Friday, November 1, 2013

Strategic Planning Analogy #514: Working the Wrong Mine

Let’s assume there are two miners, named Bob and Jason. Bob is a big believer in analytics and measurement. Bob has KPIs (Key Performance Indicators) for every part of his mining operation and measures them often. Bob receives spreadsheets every day, showing in precise detail exactly how everything is going in the mines. Using that data, Bob can make minor adjustments to improve productivity on an ongoing basis. Everyone in Bob’s mining business is trained in how to improve their KPIs.

Sure, all that time, money and effort into analytics leaves little left for anything else, but Bob is happy. After all, he attributes his devotion to analytics with allowing him to eke out a small profit from a poor mine. Bob believes that without that devotion, he would lose money at that low-yield mine.

Jason, on the other hand, takes a different approach to mining. Rather than fretting about having the latest mining equipment filled with gadgets to measure productivity, Jason just carries a simple pick axe to his mine.

And every day, Jason extracts trainloads of valuable ore from his mine. Jason is making a large fortune on his mining business.

And why is Jason doing so much better than Bob? Well, while Bob was focused on incremental improvements via analytics, Jason was devoting his time, money and effort on locating the best place to do mining. And, as it turns out, great productivity at a poor mine is less profitable than average productivity at a high-yield mine which is bursting with pure ore.

It’s common sense that—all other things being equal—a mine full of high quality ore will be more profitable to operate than a mine with very little (and low quality) ore. Yet Bob was so fixated on improving operations at his current low-yield mine site that he never stopped to consider that maybe he’d be better off looking for a better place to mine. His head was down looking at spreadsheets rather than up and scanning the geography for better sites.

Jason, on the other hand, realized that the highest determination of mining profits was in the quality of the mining location. Therefore Jason spent his effort on what was the high determination factor. Jason first searched for a superior place to mine and was rewarded handsomely.

As obvious as this common sense may appear, it seems that there are a lot more people like Bob in the business world today than Jason. Look at all the current buzz in strategic planning. It’s about big data, analytics, and KPIs. Job descriptions for strategic planners today talk more about statistical analytic prowess than big picture positioning. I recently saw where a company was placing strategy in its M&E department (Measure & Evaluate).

Now I’m not against measurement or productivity efforts. But that’s not the major source of growth and profitability. As we will see later in this blog, positioning yourself in the right place is a greater determinant of success. Therefore, positioning should be of higher importance, since decisions there will have greater impact. We need to be more like Jason and less like Bob.  

The principle here is that leaders need to focus their time and energy on activities which produce the highest impact. Positioning is one of those high impact areas. Therefore, positioning should be a high priority of leaders and their strategy group…higher than low impact issues such as analytics.

The facts back this up. The latest came this week in an interview on  McKinsey’s Chris Bradley and Angus Dawson were talking about the Art of Strategy and what we’ve learned over the last 15-20 years about the topic. In the interview, Chris Bradley said research shows that “80 percent of growth is explained by decisions about where to compete or by market selection.”

Based on this research, if 80% of growth is determined by position—where to compete, who to target, winning position—then that leaves only 20% for everything else, including analysis, productivity initiatives, market share wars, and KPI monitoring. Shouldn’t we be focusing on the 80% rather than the 20%? In other words, wouldn’t we be better off spending time finding the right place to mine rather than getting more productive in the wrong place to mine?

Chris Bradley went on to say that:

“Companies should be just as focused about positional improvement as they are on performance improvement. [The research] reveals the importance of strategy in that light, not as a method of how we gain market share or decide what our edge is going be in the next quarter, but as a way to fundamentally position the company against the right trends, catch the right waves, and put our bets on the right markets.”

As Chris implies, positioning is where strategy adds the most value, so all those other strategic tasks (like productivity, market share, or near-term KPI targets) should not be sucking up all of one’s focus.

I can illustrate this principle using a company I worked with. This company had a portfolio of retail brands. One of the brands was doing poorly, so I helped investigate the cause of the problems and potential solutions.

One of the things we learned was that there were a lot of areas where productivity could be improved. This included areas such as labor, inventory, distribution, marketing and merchandising. We investigated what it would take to improve these areas of inefficiency (time, effort, money) and what the impact might be if efficiency was improved.
But we did not stop there. We also spent significant time looking at the big picture position of this retail brand. What we learned was that the position of this retail brand was a lot like Bob’s mine—a poor, low yield position. In particular:

  1. The sites of the stores were inferior to competition.
  2. Nearly every store was in an economically depressed market with declining population.
  3. Past actions had so confused the customer that one would essentially have to start over in building a compelling reason for customers to prefer the brand.
Because of the enormity of these positioning negatives, the productivity initiatives would have only a limited ability to improve the business. Even a highly efficient store will struggle if it is in a bad location in a declining market with a confused customer. It would have been like Bob’s effort to improve his poor mine—much work with little benefit—because productivity focuses on the 20% factor rather than the 80% factor.

The only way to create the big leap in improvement would have been to fix the position (the 80% factor) by relocating the chain to better sites in growing markets with a dedicated effort to rebuild loyalty. The cost and risk on that was very high.

Therefore, rather than put in all the time, effort and money needed to incrementally improve the productivity of that retail brand, the company sold the brand and put all that time, effort and money into a different brand which had a much better position (more like Jason’s high-yield mine).

That was the right move, because it focused first on positioning (the 80% factor) before determining decisions on where to create incremental improvements (the 20% factor). By putting the effort behind the brand with a better position, it improved the return on that effort.

Incremental improvements via analytics, statistics, KPIs, Six Sigma, Lean and other such productivity tools has its place. But it is not the place of prominence. The big rewards come from getting the overall position right. Positioning needs the place of prominence in the strategic planning process. This is because if the position is wrong, then all those other efforts are constrained by the lack of potential within the poor position. You can only get so much ore out of a bad mine, no matter how productive you are. Better to focus on getting the position right, so that subsequent efforts are focused on place where the potential rewards are high.

Now some of you may be thinking that you can afford to focus almost exclusively on productivity issues now, because you already have a great, winning position. The problem is that environments change. The great positions of today may become lousy positions tomorrow. Decades ago, that poor retail chain I talked about had a great position (before the cities went into decline and the consumer position was compromised). So one can never ignore the positioning issue. It needs to be consistently monitored to ensure that it remains in tune with the marketplace and relevant with the customer.

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