Strategic Planning Analogy #505: Secrecy is Silly

THE STORY

One time I was doing some work for a client which I found very frustrating. I kept trying to give them the insight I thought they needed for their decision, but it seemed like my efforts were always a little bit off from what they were looking for.

It wasn’t until much later (after the project was over) that I found out what the problem was. My client had deceived me about what their true intentions were. They wanted to keep their true intent a secret, so they gave me instructions under false pretenses.

No wonder my insights were a bit off the mark. They were designed to meet the false pretense rather than the real objective.

THE ANALOGY

My client was not the only one who likes to keep secrets. Secrets can be found all over the business world. This secretive approach often finds its way into the world of strategy.

There seems to be this idea out there that if a strategy “gets out” and is made public, it ceases to be an effective strategy. Somehow, mere knowledge of the strategy takes away its competitive advantage.

The problem is that the true value of a strategy is in its execution. And if those executing the strategy are kept in the dark, they cannot execute it well. As we saw in the story, I could not effectively do my job when I was kept in the dark.

THE PRINCIPLE

The principle here is that strategies are most effective when they are well communicated, both inside and outside the organization. A secretive approach to strategy diminishes its effectiveness.

The Problems With Secrecy

There are quite a few reasons why keeping a strategy a secret is detrimental to its effectiveness.

1. If your employees do not fully comprehend the strategy, they will not be able to fully execute the strategy. Thousands of decisions are made all over the organization every day. Depending on how those decisions are made, they can move a company either closer to or further away from your desired strategic direction. If the strategic direction is not known all the way down the organization, it will only be random luck if their decisions move the company in the right direction. Remember that your REAL strategy is not what you put on a piece of paper, but what you actually do. So to get what you do to match what you put on the paper, you’d better make sure the doers know what is on that piece of paper.
2. When your employees know what the strategy is, then they can use their insights and initiatives to make the execution even better. By contrast, if just the top executives know the strategy, then the only way to get the strategy executed is by having the top executives order people to do specific actions designed to support the strategy while keeping the strategy behind the actions a secret. This only makes sense if you believe that:

1. All the great ideas are found only at the top of an organization; and
2. A top-down only control of the business like the old communist economies is the best way to go.

The bankruptcy of the old communist system should be proof enough that a top-down only secretive approach has many flaws. The alternative is to let the people at the bottom in on the secret and allow them to make contributions to the effort. Strategies are made much stronger when input comes from the collective intelligence of the entire organization working on a common known goal.

3. Strategies usually include a reason why certain consumers should prefer patronizing your brand over the alternatives. Why should these consumers flock to your brand if you keep your reason for preference a secret? You should be shouting your strategic benefit from the rooftops, so that there is no mistake as to why you should be preferred. And to make the claim believable, it helps to show why your strategic approach makes the claim a true differential advantage.

Take the insurance business, for example. If your strategy is based on low price and you get there by going direct and eliminating the independent insurance agent to save money, let the customer know. Conversely, if your strategy is based on best service, play up your strategic approach of having the best local independents working for you (something the price-oriented insurers eliminated).

Positioning is about owning a spot in the mind of the customer. You won’t own that position if you keep it a secret.

4. The stronger you cement your position and strategy with your customers and your employees, the harder it will be for the competition to take it away from you. In fact, if you make it clear to your competition what your strategy is and how strongly you will defend it, you can cause your competition to no longer want to fight in that space and instead take a differentiating strategy. For example, Walmart has made it clear they will fight to the death to defend their low price position, so most competitors stop trying to win price wars against Walmart and instead go a different route, which strengthens Walmart as the everyday low price leader.

The Faulty Logic Behind Secrecy

Some believe that if you let the competition know what your strategy is, then they can quickly copy it and take it away. That is why they want to keep it a secret. But this thinking is flawed, because there is a big difference between knowing what a strategy is and knowing how to best deliver it.

Great strategies are built upon great business models. And great business models are often very complex and very difficult to imitate.

For example, Southwest Airlines has done very well with its low price strategy. But if a competing airline merely copied Southwest Airline’s low prices, they would not be as successful as Southwest. Southwest’s strategy works because they have a unique and complex approach to their business model, including choice of airplanes, choice of airports, point-to-point routes, corporate culture, and so on. You need the full business model to make the strategy work. This is nearly impossible for an established competitor to convert to.

In another example, Wells Fargo has created success with a superbly executed plan to win via cross-selling.  Now it’s one thing to say “we will win via cross-selling.”  It’s another thing to have a sophisticated business plan designed specifically to optimize cross-selling.  As Wells Fargo CEO John Stumpf put it recently, “We could leave our strategic plan on an airplane and it wouldn’t matter.  It’s all about execution.” In other words, there is no reason to hide the “what” of Wells Fargo’s strategy from competition, because it would take them years and years to figure out the “how” behind the strategy, and by then you’d have made even further advances, so they never could catch up.

Here’s a little secret for you. If a competitor can immediately copy your strategy upon hearing it, then you really don’t have much of a strategy. A good strategy is based upon making a number of deliberate choices about how you operate. Trade-offs are made in certain areas so that you can better excel in other areas. These choices and trade-offs attempt to optimize against your unique strengths and weaknesses. The net result is a complex business model which is not easily copied due to its complexity and its unique suitability to your own situation.

We live in an era of transparency and openness. If secrecy is your only defense, then you are in trouble.

Remember, great strategies try to find a place where YOU can win, not where anyone can win. If anyone can supposedly win there, then nobody will win there, because nobody will have an advantage.

SUMMARY

When it comes to strategy, secrecy is a disadvantage. Strategic secrecy keeps your employees from doing their best, it hurts your ability to own your position with the consumer, and it weakens your ability to scare off a competitor from going head-to-head against you. Great strategies are built upon great business models, which are extremely difficult to imitate. As a result, even if competition knows your strategy, it doesn’t mean they know how to take it away from you. So don’t keep your strategy a secret.

FINAL THOUGHTS

If your strategy is nothing more than a hollow platitude, like “We will be the Best” or “We will be the Most Profitable” then I might consider keeping it a secret, because I would be too embarrassed to let others know how silly my so-called strategy is.

Strategic Planning Analogy #504: Fixing a Plane After it Crashes

THE STORY

After 17 years, the tragic crash of TWA flight 800 is back in the news. A documentary has come out claiming that the official explanation of the crash (static electricity igniting the fuel) is wrong. Instead, the documentary endorses the alternative explanation that the plane had been attacked with a rocket, perhaps sent by terrorists.

I have a couple of thoughts about this. First, I can easily understand why so many prefer the rocket attack explanation. After all, it always feels better to blame some outside force (beyond our control) for our problems than to admit internal incompetence, either in the plane design, maintenance or operation.

My second thought is that for the 230 aboard that flight who died 17 years ago, it largely doesn’t matter anymore which theory is correct. Neither explanation will bring them back to life or restore the plane so that they could reach their original destination. For them, it is too late.

THE ANALOGY

The business world is full of tragedies. Companies crash and burn, negatively affecting hundreds, if not thousands, of people. In terms of financial impact, these corporate tragedies are larger than the tragedy of TWA flight 800.

When these events happen, it is common for the leaders of these destroyed organizations to take an approach similar to the one in the TWA documentary—they try to blame it on outside forces beyond their control. “It wasn’t me or my leadership which caused the disaster,” they say. “No. It was the fault of some evil outside force which nobody could have prevented.”

Outside forces which get the blame can include international economic conditions, the weather, political unrest, too much (or too little) government intervention, illegal market manipulations, unfair competitive environment, and so on. The logic is that despite the Herculean effort of management to counter these evil outside forces, the situation was just too great. Nobody could have saved the company.

In a narrow sense, there may even be some truth to these claims. Dire situations can be devastating to companies. But this explanation only works if your time horizon is narrow.

In reality, strong, well run companies can anticipate most of the potential tragedies which could occur. Using strategic planning and scenario analyses, they can anticipate and be prepared for the worst. In fact, the great strategic plans avoid the disasters entirely by steering their company in a new direction before the outside forces come to pass.

Sure, it’s easy to claim that nothing can be done if you wait until your “plane” is on fire and already close to crashing before looking for a solution. But, in most cases, advanced strategic thinking years earlier could have provided a solution so that you avoid the fire altogether.

The best time for analysis is not after the crash occurs. By then, it is too late. The tragic results have already occurred; the damage is already done. No, the best time for analysis is years, if not decades in advance. That way, you have sufficient time to use the knowledge to create a path which puts a company out of harm’s way.

THE PRINCIPLE

The underlying principle here is that the best time for critical strategic analysis is not during (or after) a crisis, but before the crisis, when times are still relatively good. By attacking potential future disasters while times are still good, you have many advantages:

1)     You have more time to prepare and implement a solution;

2)     You have more cash flow to apply to the solution;

3)     You still have a strong reputation, good market share, and a consumer following, making the transition easier for your key stakeholders;

4)     You can analyze the problem more rationally, instead of making rash moves in the heat of the disaster.

5)     If you have to retreat from a business to avoid the future disaster, there is still time to find buyers for it who will pay a good price.

By contrast, if you wait until the disaster is upon you before creating an exit strategy, the situation is working against you:

1)     You have very little time to find and implement a new course;

2)     Your options are limited because your cash flow is already decimated and customers have already started abandoning you.

3)     The crisis is so obvious that nobody wants to bail you out by paying a handsome sum to take over your disaster.

Example #1: Department Stores

Look at the situation JCPenney is in. It’s on fire and looks like it could be headed for a crash. There is a lot of speculation about what or who to blame for the disastrous results of late, such as losing about a third of their business.

Some would say that the problems for the department store industry are so bad that there was really nothing that any leader could have done to save JCPenney, be that Ron Johnson, the recently fired CEO, or Mike Ullman, the replacement executive (as well as having been the top executive prior to Johnson).  The reasoning is that the department store industry was doomed due to outside economic, technological and competitive forces. It is beyond redemption.

But that is only if you start trying to fix the problem now, after the plane is already on fire.

Look at the Dayton Hudson Corporation. They used to be a major player in the department store industry decades ago. The executives there were smart. They knew that the best days for the department store format were behind them. They knew that the format was on a course headed for eventual bad times.

So while times were still good, Dayton Hudson started selling off its department store properties. First, they got rid of their holdings in the fast-growing southwestern part of the US in the 1980s, when competitors were trying to out-bid each other to buy them. They finally sold the remainder of their department stores to the May Company (another department store company) in 2004 (for a good price).

But then the bad times started to hit the industry. Soon thereafter, the May Company was in such bad shape that they had to sell themselves to Federated (now called Macy’s) at a terrible price. And now, almost all the remaining department store companies are struggling to find a winning strategy, like JCPenney, Sears and Bon-Ton.

What did Dayton Hudson do? They took the money from the sale of the department stores to invest in the future, their Target store chain. Dayton Hudson (now called Target Corp.) is doing well and avoided the department store mess.  

The point is that if you wait until the industry is in trouble (like JCPenney) before crafting a solution, you will find it very difficult. But if you start crafting a solution while the times were still good (like Dayton Hudson), you have a greater chance of success.

Other Examples

A similar situation occurred in grocery wholesaling. To an astute observer, it was obvious decades ago that the small independent grocer (the key customer of grocery wholesalers) was entering a troubling future. Walmart supercenters and the big grocery chains were putting pressure on many of the independents. Eventually, it was likely that many of these independent grocers would be out of business. It doesn’t take an expert to figure out that if your key customer is going out of business, it doesn’t bode well for those supplying them.

Therefore, while times were still good, Cardinal Foods decided to act. They used their cash flow to diversify into a field where their distribution expertise had longer life—pharmaceuticals. Now, Cardinal Foods, whose name was changed to Cardinal Health, is a strong #21 on the Fortune 500 while many of the few remaining grocery wholesalers are in challenging times.

Google did not wait until its computer-based business model was in trouble before pushing hard into the smartphone space with Android. Google did it while it could still leverage its strength. Amazon did not wait for its strength in the computer-based ecommerce era to end before launching Kindle.  By contrast, Zynga was already in trouble from smartphones taking over gaming from the computer when it decided to take the challenge seriously (and is having serious problems now making the transition because it waited until it was in a position of weakness).

There are many more examples I could mention. I’ve talked about some in previous blogs here, here and here.

SUMMARY

All strategies eventually fail. If you wait until failure comes before starting to change, you will most likely not change successfully.  By contrast, if you start adapting while times are still good, you are more likely to make a successful transition.

FINAL THOUGHTS

Think of strategic planning as a parachute to help escape problems. But a parachute is of no use if you wait until the plane has already crashed before putting it on. It only helps if you escape while the plane is still flying.

Strategic Planning Analogy #503: Unbundled Subsidies

THE STORY

When I used to eat at a fast food restaurant, I’d order a burger and fries. But then I realized that the low price menu would have burgers for about the same price as those french fries. After that, I skipped the fries and ordered a second burger.

My logic went like this: Fries are merely grease sponges—just empty calories filled with fat and covered with too much sodium. By contrast, at least with the cheap burger I was getting some protein. They cost about the same and filled me up about the same and were equally tasty. Therefore, instead of getting a burger and fries, I started getting two burgers.

That was all fine by me. But I don’t think the fast food restaurants enjoyed my new decision. After all, they made a good profit on the fries but were losing money on that low-cost second burger.

THE ANALOGY

No matter what business you are in, your customer has choices. Even in a monopoly situation, the customer has choices. They can choose a substitute from another industry or choose not to purchase at all.

Many of the decisions businesses make affect those choices, such as product assortment and pricing. When the fast food industry added low-price value items to their menu, they changed the way I made choices about how I eat.

Unfortunately, my change was to the detriment of the fast food restaurants. I switched from high-margin fries to a negative margin value burger. And it was THEIR decision which caused my changed behavior to work against them. Their actions made me a less profitable customer.

So don’t limit your discussions about what is strategic only to big issues like positioning and productivity. Even smaller issues, like the pricing of a burger, can have a huge impact on performance for years to come.

Think of it like making a small decision about whether or not to bring a woodpecker on board your boat. It’s just a little bird. But one day the woodpecker pecks a hole in the boat. Even then, one little hole is not a big deal—it can be repaired. Over time, however, the woodpecker pecks a great many holes in the boat and it sinks. It is the accumulation of many small, bad consequences from that one little decision about birds which sank the boat.

This is also true for business. It is usually not the big decisions which bring a company down. After all, executives spend a lot of time making sure they get the big decisions right—that’s why they’re called “Big Decisions.” No, it’s the accumulation of many small daily decisions (decided poorly) which sink a company.

Little decisions start chain reactions in how customers make choices. Any one of them may not hurt you, but in total they can create a disaster. If those daily decisions are not made within a strategic context or are not thought through thoroughly, they can destroy the grand design or your larger strategy. After all, your strategy is not what you say, but what you do. And what you do is determined every day with those small decisions. So strategy needs to “sweat the small stuff.”

THE PRINCIPLE

The underlying principle behind the fast food mess is “unbundled subsidies.” And if you are not careful, unbundled subsidies can ruin business models for a lot more industries than just fast food.

1) The Origin Of Subsidies

Many industries are highly competitive. This creates severe downward pressure on prices (competition won’t let you raise prices). And to top it off, we’ve trained consumers to not have to pay full price for anything. Just ask the customers of JCPenney. When JCPenney eliminated sales, they lost over one quarter of their business. It turns out that people expect deals and won’t willingly pay full price.

Therefore, highly desired items are often sold at little to no margin (or even a negative margin). So how do you make money when your key items are sold at or near a loss? The answer is subsidies. You get customers to buy additional items that have a high enough margin to offset the loss on the core.

In fast food, the high margin drinks and fries subsidize the low margin burgers. On big-ticket electronic items, high margin extended warranties traditionally subsidized the low margin device. The base sticker price on a car is kept low, but they get you with high margin upgrades, accessories, financing and repair work. Low margin industrial goods are often subsidized with service contracts. Low margin printers are subsidized with high margin ink.

It has become the way of the world. In order to compete on price versus competitors and satisfy customers who want a deal, core items are becoming like loss leaders, forcing businesses to surround them with subsidies in order to survive.

2) Unbundling of Loss Leaders and Subsidies

Originally, the idea was to try to bundle the loss leaders and subsidies as tightly as possible. That way, every purchase could still remain profitable because the loss leaders and subsidies were sold together. In the fast food world, they were called “Combo Meals”—you had to buy the whole bundle of food to get the deal.

Other industries followed with their own version of the bundle. Cable and telecom companies bundled phone/internet/TV. HP used patents so that you could only use their high margin ink on their printers.

But the hypercompetitive world started causing the bundle to fall apart. Between 2000 and 2002, McDonald’s rolled out the Dollar Menu in the US. Now you could buy the cheap items without also buying the subsidies.

In the telecommunications industry, companies started turning subsidies into additional loss leaders. For example, charges for texting used to be the subsidy for voice calls. Then texting became free and had to be subsidized by data downloads. I was talking to someone in the industry who said it is a constant race to find the next subsidy, because someone in the industry is always trying to turn the current subsidy into a loss to get an edge.

And then the dotcom world came up with the “Freemium” model. In this model, most people pay absolutely nothing for the service (it’s free) while a small minority pay for a premium version. This is how linkedin works. I pay nothing for the basic service because it is subsidized by a totally different customer, usually a recruiter, who buys a premium version. Or Zynga had most people playing Farmville for free while a small minority subsidized the whole system by purchasing virtual farm equipment.

This all starts to become dangerous territory when loss leaders and subsidies are unbundled. In fast food, you get people like me who now load up on the loss leaders and avoid the subsidies. In telecommunications, there is the risk of running out of new sources for subsidies to support the ever expanding list of loss leaders.

The price of loss leader consumer electronics got so low that it became “disposable pricing.” If something went wrong, you could afford to just replace it, erasing the need to buy the extended warranty subsidy.

The freemium model runs the risk of the two audiences getting out of balance, with not enough payers to subsidize the freeloaders. Zynga just announced huge layoffs because they are having trouble with their business model.

And it is hard to go backwards on these trends. The telecommunication folks want to dial back the unlimited data plans but are meeting strong resistance. When the fast food people try to dial back the value menus, the customers revolt. Newspapers have been trying to get people to pay for the online version (which used to be free) with only varying levels of success.

Once you set up a subsidy system, you redefine the expected cost for the loss leader. “Regular” price becomes the loss leader price. Consumers see anything higher as outrageously high pricing. This makes it very difficult to reverse the pricing once the loss leader position has been made.

But now that the subsidies are becoming ever more unbundled from the loss leader, it is more difficult to ensure that enough subsidies are sold to offset the loss leader prices. Profits become more elusive. Risk of failure is increased.

3. Lessons Learned

What can we learn from this? First, small actions today have consequences well into the future. And it may not be initially obvious today what those consequences may be. Therefore, before making some of these small actions, we need to take time to consider their impact on the larger picture. Otherwise, we may unintentionally be dismantling our grand strategy one brick at a time.

Second, if strategists (or strategic thoughts) are only limited to an annual offsite meeting, they will be unable to adequately impact all those little day to day decisions. We need to get strategic context around a larger proportion of our decision making.

SUMMARY

Strategy should be more than just big thoughts around big decisions. It needs to permeate the organization more regularly and further down the organization, where many of the more mundane decisions are made. After all, these more “mundane” decisions can accumulate to the point to where they threaten the entire strategy.

FINAL THOUGHTS

How many decisions are made in your business without asking the question “How can this decision impact the long-term viability of our strategy or company?”