Tuesday, December 17, 2013

Strategic Planning Analogy #517: Dirty Rice

Today I made myself a batch of Dirty Rice for lunch. As I was eating it, I pondered the irony of it all. Dirty Rice was originally developed in New Orleans as a way for impoverished people and struggling restaurants to stretch their food. The idea was to take the scrapings of leftover bits from the pots and pans of the prior meals and stir it into rice. Suddenly you had a meal made out of food scraps that would have normally been thrown away.

Yet I made my Dirty Rice out of fresh ingredients. Rather than being made out of leftovers, my fresh dirty rice created leftovers.

This seems to happen a lot in cooking. Foods originally created to help struggling people survive somehow eventually become gourmet food for the rich.

For example, the French are known for their gourmet cooking using great sauces. The origin, however, came out of poverty. At one time, there were large shortages of food in France. To make the meager portions stretch to feed an entire family, they were covered in sauces. The sauces made a little food look like a lot of food. Now, people who can afford as much food as they want pay premium prices at French restaurants to get food based on sauces designed to stretch food for the poor.

In many warm climates, the gourmet food tends to be rather spicy. This was because poor people in hot climates had a difficult time preserving their foods. The heat would make the food start to smell rancid. So to cover up the bad smell, they would cover the food with hot spices. Today, one of the top gourmet choices in the UK is spicy food from India. The climate and food preservation in the UK certainly does not require the spicy cover-up, but they love it nevertheless.

I suppose that someday in the future the microwave will be made obsolete by newer technology. Yet, I’ll bet there will be gourmet restaurants in the future specializing in the obsolete art of microwave cooking. Upscale microwave restaurants will be seen as reviving a lost art in gourmet cooking.

There is usually a reason why certain products, traditions and processes exist. Dirty Rice comes out of a tradition of stretching kitchen scraps. French sauces come out a tradition of making meager portions large enough to feed a family. Spicy foods come out of a tradition of covering up rancid smells and tastes.

Over time, many of those reasons for existence go away. Improved economies, food production, food preservation and other factors have made the original need for dirty rice, French sauces and spicy foods no longer as necessary. Yet the traditions live on. Ironically, the original need for these products (poverty) is not the driving force anymore. They became gourmet products for the rich of the world.
Similarly, businesses are filled with lots of products, processes and traditions which are no longer essential. Sure, there were good reasons for these products, processes and traditions when they were first initiated. But times change. The reasons for continuing down these traditional paths may no longer exist.

Just as silly as it was for me to use expensive fresh ingredients to make a recipe designed to use up cheap table scraps, it is silly for companies to continue old so-called “cost-cutting” practices which over time have become inefficient and expensive. It’s time to re-think those traditions.

The principle here is that change impacts relevancy. Products and processes which were highly relevant and useful at one point in time usually become obsolete as times change. We may continue the practices of the past with no understanding of what caused those practices. They become part of the fabric of “how things get done” without being questioned.

Yet, if we questioned these practices, we might discover that change has rendered them to be counterproductive to success. New and superior approaches may now exist. Just because something was the right thing to do in the past does not mean it should be done today. One of the keys to strategic success is knowing when to abandon the past to embrace the future. This includes a look at internal processes and structures.

Different Economy
Consider the fact that the world has largely moved from a production-based economy to a knowledge-based economy. Yet many knowledge-based companies are still using internal processes and structures designed during the production era.

Are those processes still relevant? Are there new processes and structures more suitable to a knowledge-based business? To use the analogy, are we trying to serve the rich with food originally designed for the poor? When is the last time you challenged the way things get done to see if they are best suited for a knowledge-based era?

For example, production-based businesses tend to centralize more power at the top, whereas knowledge-based businesses have often found value in pushing power far lower in the organization. This is just one of many assumptions to look at in how things get done.

Different Technology
Back when data was scarce and communication difficult, companies developed large infrastructures of middle-management. Their primary role was to gather information and communicate it to the proper people. At the time, middle-management was the most efficient way to do this.

Now, we have amazing new technologies to gather data and communicate it. Smartphones and tablets are more efficient ways to do what middle management used to do. Is middle management even relevant anymore? Are traditional in-person meetings still relevant? Are traditional offices still relevant? When is the last time you challenged tradition to see if new technology has rendered that process obsolete?

New Visionaries
Fortunately, there are people out their helping us answer these questions. One that comes to mind is Gary Hamel. He is part of an organization called The MIX, which stands for Management Innovation eXchange. This organization tries to tap into the business world’s knowledge base to find out what internal processes and structures are best for the changing business environment.

And then there are programs like six-sigma, lean, and a host of innovation tools to help companies get rid of obsolete processes and become more relevant for the times.

There are also plenty of leading-edge companies out there trying unconventional approaches. They are worthy of examination for ideas.

One of the major roles of strategic planning is to help companies become relevant in an ever-changing world. Often, that focus is primarily external—deciding who are the relevant consumers to target and what innovative, new product/service should be offered. Yet, the external adaption to change is only part of the battle. There are also internal considerations. We need to make should that our internal processes and structures are also relevant in the changing world. Do we have the right organizational structure? Do we have the right internal work rules? Is power located in the right places? Is modern technology being optimized? How should people be compensated?

Getting the internals right may give you more of a competitive edge than getting the externals right. They are worthy of serious concern as part of your strategic planning process.

Next time you eat in a fancy gourmet restaurant, remember the irony that the food eaten by the rich often was designed by those in poverty. Use it as a reminder to look at your internal processes, to see if they are equally out of touch with their original intent. Then change your processes to get them relevant to the future.

Tuesday, December 3, 2013

Strategic Planning Analogy #516: Avoiding Driveways

My wife and I disagree on which types of roads are safer. I think expressways are safer. She thinks city roads are safer.

My logic goes like this: Accidents happen when the unexpected happens (like someone turning off or entering the street) or when change occurs (like a change in speed). By that reasoning, on a city road every driveway, every parking lot entrance/exit, every intersection, every stop sign, every traffic light is a place where an accident can happen, because they are potential sources for the unexpected or change. So, in a few miles of city driving, you may drive past literally thousands of these potentially dangerous locations.

By contrast, on an expressway, I only have to worry about the few cars immediately surrounding me and the rare entrance/exit ramp. That’s a lot fewer potential accident triggers.

My wife’s logic is simpler. The higher the speed, the more dangerous the accident, so drive on slower roads to be safer.

Business strategies can take you on many journeys, including acquisitions, joint ventures, start-ups, brand extensions, new geographies, new customers, and so on. And statistics show that most of these actions end up as failures. There is no safe alternative—acquisitions, joint ventures, start-ups and other business changes all are statistically more likely to fail than succeed.  

It’s like driving when you know that you are more likely to have an accident than not. It’s enough to make one hesitant to get in the car.

But if you don’t get in the car, you will never reach your strategic destination. And because of all the changes in the environment, the status quo will eventually become obsolete. Therefore standing still is not an option, either. It too will eventually be a failure—a horrible accident.

So the business strategy dilemma is similar to the one in the story: What is the safest route to take to avoid terrible accidents?

The principle here is that tactics like acquisitions, start-ups, joint ventures, and diversifications are not by themselves the salvation of your company. In fact, they statistically increase your risk for failure. Instead of being your salvation, they are merely tools—and dangerous ones at that. To be successful, one needs a strategy for how to use these tools—a path which optimally avoids most of the accidents which often accompany these tools.

So which path should one take:

  1. My wife’s approach (go slow in the city to avoid the biggest accidents);
  2. My approach (go fast on the expressways which avoid the uncertainties which increase accidents by avoiding driveways and intersections);
  3. Or a combination of paths?
Going Slow
Applying my wife’s advice, the answer would be to go slow. In some cases, that is good advice. Remember, the strategic goal is not to be the first to arrive, but the first to succeed. A strong and savvy follower is often more successful than the reckless trailblazer. As the old saying goes in US westerns, it is the advance scout who gets hit with the most arrows.

For example, Coke did not invent diet cola or cola in cans or caffeine-free cola or sports beverages or pretty much any other beverage innovation in the last 50 years. Yet, Coca Cola is a leader or strong player in just about any non-alcoholic beverage segment currently in existence. Why? Coke is a great fast-follower. By building superiority in distribution, points of customer contact and marketing, Coke can overcome the small innovators over the long haul. Coke lets everyone else take all the risks and then—once a successful innovation becomes apparent—they swoop in and eventually take over. They let other, faster people have all the accidents.

There are several effective tools in the “go slow” approach, like stage-gating and real options. The basic idea is to chop up a grand goal into smaller sub-goals. You aim for the nearest sub-goal. Depending on the success of that early effort, you will make changes in subsequent sub-goals or perhaps halt the project completely. This keeps all your accidents small.

A similar approach is doing a lot of beta-testing. Rather than speeding as fast as possible down a path, you pause to consumer-test the concept and make adjustments based upon the tests. Amazon is famous for doing a lot of testing.

However, the “go slow” approach often has its limits. Sometimes, the dynamics of the market do not provide the luxury of going slow. Faster competitors can get too much of a first-mover advantage (not all of us have as much power to overcome as Coke).

And even the “go slow” approach can eventually require big moves into big acquisitions, big joint ventures, big divestitures and the like. So even though you have eliminated some of the potential accidents, there can be many more that the go slow approach cannot avoid. So going slow it may be part of the solution, but it is not the whole answer.

Avoiding Driveways
So that leads to my go fast approach on the expressways. Accidents are minimized on the expressway because many of the causes for accidents are taken away—driveways, intersections, stop signs and traffic lights.

The business equivalent to avoiding driveways is to look at where the inherent risks are in each business tactic and then try to eliminate them. For example, key sources of accidents in joint ventures come from items like divergent objectives, conflicts between core businesses and the joint venture, governance issues, power issues and so on. The more you can eliminate these sources of accidents up front, the fewer the accidents. These are joint venture equivalents to driveways, intersections and stop signs. The more you can specifically eliminate risks in these areas, the less likely your joint venture will have an accident.

Similarly, in acquisitions many of the risks have to do with things like over-evaluating synergies, paying too much, poorly integrating the two companies, dealing with divergent corporate cultures, underestimating negative customer reactions, and so on. If you can eliminate these sources of accidents, your acquisition is more likely to be successful.

The folks at McKinsey did research and discovered that the companies which are most likely to avoid accidents in acquisitions are the ones who do a lot of acquisition and have built core competencies in how to do acquisitions well. In other words, the successful acquirers have enough experience to know where all the driveways and intersections are and have competencies in finding paths to avoid them (their expressways).

So the idea here is to first understand the key sources of risk in whatever tactical tool your choose. Then, take a path of implementation which avoids these sources of risk (Better yet, make understanding and avoiding core competencies of the firm).

For example, don’t even try to do a joint venture with someone who has a radically conflicting strategic agenda. That’s like driving the wrong way on a one-way road. You are just begging for an accident. Instead, take the expressway where that intersection doesn’t even exist.

A Combination
In reality, a combination of the two approaches can often work best. Don’t be so hasty that you take needless risks. Taking time out for stage-gating or beta testing can be very prudent. On the other hand, large, gutsy moves may eventually be required to reach a better tomorrow. Rather than delay them too long, move forward quickly, but smartly by proactively avoiding specific areas which are most likely to increase the risk of a failure/accident.

Tactics like acquisitions, start-ups, joint ventures, and diversifications are not by themselves the salvation of your company. Instead, they are necessary, but dangerous tools which increase one’s risk of failure if used improperly. To improve one’s likelihood of success with these tools, consider the following:

  1. Before rushing full speed ahead, take time to de-risk the overall strategy. Consider additional tools like stage-gating, real options, and beta-testing to make sure your ultimate goal is correct.
  2. Consider building competencies which can make you a great fast-follower towards good strategic goals “proven” by riskier firms.
  3. When implementing tools like acquisitions to reach the goal, understand the risks inherent to the particular tool. Then specifically address those risks prior to acting, so that those risks can be avoided.
  4. Consider building core competencies in handling these tools before using them.

So, in a way, I guess my wife and I are both a bit right in our approaches to safe driving.