceived at a time when smartphones were little more than a novelty and the thought of doing meaningful activity on them via the internet was little more than a dream. However, like a tornado chaser, Google could see that mobile could create the condition for a major competitor force in the future which could blow away Google’s computer-based search foundation.

Therefore, they went to mobile early and created a way to harness the eventual force to their advantage. Experts predict that by 2013, internet access via mobile will surpass internet access via mobile. It has indeed become a major force which could have destroyed Google’s base. However, because Google attacked the danger before it existed (via Android), they have used the force to their advantage and can move their search strength to the mobile platform.

Contrast this to the history of Microsoft. Historically, Microsoft has waited until the force of threat is already quite strong before making a move. It occurred with internet access, cloud computing and mobile. With mobile already larger than computers, Microsoft is still just trying to penetrate the market. They are very vulnerable to suffering significant damage from this force because they waited too long.

Do you have an eye out looking for where potential dangers can occur, or do you wait until the danger has built up a force of power before taking action.

2. Move to Where the Action Is
Tornado chasers don’t wait for the storm to come to them. They go to the storm. This is also true for businesses. In a prior blog, I explained why it is usually advantageous to fight your battles at the periphery before it gets to your core. If the new force is going to be the next new thing, then you need to embrace the force before it makes you obsolete.

When Google saw internet time moving to mobile, they went to mobile. When Sam Walton saw that supercenters, with groceries, had the potential to under-price his discount stores, he shifted to Wal-Mart Supercenters. When Amazon saw how digital books could ruin their business model, they agressively brought out the Kindle reader.

Now people could argue that Google had no right to get into creating a mobile platform. Their expertise was search algorithms and advertising. It looked crazy. People said the same thing when Wal-Mart added groceries—it was not a part of their expertise. It looked crazy. Amazon was a digital retailer, yet it reinvented itself as a device manufacturer with the Kindle. It looked crazy.

But here is the point. If the new force is drawing away your customers, you don’t have much of a choice. Either you find a way to become an expert in the new area, or the force will blow you away, like a trailer park in the path of a tornado.

3. Take the Threat Seriously
Most tornado chasers are not idiots. They realize that tornados are powerful, destructive forces. They respect that power and take precautions. They take their threat seriously. That’s how they stay alive. The same should be true for businesses. When a new threat arises, don’t be casual and half-hearted. Treat the threat for what it truly is—a force with the potential to destroy your brand’s very existence. Take it seriously and fight as if your life depended on it.

Google took the mobile threat very seriously. They did not wait for someone to build a platform to put their search engine on. They made sure there was a platform available for them by building it themselves (Android). In addition, they were concerned enough with the possibility that the Apple platform would try to lock them out that they gave away the Android for free. Now that shows how seriously Google respected the threat. As a result, Android now has close to half the market share and Google remains a powerful force in search and advertising.

Facebook could see a potentially forceful threat by Instagram, the photo-sharing site. They took the threat so seriously that they immediately purchased the company for $1 billion, even though the sight had no revenue. Now the potential threat is an ally.

Other companies often will put up a small fight in the new space, but do not treat the battle as seriously as they should. They do not fully respect the power of the new force to destroy them. Kodak did not fight the digital imaging war as seriously as it should have.  As a result, it did not land a new position in the digital space and had the digital competition blow away Kodak’s analog film business. It ended up with nothing.

Whereas Wal-Mart was willing to bet the company on an aggressive push into supercenters, Kmart only dabbled half-heartedly with the concept. As a result, Wal-Mart grew ever-stronger and Kmart grew ever weaker.

All strategies eventually fail. They become overtaken by a new force in the marketplace. Resisting the new force in an attempt to save the core usually leads to failure in both spaces. You end up with nothing. Take the threat seriously for its potential to wipe away your core and envision a way to win even if your core is severely damaged (or completely wiped out).

4. Never Rest
The thing about tornados is that they come back every year. You can never say that you’ve seen the last tornado. There will always be another one.

The same is true in business. Forces of change will continue to come. Today’s status quo will be replaced by the next big thing. And that next big thing will eventually be replaced as well. It doesn’t stop.

As a result, one cannot rest on the past. One has to always keep an eye out for the next storm.

That is what makes the half-hearted moves by Kmart into supercenters so interesting. Back in the 1960s, Kmart (then called Kresge) could see that the force of discounting was going to destroy their Kresge variety stores. Therefore they bet the company on the new trend by abandoning the variety stores and aggressively embracing the Kmart discount store format. As a result, Kmart was a powerful, dominant, and highly profitable force in retail for many, many years.

Yet, when the supercenter force came, they did not follow the pattern of destroying the old (Kresge) for the new (Kmart). They rested on the strength of Kmart and only pursued supercenters as an additional piece—not as a replacement. As a result, Wal-Mart supercenters are replacing Kmart in the marketplace.

And now we look at the force of e-commerce on the brick and mortar stores. Was Wal-Mart resting on its supercenter success too much and not taking the e-commerce threat seriously enough? Has Best Buy rested on its past too much and missed the next retail transformation? Only time will tell.

Yahoo and AOL may have lead the change on one wave of force. However, they may get wiped away by the current wave. You can never rest on the past.

Economist Joseph Schumpeter coined the term “creative destruction” to describe how capitalism works. His point was that there are forces in the economy which destroy the status quo, much like a tornado. The status quo is then replaced by something more in tune with the marketplace. As a business person, you need to devise strategies to use creative destruction to your advantage. Otherwise, the natural forces will wipe you away.

Which is more dangerous—going out to attack the tornado or sitting inside a mobile home not knowing that a tornado is about to cross your path and destroy your existence? Get out of hiding and embrace the new force before it blows you away.

Friday, April 20, 2012

Strategic Planning Analogy #447: You’re Buying People

Years ago, I was working on a deal to do a joint venture with a company in Korea. We had all sorts of lawyers on our side helping to craft the proper legal document. We noticed that our potential Korean partners were not using a lot of lawyers. We asked why.

The response? They said that they would rather save their money and have us spend all the money on legal issues. Then, at the very end, and only at the very end, would they bring in their own lawyer to help make the final changes.

We thought that was a bit risky on their part, but we went along with it. After all, that put our lawyer in control of the contract, so we figured we were getting a better deal.

Later on, as we started preliminary work on the joint venture, we learned that within the large family Korean business with which we had been negotiating, there were many different family factions. As it turns out, we had negotiated with the wrong faction of the family. As a result, the joint venture failed.

We may have had a superior legal document, but since it was negotiated with the wrong people, the deal was worthless. In the end, we took the bigger risk by relying on lawyers rather than in understanding the people.

A lot of strategic planning involves doing deals with others. It could be joint ventures, mergers, acquisitions or some other arrangement. In doing these deals, it is easy to fall into the trap of seeing the deal as a legal or financial arrangement between two companies. Under that assumption, you would do as we did at that company in the story and put the emphasis on making the best legal arrangement we could. In other words, do a good job at doing the deal.

But successful strategies are not just about doing deals. Doing the deal is just a means to an end. Supposedly, the deal was done in order to accomplish a strategic objective. And supposedly, that objective could be better accomplished working with this partner rather than by doing it alone.

So, in reality, the most important aspect is not the creation of a deal between two companies, but in the creation of great working relationship between two groups of people. For, as we found out in Korea, if you are connected with the wrong group of people, it is irrelevant how good the deal was structured. The work was not going to get done.

So when structuring a strategic plan, don’t look at it as a series of deals which need to get done between companies. Look at it as a series of objectives which must be done by people, regardless of who they work for. Then focus on ways to get the best people in the best situation to get the best outcome.

The principle here is that companies are made up of people. And if you want to do great things, you need to get the right people together in the right way. The best deals are not the deals with the best contract or the best pro-forma financial model. No, the best deals are the ones with the best results. So, rather than fretting primarily over the words and numbers on the piece of paper, focus on what creates the best results—the people and their working environment.

Listed below are a few examples of how to put this idea into practice.

1. People Due Diligence
Before deals are done, most companies will do due diligence. In other words, they will investigate the company before purchasing it. A lot of the items on most due diligence lists have to do with looking for hidden risks. The idea is that you don’t want to purchase a company with a lot of unknown legal or financial liabilities. Therefore, companies have their legal and financial experts “scour the books” of the acquisition target (that is, read all the legal documents and financial reports to make sure you know what you’re getting).

This is not a bad practice, but it is not enough. What you are purchasing most of all (in most cases) are the people who work for the company, along with the culture and the practices by which those people work. That’s where the biggest risk lies. The company may have wonderful documents and great balance sheets, but if the people, the culture and the practices are wrong, it really doesn’t matter. The work won’t get done. Therefore, the main focus of due diligence should relate to the people, practices and culture.

I can think of more than one occasion in my career when I was negotiating with another company and had to tell my superiors that we needed to stop the negotiations right away because we are dealing with the wrong people. They were untrustworthy and/or had questionable business practices and/or the culture didn’t fit. It was useless to work any further on hammering out a deal, because you could never work well with them under any contractual scenario.

So make sure your people due diligence is just as thorough as your financial and legal due diligence (if not even more thorough). My Korean friends in the story understood this and put more emphasis on people and relationships than they did on having hoards of lawyers trying to protect them with a piece of paper. If we had done the same, our people due diligence would have shown us that we were negotiating with the wrong branch of the Korean family.

2. Get the A Team
Over the years, I have dealt with a lot of consultants and financial advisory companies. People will ask me which are the good companies. I always answer by saying, “If you get the A Team, they are all good. If you get the B Team, they are all bad.”

In other words, you are not really doing a deal with a company, you are doing work with a group of people. If you get the wrong people, it really doesn’t matter which company they came from.

Therefore, when negotiating with consultants, financial advisors, other service companies, or potential joint venture partners, don’t just focus on terms and prices. Focus on the people. Request that particular people be a part of the team working with you (and that they spend at least a meaningful part of their time on your behalf). Make it a key condition for doing the deal. Put it in the contract.

3. Think Through the Process in Advance
Even if you have great people, you can still fail if the surrounding process and culture is wrong. Therefore, you should consider how the work is to be done before doing the deal. Then you can put the topic of how the work gets done into the negotiations.

For example, the two companies may have differing visions on how to do the work. If you find that out after the deal is done, it may be too late to reconcile the differences.

A key point of contention is often about intellectual capital or proprietary information. How much sharing of knowledge will take place? What skill sets or technology will be contributed? Will your teams be working side by side or will the work be segregated so that the other does not see how you fulfill your part of the deal? Don’t assume anything in this regard. Talk it out in advance.

In addition, by talking out the process during negotiation, one can get a great window into understanding the culture at the other organization. If the cultures are too divergent, it may not be possible to find a great working relationship. And even if you are acquiring the entire company, that does not mean that one can instantly fix such a cultural divide by merely imposing the acquirer’s culture onto the one being acquired.

Remember, companies are made up of people, and the people may resist the cultural change. These people were likely at the other company because they enjoyed that other culture. You could end up with defections, resistance, and demoralization if you push a foreign culture too quickly on a situation.

When you look at literature on acquisitions, a key source of failure is lack of cultural fit. Figure this out in advance.

4. Negotiate With Outcomes in Mind
In the end, success is not the deal but the outcome. Therefore, it may be desirable to negotiate the outcome as part of the deal. For example, some of the price can be pegged to future outcomes. Or outcome incentives can be negotiated as part of the deal. Buyout or separation clauses could be pegged to performance. At the very least, the deal could outline in detail what the outcome expectations are (by party), so at least you are going into the deal with a common goal.

Strategies shouldn’t be focused on doing deals. They should be focused on accomplishing strategic objectives which improve the positioning and performance of the company. This is the ongoing work that is done by the people long after the ink on the deal has dried. Therefore, strategy needs to concern itself with the people and the processes and culture in which these people operate. Otherwise, you will have a lot of deals that get you nowhere. And that isn’t worth a whole lot.

How much of your strategic time is spent on looking at people and culture versus time spent on getting a deal done? Is your desk cluttered with legal documents and financial proformas or is it covered with people and cultural assessments?

Wednesday, April 11, 2012

Strategic Planning Analogy #446: The Mighty Fall, Too

I had a summer job in college going door to door in the worst sections of the inner city of Detroit. My job was to interview residents at each house to get information for creating a directory.

It was a tough job. I had people come to the door with rifles and attack dogs. I had my life threatened. I had my car stolen. All so that I could get the information for the directory.

It seems kind of silly now all these decades later. Today, people voluntarily give up more information than I was asking for to Facebook all the time. And if you want to learn about people, there are all sorts of web sites you can go to. It can all be done digitally, from the privacy of your own home. There is no need to go outdoors and put your life at risk like I did.

Over time, the idea of what is a “normal” activity changes. When I was in college, the normal way to get data was out of books and printed directories. The people who put those directories together made a lot of money because that data was scarce. The publishers could afford to send out thousands of people like me to go door to door to get that data.

Today, that activity seems abnormal. Data is easy to come by and quite often free. All you have to do is go to the internet. And the data on the internet is often volunteered for free. That is the new normal activity. And as we will see below, this new normal is causing the directory business to fall apart.

When a business finds a way to exploit the normal way things get done, its leaders can get complacent. By becoming a huge, highly profitable player within that “normal,” you can start to feel invulnerable—too big to fail.

Unfortunately, today’s normal can become tomorrow’s idea of silliness. And being #1 at something people find to be silly and antiquated isn’t worth much. Yes, even the very big can become irrelevant if the new normal makes them obsolete.

The principle here is that all strategies eventually fail—even the really good and really successful ones. The reason all strategies eventually fail is because the environmental context in which that strategy operates does not stay constant. It changes over time. Eventually that environment will change so much that your old strategy is no longer relevant.

Normal is not permanent. It only lasts for a limited time. Then a new normal appears. And these days, that time span keeps getting shorter. And being big and highly successful in the past is no guarantee that you will even survive in the new normal.

Two recent stories in the news point this out.

The Demise of Phone Directories
On Monday, April 9th, AT&T announced that it was selling off a majority stake in its Yellow Pages phone directory business. They did this because the profitability of the Yellow Pages model was falling apart. Revenues had declined 30% in just two years. Impairment charges were wiping out the profits. Verizon sold off its competing unit in 2006, which filed for bankruptcy in 2009.

At one time, the Yellow Pages were one of the most profitable legal enterprises on the planet. Businesses paid a fortune to get a tiny ad in the directory because it was a highly valued place to be. After all, the normal way people found businesses was to look in the yellow pages. It was such a valuable book, that people wanted to steal copies. As a result, places in the past would chain the directory to the wall so that it could not be removed.

Now, that old normal seems a little silly. Why trust a book full of biased ads when you can go to places on the internet like Yelp or Angie’s List and see unbiased reviews from people who used the service in question. That’s why one of the most profitable businesses of the 20th century is now becoming obsolete. It no longer makes sense in the new normal.

The Demise of Big Box Stores
On Tuesday, April 10th, Best Buy announced that its CEO Brian Dunn was immediately stepping down. Although there were a lot of reasons for this, part of it was due to the recent poor performance of the company. Sales, traffic and profitability were all going down, and it appeared they would continue to go down. The stock price for Best Buy has dropped over 55% from where it was five years ago.

What happened? Best Buy dominated electronics retailing for two decades. It was huge. It was highly profitable. Now, it cannot find enough profitable items to fill up its large stores.

One of the problems is a concept called “showrooming.” This is where people come to the store to find out what they want and then go buy it at a cheaper price from an online competitor. Customers bring their smartphones into the store and check to see if they can get a better deal somewhere else before picking up the item. And since there is almost always somebody online willing to sell cheaper than the big box store, the big box store loses. This is the new normal.

It used to be that customers were confused about all of the new digital products. They went to places like Best Buy to get expert advice. That was the old normal. In the new normal, that seems silly because:

1) Consumers can find more information on the internet than what can be found from asking the so-called expert sales help; and

2) Digital items aren’t new anymore. They are becoming familiar commodities that you feel comfortable buying anywhere on your own.

As a result, one commentator said, “Best Buy is dying because the free standing consumer electronics stores model is obsolete.” It no longer fits well with the new normal.

So What Should We Do
So if pillars of past success like the Yellow Pages and Best Buy can fall, so can anyone. There is no “too big” or “too successful” to fail. Even the most valued and prized option can become irrelevant if it falls out of step with where normal behavior is heading.

So what is a company to do? Remember two words—Best and Bold.

a) Be Best at the Right Thing
Nearly every company or brand tries to be the best at something. Unfortunately not all of these goals to be best are suitable to an ever-changing normal. In particular, there is a big difference between being the best at who you are verses being the best at solving a problem.

For example, if you are a telephone directory business or a big box retailer, you can try to become the best telephone directory or the best big box retailer. Unfortunately, if nobody wants that product any more, being the best doesn’t get you very much. Being the best at who you are is only relevant if people like who you are. And with a changing normal, that will not last long.

By contrast, one could have instead tried to provide the best solution, such as the best source for finding a business or the best source for buying electronics. This implies that you may need to radically change who you are in order to stay the best as normal changes. Although this is a lot of work, it is better than becoming obsolete.

Unfortunately, I see so many companies focused just on becoming better at who they are. They are looking for incremental improvements to the current model rather than new models which better serve the changing normal. This is a recipe for obsolescence. The better recipe is to also have an eye open for new ways to stay relevant by offering the best solution—even if it is radically different than the old offering.

b) Be Bold in your Change
If you find a need to replace your business model to remain relevant, do it boldly. Remember that your new competition is boldly moving forward because they have nothing at stake in the old business model. Amazon was much bolder than Best Buy in pursuing ecommerce. Yelp and others were much bolder than AT&T in embracing a social media approach to finding companies. If you are timid in your transformation, you will not win against people like these.

Also keep in mind that it can be futile to hold back in an attempt to prevent your new venture from cannibalizing the old. Just because you are not willing to cannibalize your core does not mean that others won’t do it to you. Ford was timid about introducing minivans for fear of hurting its station wagon business. So Chrysler did it instead and Ford still lost the station wagon business. The same thing happened to Kodak, who was timid about digital imaging for fear of hurting its core analog film business. It still went away. It is better to be bold and have a business left after the old one goes away.

Because the world keeps changing, the concept of what is normal behavior changes over time. Therefore, if you want to remain relevant, you have to change as well. To stay relevant, focus on being the best solution and be bold about it.

When’s the last time you really thought seriously about how silly your offering may appear to the next generation?

Monday, April 9, 2012

Strategic Planning Analogy #445: Stifling Creativity

Several years ago, I was reading a book review on a book about creativity (I forget the name of the book). The book stated that there tend to be two approaches used by creative people. The book used Orson Welles as an example of the first approach. Orson Welles had great success early in his career with works like “Citizen Kane.” The greatness of his early works set a high standard that Welles wanted to continue. As a result, he often abandoned projects early because he didn’t think the projects would end up living up to his high expectations. Net result? Orson Welles’ finished creative outputs over his career were disappointingly low.

The other type of creativity was illustrated by an opera composer, whose name I have forgotten. Unlike Welles, he was very prolific. He wrote a large number of operas. The secret behind his large output of operas? He did not pre-judge them. Over time, he had found out that some of the operas he originally thought would be mediocre turned out to be rather good. And some of the operas he originally thought would be great turned out to be mediocre. As a result, he pursued them all, not knowing which would be great. So the quality level varied in his output, but it did result in a number of very good operas.

I have seen a similar situation in my own music writing. My initial impressions of the quality of the music early in the composition process are not well correlated to my final impressions after the composition is completed. Therefore, following in the processed used by the opera writer in the book, I pursue them all (at least until they are roughly fleshed out).

A significant part of strategy formulation is creative. Yes, the creativity is built within a context of knowledge. But merely gathering knowledge of the marketplace is not enough. To win in that marketplace, you need to create a winnable position. Many of these winnable positions are based on new propositions and business models which did not previously exist. They had to be created.

Think about Apple. Its success has not been based on Apple’s superior ability to gather data. In fact, Steve Jobs didn’t do consumer research. Instead, Apple’s success came from superior creativity in product and business model design. They created strategies which did not exist before, like the entire ecosystem surrounding its “i” products—the device, the software, the usability, the interconnectivity, the App Store, the Apps, the Apple retail store, and so on. This was very creative.

Given the importance of creativity to strategic success, it is worth examining the book referred to above. The book contends that depending on one’s approach to creativity, one can either enhance one’s output or stifle it. Let’s make sure we pick the right approach, so we don’t stifle our potential for success.

The principle here is that great innovative strategies as originally conceived often tend to initially look like craziness. And if that initial impression of craziness scares you away, you will never find the nugget of genius within the initial thought which leads to strategic greatness. Therefore, we need to be less like Orson Welles and more like that opera writer. We need to give those raw initial ideas a chance to grow a bit before we pass judgment on their true level of craziness.

In particular, there are three key points to keep in mind.

1. Living in the Shadow of a Great Legacy
Orson Welles lived his life in the shadow of the great legacy which came from his early success. He felt so much pressure to surpass his early success that he found it difficult to start anything new later in life.

The same thing can happen to businesses. A great legacy business can cast a large shadow over the future of a company. The legacy business is huge and is throwing off boatloads of cash. There is great pressure to only come up with strategies which can quickly surpass the success of the legacy business.

Unfortunately, new businesses often start small and consume cash in their earlier years. That doesn’t look good when compared with the legacy business, so the new idea is not pursued.

This is what happened to Kodak. They invented digital photography, but their analysis showed that digital was a less profitable business model than the legacy film development business. Therefore, they did not aggressively pursue digital photography. Why destroy a great legacy business with an inferior profit model? That’s crazy, isn’t it?

Well the problem is that somebody will come along who does not have that large legacy business casting a shadow over them. They will be happy to make the profits available in the new business model and turn the legacy businesses into extinct dinosaurs.

The old record labels let their legacy analog businesses prevent them from aggressively pursuing the less profitable digital downloading of singles. Apple had no legacy music business, so they were willing to go after it.

Look at those exciting new social media companies. They aren’t coming from companies with great legacy businesses, because the early analysis of these ideas doesn’t show an easy path to profits.

But those ideas could have come from legacy companies, if the companies could have gotten out from under the shadows of their legacy business (which will eventually become an extinct dinosaur). Don’t get trapped by earlier success like Orson Welles.

2. Abandoning the Absurd too Early
Initial impressions aren’t always correct. As the opera writer discovered with his music (and I discovered with mine), the final output can often surprise you (both favorably and unfavorably). If you stop development too soon, you may kill a great idea before it has a chance to blossom.

Innovative ideas initially look crazy because they are so different from what people are used to and comfortable with. If you eliminate those types of ideas, all you are left with are minor variations on the status quo. You cannot radically reinvent the status quo with ideas that are only minor variations on the status quo. And without a tolerance for a little initial “uncomfortableness”, you will never be able to escape the status quo. You are stuck.

That is why I do not like to condense the entire creative part of strategy formulation into a one-week strategy off-site meeting once a year. That is not enough time to get beyond that initial uncomfortableness and discover the great strategic breakthrough. Great ideas will be tossed away too quickly, because not enough time was given to flesh them out.

Google has all sorts of experiments and idea incubations going on all the time. Sure, not all of them are winners, but that’s how you come up with the next Android idea.

I like to use a process I call the “illogical extreme.” The idea is to push the limits of an idea to the point of ridiculousness and then slowly walk the idea back towards the status quo until it starts to look good. That way, you find the sweet spot between being too far away from the status quo and being too close to the status quo. This takes time.

Remember, just because the first draft of an idea looks crazy does not mean that the final draft will be crazy. Take the time to try a second or third draft before abandoning an idea. You may be surprised about how good that last draft can be.

3. Knowing when to Focus.
Not all surprises are good, however. Sometimes a seemingly great initial thought can lead nowhere. Some of those operas which initially seemed fantastic did not pan out. Therefore, not all ideas should be followed through to completion. Yes, spend enough time in thought and incubation in order to get a more informed point of view. But eventually narrow the focus to the few ideas with the greatest potential.

If you try to go down every path, you will never excel in the execution of any path. And you will quickly run out of time and money. And you will confuse the customer about what you stand for.

Therefore, narrow the major efforts to a small number of high potential initiatives, chosen from among the broad-based, but small effort, incubations going on all the time.

And if a major initiative eventually turns out to be a bomb, it is okay to retreat and start over again. Netflix quickly discovered that their idea to split the company and drastically raise fees was a bomb and smartly retreated. Don’t let your ego keep you from admitting mistakes. After all, you can’t fix a problem until you admit you have one.

Strategic planning has a significant creative element within the process. To ensure that the creative effort is allowed to create enough great ideas, one needs to avoid prematurely rejecting anything that initially sounds a bit crazy. Keep in mind that a legacy business will not last forever and if you don’t replace it, someone else will (often with an idea you rejected). Also, remember that it takes time to figure out which ideas truly have merit. Initial impressions can be wrong, so don’t be too hasty. Finally, if an idea goes bad during execution, it is okay to retreat and start over. Mistakes are only bad if you continue in them and do not learn from them.

A few losers don’t look so bad if they are surrounded by many more great successes. And sometimes the only way to get all those great successes is to take the risks which lead to a few losers. Doing nothing, in order to prevent any losers, also prevents any winners.