Friday, September 14, 2012

Strategic Planning Analogy #469: Mirror, Mirror

I knew a woman who didn’t like the way she looked.  She wanted a quick and easy way to solve the problem…and she found one.

She took all the mirrors out of her house.

Yes, getting rid of the mirrors meant that she could no longer see the way she looked.  And yes, by not seeing the way she looked, she no longer was reminded of the way she looked, so it did not bother her anymore.  But it didn’t change the way she looked.  The problem was merely avoided, not eliminated.

Company leaders often take a similar approach.  They are uncomfortable with their long-term prospects (or how to deal with them).  As a result, they only focus on what they are comfortable with—the near-term issues (the crisis of the day).  They never take the time to examine the firm with a look at the long-term.  The long-term views are eliminated like mirrors, so that you can no longer see how dire the future might be.

Although that may be the comfortable way to eliminate dealing with the issue, it doesn’t solve the problem.  It merely avoids the problem.  Eventually, long-term issues will catch up with you.  And if you haven’t dealt with them in advance, they can destroy your business.

The principle here is that the future is will come, whether you are paying attention to it or not.  The more you pay attention to it in advance, the better it will be.

Back in the 1980s, Gary Hamel and CK Prahalad wrote an article for the Harvard Business Review saying that senior executives should be spending about a third of their time looking into that future mirror.  Instead, what they found was that senior executives were only spending about 3% of their time looking into that mirror.  I don’t think those numbers have changed significantly since then. 

The tyranny of the immediate always seems to win over gazing into the long-term.  And there is a serious price to pay for this.

Why ignoring the future is a mistake:

1) The Future Determines Your Valuation
The value of a company or business is not based on what happened in the past or what is happening now.  It is based on what will happen in the future.  Companies are cash flow machines and today’s value of the firm or business is roughly the sum of its future cash flows brought back at some discount rate.

Look at the social media firms like Facebook.  Their extremely high stock valuations cannot be justified by what is happening today.  They can only be justified by future expectations.

If you want a high valuation for your firm or business, then you need to have a compelling story about the future and future cash flows.  And you won’t have that story if you ignore the future and only concentrate on the here and now (by throwing away the long-term mirrors).

The question is not what have you done for me lately, but what are you going to do for me tomorrow.  And a great tomorrow won’t happen by accident.

2) Others Are Still Looking at Your Future
In the story, the woman no longer fretted about how she looked because she could no longer see what she looked like.  However, throwing out the mirrors did not stop others from looking at her.  And if they were turned off by her appearance, she would still have problems.  It could hurt her social life, hurt her career and lead to a less desirable life.

The same is true in business.  Consumers look at you; bankers look at you; private equity looks at you; parent companies look at you; clients look at you; vendors look at you; competition looks at you.  If they don’t like your future prospects, they can make your life miserable.  They will take away funding.  They will take away business.  They will assume you are a higher risk and charge you more for their services.  As a result, you will have even more near-term crises and more dire future prospects.

3) Others Are Preparing their Future
If everyone was equally blind to the future, we would all be similarly handicapped.  However, there are always those companies who seriously work to optimize their long-term prospects.  Their proactive approach will help define how the future unfolds.  And since they are working for their own advantage, the future will not unfold to your advantage.  You will become weaker as they become stronger.

Remember that if you don’t define a place for yourself in the future, someone else will define it for you…and you probably won’t like the results.

4) The Future is not Always Incremental
The future does not roll out as a smooth continuous line of incremental improvement.  Major disruptions can occur.  Just ask anyone in the analog business who got wiped out by the digital revolution (like Kodak, traditional newspapers, etc.).  So just trying to get better at the status quo will at some point break down.

So if your head is only looking down at what is in front of you today and all you are trying to do is make it incrementally better, faster, or cheaper, then at some point you will have the best, fastest, cheapest obsolete item on the market.

Only by looking to the future will you have the foresight needed to adapt to the non-incrmental change (which is inevitable)—hopefully with enough advance notice in order take advantage of the leap rather than be a victim of it.

So What is the Solution?
If top management has a little trouble finding sufficient time (or desire) to stare into the mirror, then someone else needs to be doing it for them.  That would be a key role of a strategic planning group.  By being freed a bit more from the tyranny of the immediate, they can spend more time looking into the mirror and pondering what the future looks like.  

Then, as a trusted advisor (and a bit of a nag), the strategy group can ensure that the voice of the future is at the table when decisions are being made.

The future will come, whether we are ready for it or not.  And the future will be better if we are prepared in advance.  After all, that’s where today’s value comes from—our potential future prospects.  And if top management cannot carve out enough time to do so, then strategic planning can add significant value by doing much of it on behalf of senior management.  That alone should make every executive team want to have a vibrant strategic planning unit.

There’s an old saying which goes something like this:  “Blessed is the company which never does any long-term planning, for their inevitable demise will come as a complete surprise to them (and they won’t have wasted all that time in worry about it).”  A better blessing would be to properly prepare for the future so that you can be rewarded with long prosperity.  Look into those long-term mirrors.

1 comment: