Friday, March 29, 2013

Strategic Planning Analogy #495: The 3 Keys to Success (Part 2)

I was excited the first time I was to visit the Museum of Modern Art in New York.  The museum is full of famous works of art.  I had read about or seen pictures of this art in books, but now I was going to get a close up look at the original paintings. I imagined that it would be a very inspiring visit.

Instead, it turned out to be a very disappointing visit.  As it turned out, not only do you see the greatness of the paintings when you see them up close.  You also see all the imperfections.  In particular, I remember looking at some very famous Picasso paintings.  When you studied them up close, you could see the rough pencil sketch underneath the paint.  They looked a lot sloppier than the little photographic reproductions I had seen of them earlier in art books.  After awhile, I became so fixated on the imperfections that I couldn’t enjoy the paintings.

I kept thinking to myself that I could probably find many artists who would be able to reproduce all of these paintings and have fewer imperfections. But in later reflection, I realized that I was missing the point.  No matter how much more “perfect” these reproductions would be, they would never be more valuable than the original.

Copying is a lot easier than creating something entirely new. Imitators may even be able to make small improvements over the original.  But in the world of art, the value belongs with the original, no matter how flawed it might be. 

A similar situation exists in the business world.  The ones who create, get known for and exploit exciting new business models first usually create more value than the later imitators.

Therefore, you’d think that there would be more business people striving to be the next Picasso—creating something new, exciting and very valuable. Yet, when I look around, it seems that the business world is more often filled with imitators and copiers. The idea seems to be that “People like that original over there, so if I make something just like it, they will like mine just as well.”

But as we all know, a “just like Picasso” is never as valuable as a real Picasso.  Why should we expect the rules to be all that different in business?

We are currently on the second blog in a series on the three characteristics which tend to determine whether a business is a great, lasting winner, or a long-term loser. In the first blog, we looked at “Passion” and saw that the winners have a passion for the business and the intricacies of the business model which makes it work in the marketplace.  The losers focus their passion on the money that comes out of the business and are only tangentially concerned about the details in how it is made.

In this blog we will look at “Direction.”  Winners tend to move in new and different directions, like Picasso.  Losers direct themselves to follow what is already working (the imitators).

The Problems With Following
There are many reasons why the followers rarely become the great companies. It doesn’t matter if you are following the standard rules of convention for your industry or following the innovation of the leaders.  You are still following.  And followers rarely reap great rewards.

There are three problems with focusing on following the conventional rules for how your industry works.  First, if everybody is doing the same things in the same way, then you tend to have parity of offerings amongst the competition.  How do you win over the competition if you are all perceived as being the same?  This tends to lead to price wars (“everything is the same, but we cost less”), and we all know that price wars are not the path to creating above average prosperity.

Second, even if you can execute within the conventional rules a little bit better than everyone else, it is usually only a temporary advantage. In an earlier blog, we looked at the battle between Fuji and Kodak in conventional analog photographic film.  Sometimes Fuji would have a slight advantage; then Kodak would get a slight edge—back and forth it went with no clear winner.  The real winners were the innovators who abandoned the conventional rules of photography and brought digital imaging to the masses.

Third, there are limits to how much better one can become by playing by the same rules. The law of diminishing returns tells us that ever increasing improvements tend to lead to ever smaller perceived benefits.  For example, I could make an ever more perfect nail, but at some point, the guy hammering that nail into a board won’t be able to see how those perfections improve his hammering.  In other words, superior executions of the status quo often do not create enough of a differentiating benefit to shift habitual shopping patterns for the customers.

So what about following the innovators?  Well, you’re still a follower.  The last time I checked, followers never win races.  Just as Picasso gets superior credibility for pursuing a new path, business innovators get superior credibility over their followers.  The innovator becomes synonymous with the innovation.  The rest are seen as mere copiers. 

For example, Google means search.  Even though the follower Bing claims a slight superiority in blind tests, Google still wins the war for market share in search.  Why?  We are not brand blind.  The emotional bonds associated with the leader brand overcome the slight differences.  The same thing happened when follower Pepsi claimed superior taste in blind taste tests over Coke.  Coke still won the war.

Finally, the follower usually is one step behind the innovator.  By the time the follower catches up to where the leader was, the leader has moved on to the next innovation. That is why hockey great Wayne Gretzky attributed his success to ignoring where the puck currently is and instead going to where the puck is going to be.  Rather than following the puck, he got in front of it. 

There are only two ways to win by following.  First, you can win by having your competitors make colossal mistakes. Their failure becomes an opening for your gain.  But a strategy that depends on others to make mistakes is not much of a strategy.  In addition, if you are a follower, you will probably follow them into similar mistakes.  For example, the financial collapse which triggered the great recession was caused by colossal mistakes in the banking industry.  But because most of the big banks tended to be following each other and playing by the same flawed rules, most of them fell victim to the flaw and could not gain meaningful advantage.

The second way to win playing by conventional rules is if you are substantially larger than everyone else and can leverage your size to your advantage.  However, this begs the question of how one gets to be so much larger than the others in the first place.  Usually the bigger players got to be so much bigger because they were the innovative leaders which rewrote the old conventional rules into what became today’s conventional rules. It was their leadership which made them big, not any form of followership.

The Value of Being Different
There are two ways to be different.  First, you can create a new business model which is inherently superior to the status quo model at delivering value.  For example, Southwest Airlines has been a consistent success competing against other airlines who struggle to survive.  Why?  Southwest Airlines played by a different business model, focused on point-to-point (among other things).  It’s unique business model allowed it to provide superior value that those playing by conventional rules could not imitate.  Even the best player by conventional rules could not exceed the value offered by Southwest’s different approach to the business.

Another example would be  While others were playing by the old rules of installing and supporting software scattered everywhere, eliminated the software paradigm and was a leader in putting everything up in the cloud.  That change in business model gave inherent advantages that the conventional operators couldn’t match if they stayed in the old paradigm, no matter how well they executed it.

This helps reinforce the first differentiation we talked about in the prior blog—where winners focus on business models.  You won’t find the success of a Southwest Airlines of unless you spend time focused on business models. 

The second way to win in difference is by creating a new value proposition which did not exist before.  Apple has been a winner by creating wholly new types of value expectations.  The iPod, iPhone, and iPad changed the whole way people thought about how to live and enjoy their lives.  They created new values in new places.

The “Fast Fashion” operators, like H&M, Zara and Forever 21, helped change the definition of what to value in fashion for a significant segment.  Instead of defining fashion by Exclusive Labels, High Prices, High Quality and Fashion Seasons, they made fashion more disposable, where frequent change/variety combined with low prices (and lower quality) was a new winning formula.

If you look across the spectrum of business, you will find that nearly every great company at some point took one of these different directions.  They either came up with a new business model which had inherent advantages over the old model in the conventional industry, or they invented whole new industries by redefining or creating new value formulas.

One of the key differences between business winners and losers is the direction the leaders take the company.  The losers tend to move in a following direction—either following the conventional rules or following the innovators.  By contrast, the winners tend to move in a new direction, either by finding new ways to better satisfy old values or by creating new values through new industries.

Artists create; craftsmen copy.  Are you an artist or a craftsman?

Wednesday, March 27, 2013

Strategic Planning Analogy #494: The 3 Keys to Success (Part 1)

When I was a young boy, I owned a Piggy Bank. It had two holes. The first hole was a slot at the top, used to put money INTO the piggy bank. The second hole was on the bottom. It was used to take money OUT OF the piggy bank.

My problem was that I tried to take money out of the bottom of the piggy bank more often than I put money into the top of the piggy bank. As a result, my piggy bank was almost always empty. That made it a fairly worthless bank.

Businesses are a lot like that piggy bank. Money comes into the business through sales.  It is like putting money into the piggy bank’s top slot. Money is taken out of the business through events like salaries, profit sharing and dividends. That is like taking money out of the bottom of the piggy bank.

If you take money out of the business faster than you put it in, the result is similar to my empty piggy bank. It becomes worthless.

Most traditional small entrepreneurs I’ve met get this principle. They put a major emphasis on cash flow, to make sure that money coming in the top slot exceeds money going out the bottom hole. They realize that if the money is not coming in the top, there will be no money for them to buy groceries to eat. 

This principle, however, seems to get lost in a lot of modern digital/social businesses and large enterprises. The connection between inflows and outflows becomes less obvious. After all, there are digital/social businesses out there valued at huge sums of money (and making their owners rich) which have little or no source of income coming into the top slot.

Without strategic concern for both holes, the business (piggy bank) eventually becomes empty and worthless.  This is why you ended up with the bubble bursting on the original dotcom boom and many stock market disappointments in the current digital/social boom. The private equity contributors to the piggy bank eventually want to get their money back out. But since more money was coming out the bottom than was going in the top, there was not enough to satisfy everyone.

In this blog (and the next two), I will be talking about the keys to real success in business. I’ve spent a lifetime in the business world and have witnessed first hand (and second hand) a large number of successes and failures. 

Based on what I have seen, it appears to me that there are three key differences between the big winners and big losers. So in this and the next two blogs, I will be looking at these three characteristics which differentiate the winners from the losers. 

Passion for the Business Model
The first characteristic has to do with passion—that which captures the attention and focus of the leaders (and their followers). In the losing companies, the passion and focus tends to be on wealth.  The focus is on profits or personal wealth—making them as large and as quick as possible. By contrast, the passion of the successful firms tend to focus on the business model. The focus is on making the model ever better at serving the customer.

Does this mean that profits are bad? Is it wrong to want your business to have larger profits? Of course not. But if you are more passionate about profits than the business model, then you are like me when I kept taking money out of the bottom of my piggy bank without putting money in the top. Eventually, the model falls apart and the business becomes a worthless empty shell.

If you ignore the business model, then the only way to keep taking money out of the bottom is by “financial engineering.”  This is essentially the idea of putting other people’s money in the top so that you can keep on taking out money from the bottom. As a child, that financial engineering would be to convince my father to loan me some money beyond my allowance, so that I could keep on taking out money beyond what I earned. In the business world, this consists of taking on extra debt or equity, either private equity or public equity. 

The problem is that these types of contributions to the piggy bank come with strings attached.  These contributors also want a turn at taking more money out of the bottom of the bank than what they put in the top. And, as it turns out, it is impossible for all of you to take out more from the bottom than you put in the top if the business model is not sufficiently multiplying the money.

By contrast, if you have a passion for the business model, you will be always looking for ways to improve the way the business fulfills its position in the marketplace. This leads to efficiencies (a less expensive way to serve) and effectiveness (a more valuable service for customers). This makes the money in the piggy bank grow by getting satisfied customers to contribute to your success in ever more profitable ways.

Hence, the irony. If you want a lot of profits, don’t focus on profits; focus on the business model.  Focusing alone on profits can lead to bad behaviors, such as:

  1. Underinvesting in the business model;
  2. Ruining the Balance Sheet;
  3. Short-term gains which ruin long-term prospects;
  4. Ruining the relative value for the customers (as you give more value to yourself than to your customer)

These actions all cripple your ability take money out of the bottom of the bank over the long haul.  However, if the passion is about improving the business model, the profits will be there for years to come and the piggy bank will never be empty.

Example #1 Euro Zone
Just look at the economic challenges in Europe.  Rather than a passion for building a solid business model for a continental economy, the Euro Zone has been plagued by governments and citizens who keep taking more out of the bottom of the piggy bank than is put in.  To fund this passion of taking money out, the governments took too much of other people’s money in the form of debt. Now the piggy bank has nothing but debts that cannot be paid. And the governments seem unwilling to make the tough choices on how to fix the broken business model.

The exception is Germany.  And guess what—the Germans have focused for decades on building a solid economic business model. This business model passion means that more is going into the piggy bank than is coming out. Germany is solid

Example #2: Formica
Awhile back, I was in discussions with the top executives of Formica about doing some consulting.  They explained to me the history of the company. Decades ago, Formica had been a strong brand with great profits. They essentially owned the countertop industry. 

But then, Formica was bought by people whose passion was profits. They started taking more out of the bottom than was coming in at the top. This caused two problems. First, the countertop marketplace was changing and they underinvested to meet the challenge of the change. This hurt the status quo business model, weakening the ability of Formica to fund obligations. Second, taking too much out of the bottom required loading up the balance sheet with debt, thereby increasing obligations. Eventually, since they couldn’t make ends meet, they sold the company to others.

The “others” also had a passion for profits and continued these practices. In due time, they sold the business, too. After several iterations of this process, Formica had been so weakened, that it had become an empty shell full of IOUs that could not be paid.

Eventually, Formica ended up in the hands of Fletcher Building of New Zealand. This was a company which had a passion for the building materials business. They focused on the business models within the industry they loved. As a result of their passion for the business model, they are bringing back Formica from the dead.

Example #3: Amazon
Recently, I had discussions with some executives at Amazon. In my discussions with them, they never really talked about profits. Their talking pointed to their passion for the Amazon business model. All they wanted to do was improve that model by making it faster, easier and cheaper for customers to interact with Amazon.

As a result, the Amazon business model keeps getting better and better. This is increasing their competitive advantage in the marketplace. Yes, the near-term profits have recently suffered a bit, but that was because of extra investments in the business model, not a failure to win in the marketplace. Amazon is on strong, solid footing. It survived the dot com bust and the digital/social slump. And it has the big box stores around the world panicking as they continually lose share to Amazon. Founder Jeff Bezos was the 2012 Fortune Businessperson of the Year. This is a company built for long-term success.

Long-term winners tend to have characteristics that are different from long-term losers. One of those characteristics has to do with where the passion lies. The losers tend to have a narrow passion focused around rapid personal wealth-building. This usually leads to bad behaviors which choke the prospects for long-term business success. They prematurely empty out the piggy bank.

The winners, by contrast, tend to have a passion for the business and its business model. They are more concerned with improving how the business works in the marketplace than how much they can pull out of the business for themselves. They get interested in all the little details about how to make the business better. They build piggy banks which are full for a long, long time.

Now that I am grown up, I have an electric bank which sorts coins and puts them into the appropriate paper rolls.  And when the rolls get full, I take them to the bank rather than spend it right away. That is the better path for the long term. Is your corporate culture promoting actions like what I did with my boyhood bank or my adult bank?

Monday, March 18, 2013

Strategic Planning Analogy #493: The Blame Game

Recently, I was at a technology conference. One of the presenters wanted to demonstrate their technology on a large screen. Unfortunately, they could not get the technology up on the screen to demonstrate it.

At first, the presenters were panicking. Then they came to the conclusion that the problem was not with their technology, but with the technology used to get it up on the screen. So they told everyone that their inability to do the demonstration was the fault of someone else’s technology. Then they merrily continued their presentation without showing us the demonstration of their product.

My first reaction was “why are these presenters so happy?” Their ultimate goal was to try to sell me on the merits of their product. Yet, that attempt was seriously destroyed by the inability to demonstrate the product to me. 

Apparently, they had lost sight of that bigger picture. They were fixated on the smaller picture: As long as they or their product was not to blame, then the presenters were okay. And if they were okay, then everything was okay.

But everything was not okay. The audience was denied the most important part of the presentation and the technology company was denied the opportunity to fully sell their product.

Very few companies are fully self-sufficient. Instead, companies rely on many other partners to get their work done.  It could be depending on suppliers for parts. It could be depending on distributors for getting the product sold. And in today’s economy, it could also be outsourcing almost everything in-between, from payroll to call centers to manufacturing to key pieces of design and technology.

Look at how much of the Apple ecosystem is outsourced. Apple does not manufacture the hardware. Apple does not create most of the apps.  Apple does not create the music. Apple does not operate the cell towers which allow everything on the iPhone to actually work. The portion of the ecosystem actually produced by employees of Apple is quite small.

Everything from all the partners needs to work in order to accomplish the strategy. If one of the partners really messes up on their part of the grand design then the whole grand design is at risk.  Just ask the folks at Boeing about how their grand design for the Dreamliner is faring as a result of the problems with an outsourced battery.  All the planes are grounded.

In the story, the presenters were happy because they could blame their problems on someone else.  Since they did not feel “at fault” then they felt satisfied.  However, I don’t think that the audience or the technology company was happy.  The purpose of the presentation had failed.

What if the executives at Boeing had been like those presenters and said, “Nothing Boeing did in-house on the Dreamliner is at fault.  Therefore, we should all be happy and just move on.” Nobody would have accepted that behavior. Boeing is being held accountable and the planes were not allowed to fly.

You should not accept that behavior, either.  In the big picture, if the grand design doesn’t work, then you have failed. And blaming a strategic partner doesn’t make the failure go away.

The principle here is that just because you can blame someone else for a problem does not make the problem go away. Your customers really don’t care all that much which of your strategic partners is at fault. All they know is that something is wrong. They are angry and they want YOU to fix the problem.

There is no room for smugness is the fact that none of your own people were directly at fault.  Everyone is in this thing together. As the old saying goes, a chain is only as strong as its weakest link.  It doesn’t matter if your link is strong when the link of your partner is weak. The whole chain will fail.

Since modern business models seem to be adding ever more outside links to the strategic chain, the potential for outsiders to mess up the chain for everyone increases. And to compound the situation, consumers are being ever more demanding about the social consciousness of the companies they do business with. So even if your outside partner produces its link in the chain well, it could still create a failure if the WAY they produce their link violates the societal and ethical demands of your customers.

And thirdly, the social network exposes more disappointments, more quickly, to more people than ever before. This make mistakes harder to hide and more damaging when discovered.

As a result, the potential for strategic disaster in this area is increasing exponentially. Partnership management can no longer be tangential to strategy. It needs to be integral to strategy.

So what can one do to minimize partner problems? Here are some suggestions.

1. Choose Your Partners Well
The best way to fix a problem is usually by preventing the problem from occurring in the first place.  And one way to prevent partner problems is by choosing the right partner. And what makes a partner “right” has to be more than just “can they get the job done cheaply.” 

Remember the thoughts of astronaut Alan Shepard as he was flying through space: “It's a very sobering feeling to be up in space and realize that one's safety factor was determined by the lowest bidder on a government contract.”  Cost is important, but it isn’t the whole story.  Here are just a few of the other issues to consider:

a)      Will their practices upset the ethical and societal expectations of your customers?
b)      Are their practices consistent with the strategic intent of your business model?
c)      Can they scale at the rate needed for the grand design?
d)     If they are to achieve their strategic intent, will it make it difficult for them to provide what you are looking for?
e)      Will they protect company secrets?
f)       Which of you has more power/clout in the negotiation process?
g)      Will they have concerns or issues about being tied in with your other partners?
h)      How will working with this partner impact your competition?

When you tie up with a partner, you get more than just their output (if they are the provider) or their money (if they are the client). You get the personality, practices and principles of the partner. Is that something you or your customers want you to be associated with?

2. Set Up the Partnership With The Grand Design In Mind
If you want a partnership to work well, it needs to be structured in a way which increases the likelihood of that occurring.  Set up expectations in advance and get a sign-off.  Create incentives (positive and negative) which encourage strategic compliance. Think about the big picture (the grand design) when creating the small picture (individual partner arrangement) so that compliance with the small supports improving the big.

3. Monitor Your Partners
Don’t assume everything is fine once the deal is signed.  If you are going to be held responsible in the customer’s eyes for something the partner does, then make sure the partner does the right thing.  Have the right to monitor progress and principles.  Have systems in place to detect problems early, so they can be fixed with the minimal amount of down-side implications. Test output to see if it meets requirements.

In many ways, treat the partner as if they were your own employees that you were responsible for. After all, if they disappoint, they can hurt your reputation and business as much as if they were your own employees.  Don’t blindly assume compliance with a “hands off” approach. 

This is not to say you don’t trust your partner.  Rather, to quote Ronald Reagan, “Trust, but verify.”

4. Put Solving Ahead of Blaming
Finally, when problems do occur, put the main focus on finding the solution rather than finding the blame.  Yes, a problem cannot be solved until they source of the problem is discovered. And yes, the process of finding the source of the problem will touch a little on finding who and what is to blame.  So blame cannot be ignored. 

But the main focus cannot be put on assigning blame.  The main focus initially needs to be in solving the problem.  Full assessment of blame can come later, once the problem is solved.  The problem with too much focus initially on blame is that:

1) Those that work hard to “prove” they have no blame will be more reluctant to pitch in and help solve the problem.  Because they feel no obligation to the problem, they feel no obligation to the solution.  Unfortunately, the problem hurts everyone in the chain, regardless of blame, so everyone should be incented to help solve it. 

2) In addition, a lot of the problems do not clearly fall in one camp or another.  For example, problems can occur at the point when one partner hands off to another. Interpretations and assumptions can vary among partners.  So it is often not immediately clear where the blame lies.  Time spent sorting all of that out at the beginning is time spent not solving the problem.  And the longer the problem goes unfixed, the worse it can become.  How time was wasted, and how much oil leaked out into the Gulf of Mexico while BP argued with its partners over who was to blame for their massive oil leak? 

3) The blame game tends to increase the friction among partners rather than the goodwill needed to create stronger, more effective partnerships.  When trust is broken, the entire chain suffers.

Yes, I know people worry about the eventual lawsuits and that is why they are so concerned about blame. But if potential lawsuits are your primary worry, then get some of the ground rules written into the original partnership agreement.  That way, the general resolution is already in place before the problem happens.  And it gives you a chance to get a resolution which works best for everyone in the chain at getting problems resolved quickly.

In today’s economy, ever more of a company’s fate is in the hands of its partners, including its customers.  Therefore, the way those partnerships are formed and are operated increasingly impacts our strategic success.  And just because my firm is not directly at fault when problems occur does not mean that I do not suffer from the problem.  Therefore our strategies need to take these partnerships seriously and look for ways to a) prevent problems in the first place; and b) when problems occur, focus more on solving the problem than in assessing blame.

There’s an old saying that “Success has many fathers, but a failure is an orphan.”  This means that if you focus on finding who is the father of the problem, you may end up finding no one.  It is far more productive to focus more on just fixing the problem.

Wednesday, March 13, 2013

Strategic Planning Analogy #492: Straight Line Nearsightedness

Imagine two executives who were told to get from point A to point B. The first executive wanted to be very efficient in his task. He knew that the shortest distance between two points was a straight line, so he drew a straight line between points A & B.  “This straight line,” said the first executive, “will be my path to success.”

Unfortunately, his straight line was drawn directly through the middle of a large zoo. This posed many challenges to his straight line approach. Following the line, this executive first had to find a way to break into a lions’ cage. Then he had to find a way to get around the man-eating lions in that cage without being eaten. Then he had to find a way out of the lion’s cage on the other side. This process was repeated as he had to get through the cages of poisonous snakes, hungry crocodiles, and other wild beasts.

These challenges were very difficult, but each time, the first executive found a workable solution.

As the first executive reached point B on the other side of the zoo, he was very proud of himself.  He thought, “I’m an excellent executive. I found the shortest path to point B. Then I successfully found an answer to every challenge on that path. I overcame every obstacle and reached my destination without any serious injuries. My boss will call me a hero.”      

However, there was nobody waiting for this first executive when he got to point B.  He later found out that the second executive had gotten to point B days earlier.  What she had done was called a taxi and had the taxi driver drive around the zoo to the other side.  It took less than an hour. 

The first executive did get a response from his boss, but it was not to be called a hero.  Instead, his boss called him an idiot, told him he was fired and that he would have to personally pay for all the damages he made to the zoo.

The first executive considered himself to be a hero because of all the great accomplishments he performed. He made a quick decision on finding the shortest path and then found solutions to all of the problems along that path. And since they were difficult and dangerous problems, his ability to solve them without injury was that much more remarkable. Yes, he had quite the long list of impressive achievements.

Yet, his boss called him an idiot. Why? Because it was an expense, destructive and excessively time-consuming way to get to Point B. The goal was not to achieve a long list of impressive feats of management, but to quickly and efficiently get to the other side of the zoo. That could be done with a quick taxi ride.

I see a similar type of occurrence in the world of strategic planning. We set a strategic goal to get from point A to point B. Then we set loose the executives to go down that path. Once the executives get moving along the path, they lose sight of the big picture and only see the obstacles immediately in front of them. Then, one by one, they tackle each of those daily obstacles.

The big picture gets lost while attention moves to the obstacles immediately in front of us. At the moment each obstacle is conquered, we may feel like a hero. But all that “heroic” effort is really a waste of time, because it is unnecessary,

That first executive could have saved a lot of time and effort by waking around those cages rather than trying to go through them. Or better yet, he could have followed the second executive’s approach and just taken a cab around the zoo. It may make for a much less impressive list of accomplishments, but the big strategic goal is accomplished a whole lot faster and easier.

The principle here is that the importance of the task is often correlated to distance. In other words, achieving the big strategic goals off in the distance are usually far more important to the ultimate success of the business than conquering the crisis of the day. Yet in practice, we tend to operate in the opposite direction. We spend most of our time tackling the challenge immediately in front of us. Like that first executive, we get so intent on finding a way through the lions’ cage in front of us that we miss the quick and easy path to the bigger goal on the other side of the zoo.

We can call it nearsightedness, because the executives lose site of the distant goal and can only see the challenge immediately in front of them. In the past, I have referred to it as the tyranny of the immediate.  The immediate becomes our master and tortures us into submitting to its wishes rather than freeing us to achieve the larger, more distant (and more important) goal.

So how can we minimize activities like the first executive in the story and may our executives act more like the second executive? Here are some suggestions.

1.  Keep the Distance Continually in View
When executives become nearsighted, we need to help them by giving them corrective vision so that they can see the bigger goal in the distance all the time. If the only time your company focuses on the distant goal is at an annual off-site meeting, then the battle is lost. The near-term challenge will win the daily battle for the limited executive’s time. The distant goal will be forgotten until the next year’s annual meeting, when people wonder why they are no closer to the goal.

There are several ways to get the distant goal clearly visible on a daily basis.  For example, you can change the culture so that a simple question is asked at EVERY meeting and when important daily decisions are made.  That question is this: Does your decision get us closer to achieving our big goal or not?  Or perhaps it can be worded like this:  What decision gets us faster to where we want to ultimately be?

Another way to do it is by linking the goal to a position or philosophy.  For example, if your goal is to win via innovation, you can look at daily decisions about what to tackle as a choice to focus on those activities which most support innovation. 

I was very impressed when I recently visited the Walmart headquarters.  When I listened in on how daily decisions were being made, it was obvious that the long term goals, positions and philosophies were deeply ingrained into the process.  Every decision seemed to go through the same filter:  Is this going to help Walmart bring lower prices to their targeted consumers so that they live better lives on their limited incomes?  The challenge of the day did not seem to overpower the drive to spend time on what was most critical to their long term success.

So be a pest and make sure the big vision become imbedded in the daily grind.

2. Watch What You Reward
We like to reward “heroic” levels of effort which overcome huge challenges.  It’s human nature.  But often times, that effort is just foolishness in disguise. That first executive in the story overcame numerous challenges in that zoo.  But it was all an effort in foolishness that kept him from achieving the important goal.

Spending a lot of time and effort to overcome a huge challenge is huge mistake if the challenge can be avoided. You don’t need to fix problems if you can avoid them in the first place (like going around, rather than through a lions’ cage). And some problems aren’t worth the effort to fix them (the cost benefit ratio is wrong). And then there are the opportunity costs…all that effort to fix that problem is effort that was unavailable for more important tasks.

Therefore, don’t automatically reward great effort which overcame a challenge. First, find out if the problem could have been avoided or whether the problem was worth the effort or whether the effort prevented more important accomplishments.  If this is the case, then perhaps punishment is more appropriate.

People do what gets rewarded.  If overcoming challenges is what gets rewarded, then people will find (or even create) lots of challenges to work on.  They will be like the first executive in the story—busy on the wrong things, but looking good while doing it. That second executive didn’t look all that heroic (all she did was take a taxi).  But she was the one who got the important big picture stuff accomplished. That is what should be rewarded.

The more you link rewards to achieving the big picture, the more likely folks will focus on that.  Remember, standing on your head while juggling may take more effort and look more impressive than walking, but it will never get you to your destination.  Those who just keep walking towards the goal are the real heroes, not the jugglers of the inconsequential “crisis of the day.”    

3. Just Say No
Although it is tempting to want to roll up one’s sleeves to tackle the challenge of the day, it may be more heroic to just say no.  Don’t spend any time focused on it at all.  This can be done in two ways.  First, one can set up rules in advance for how issues are to be handled.  That way, the old crisis of the day is no longer a crisis because we have established the protocol in advance for how to handle it.  Instead, the old challenge requiring executive effort becomes a routine event that just goes through the system based on the established protocol. You’d be surprised at how many crises are just routine events that are merely missing a protocol.

Second, one can delegate the problem to someone else lower in the organization.  This will free up your time to devote to more critical long-term issues that only you can solve. 

I’m reminded of what management guru Peter Drucker said in his book “The Effective Executive: The Definitive Guide to Getting the Right Things Done.”  In the book, Drucker says, “Effective executives concentrate on the few major areas where superior performance will produce outstanding results. They force themselves to set priorities and stay with their priority decisions. They know that they have no choice but to do first things first—and second things not at all. The alternative is to get nothing done.”

This is what my second executive in the story did.  She ignored the zoo entirely and only did the important thing—getting to point B quickly and effectively by taxi.

Although the challenges immediately in front of us may appear at the moment to be the best use of our time, that is rarely true.  Instead, it is getting to those more distant major strategic goals which is the most effective use of our time.  To help get executives focused on the bigger picture, we need to a) keep the distance in view on a daily basis, b) stop rewarding great effort focused on the wrong thing, and c) just say no to the crisis of the day.

If you look at a newspaper from a week ago, you may find that what seemed important enough to put on the front page then no longer seems all that critical if read today.  The same can be said about most of the crises of the day.  A week later you may wonder why it seemed so important then.

Monday, March 4, 2013

Strategic Planning Analogy #491: Seeking Choices

When my children were little, they often weren't pleased by what was served at home for dinner. They would complain and ask if they could have something different to eat.

I would explain to them that we weren't running a restaurant. I did not have an extensive menu of options for them to choose from. Each dinner had only one meal on the menu. The only choice they had was to either eat it or go hungry.

It did not make my children happy when I eliminated their eating options.

It’s not much fun looking over a dinner menu if there is only one item on the menu. The lack of options and choices makes the task seem a bit futile. Since you’re going to get the one item on the menu anyway, you may as well skip looking at the menu.

A similar situation can occur with strategic planning. A lot of business people resist going through the planning process, saying they do not enjoy it. In many cases, I think the reason for resisting a strategic planning process is similar to the reason for resisting a menu with only one option on it—a perceived lack of choices.

If you think you are going to be basically doing the same things after the planning process as you were doing before the process (because of a perception of no other alternatives), then why do the process? You can skip it and go back to doing the one thing you knew you were going to do anyway. Under these assumptions, the strategic planning process can be seen as a waste of time, keeping you from getting your one task done (just as looking at a one-item menu wastes time and keeps you from getting to eat the one meal you know you are going to have).

This really hit home with me as I looked at the way business people from different countries treated the concept of strategic planning on social media sites like Linkedin. In fully developed mature economies, pure strategic planning jobs were disappearing and the discipline was not held in high esteem. By contrast, in emerging economies people actually seemed excited about strategic planning and there appeared to be a greater abundance of professional strategic planning positions being created.

Then I started to make the connection that much of the excitement around strategic planning in developing economies was due to a perception that businesses had many more options. As a result, it was important to spend time in these countries doing strategic planning in order to choose which options to focus on. It was as if they saw strategic planning as the way to choose the best items on a lengthy menu of tasty options.

By contrast, those in mature economies or industries seemed to see fewer options available to them.  It was as if the rules had already been written and hardened in concrete.  You couldn’t change anything—choices had already been made.  Your only option was to work harder at the same old thing.  Therefore strategic planning was a waste of time—a one-item menu that could be skipped.

Of course, a skilled strategic planner can see the value of strategic planning in virtually any environment—even mature ones.  But if their audience does not perceive the value, the planning process will be resisted (or even eliminated).  Therefore, strategic planners need to address this issue of perceived choices.

The principle here is that great strategic planning processes deal with determining which strategic choices to make.  Choice is the essence of what strategy should focus on.  In his famous Harvard Business Review article “What is Strategy?” (from November-December 1996), Michael Porter said “Competitive strategy is about being different.  It means deliberately choosing a different set of activities to deliver a unique mix of values.”

In the 2011 book Good Strategy/Bad Strategy, Richard Rumelt says that the main difference between good strategies and bad strategies is that good strategies are based on making tough choices and bad strategies refuse to make choices.  Or, in Rumelt’s words “Strategy involves focus and, therefore, choice. And choice means setting aside some goal in favor of others.  When this hard work is not done, weak amorphous strategy is the result.”

In a prior blog, I also talked about how the lack of making choices can lead to disaster.

The problem is that many modern strategic planning processes are missing this key point.  They are focusing on something other than making the hard choices and trade-offs necessary for creating a winning position with a complementary winning business model.

It’s gotten so bad that even many of those in the strategic planning field no longer see their primary task as one of helping companies make tough choices and coordinated trade-offs.  Without someone advocating the need to make tough choices in a strategic manner, the tough choices won’t be made.  Worse yet, business leaders are increasingly buying into the idea that there is no need to make tough strategic choices.  And once they start believing in that, it isn’t much of a leap for these executives to questioning why strategic planning should be done at all.  After all, what is the benefit of staring at a one-item menu?

Common Substitutes for Choice-Making
There are many processes out there which call themselves strategic planning, but really are not, because they do not focus on making choices.  Here is a brief description of some of them:

1. Elaborate Budgeting:  Here, the end outcome is not a set of coordinated choices and trade-offs, but a set of numerical spreadsheets.  In essence, it is just a budget with perhaps a couple more years of length to it and a few more words attached to it.  The tough choices needed to make the budget a reality tend to be missing.  It’s just a bunch of numbers one “hopes” to achieve. This often occurs when the planning process is housed in the finance department and run by the same people who create the budgets or do financial analyses.  In the past, I have used the basketball analogy and said this insufficient process is like focusing on yelling at the scoreboard rather than focusing on the hard choices of what play to draw up on the clipboard.  Yes, the highest score wins, but you don’t get the highest score by just staring at the scoreboard (the numbers).  I've spoken more about this here, here, here, and here.

2. Platitudes and Lofty Aspirations:  In this version, the focus is on lofty goals and aspirations which end up sounding like hollow platitudes. The end outcome is not a set of choices, but a nice phrase that can be put on a banner and hung in the lobby. They say things like “we aim to be a world class this or that” or “delight customers” or “create superior shareholder value” or something similar.  These are nice things to achieve, but unless you make hard choices about how to be different, or how your business model’s trade-offs achieve these things profitably, they are only wishes.  Wishes won’t come true just because you want them to.  They are the outcomes of tough choices. I’ve spoken more about this here and here.

3. More Better:  Here, the goal is to just do the same old thing as before, only more of it and better than before.  The end outcome is list of things to do which improve upon the status quo.  The problem is that this assumes the status quo is the right set of choices. It often isn't  because environments change, making the status quo obsolete. Second, when you try to improve everything, you often improve nothing, because you did not make any trade-offs needed to truly excel in any area.  Instead, the efforts cancel each other out.  The third problem is that this process tends to try to outrun the competition with a similar position, rather than trying to find a point of differentiation.  In other words, this version rushes directly to what to “do” without first stopping to decide (choose) what you need to “be.”  I've spoken more about this here, here and here.

How Do We Overcome This?
So how do we overcome all of these poor excuses for planning and get back to solid strategic planning which focuses on making the right choices?  There are two areas to work on. 

First, we need to offer strategic planning processes where choices are the focal point.  This needs to replace lesser processes which are often little more than budgets, platitudes or attempts to be more better.  We need processes focused on questions like:

  1. Where are we going to win? (Customers, Markets, Solutions, Points of Differentiation)
  2. Why are we going to win? (What bundle of trade-offs will give us the competitive edge in owning the winning position? What business model will beat out the alternatives?)
  3. What do we need to focus on to pull this off (capabilities, capacities, competencies)?
  4. What should we NOT focus on? (because it will keep us from winning)
  5. How do we tweak the business model so that we not only win, but make money?

Second, we need to get management excited about the importance of making these types of choices.  There are many reasons why management may not see the importance of making choices.  First, they may not believe they have many choices.  This is usually a false notion.  Restructurings, repositionings and new business models come about all the time.  Just look at how businesses and industries are continually being replaced by something new.  Why not become the next new thing which replaces the status quo?

Or perhaps management feels that the status quo is just fine, so there is no need to change it (no additional choices needed). But we all know that the environment changes and that all strategies eventually become obsolete. Isn't it better to be the agent of change and grab all the market share which comes with being the next big thing rather than to be the victim of someone else’s change and become obsolete?  Making better choices will create a stronger, more prosperous company and who wouldn't want that?

In other words, first we need to build processes which create robust lists of options and a way to choose the best option (like the Maitre D who helps restaurant patrons make a great choice from a great menu). Second, we need to get management to want to make the tough choices (desire to go to the restaurant and choose something new to eat off that menu).

The key function of strategy is to help companies make the tough choices and trade-offs which will place them in differentiated positions where they can win.  Unfortunately, lesser processes which focus only on budgets, platitudes or tactical improvements have crept in to replace the key function of choice. To get companies back on track, strategists need to do two things: 1) Bring back processes which focus on choice; and 2) get management interested in making those tough choices.

To get patrons to try new choices on the menu, some restaurants offer free samples. Perhaps you need to get your management interested in making choices by giving them samples of what particular choices could mean for the company.