Tuesday, March 25, 2014

Strategic Planning Analogy #526: Big Stick

One time, while vacationing in northern Minnesota, I stopped to see the big tourist attraction in Eveleth—the world’s largest free-standing hockey stick. The stick is 110 feet long and weighs over 5 tons. Next to the hockey stick is a 700 pound hockey puck.

My thought is that, sure, that’s a big hockey stick. But I’ve seen bigger ones in the business world. I’ve seen business graphs with hockey sticks that span millions of dollars!

When a line graph shows a history of slight decline followed by an incredibly fast upward rise, people call that a “hockey stick.” It got that name because the graph has a shape similar to a hockey stick (see chart).

In the business world, I’ve seen lots of hockey stick graphs. The story behind the graph is always the same: Yes, our historical performance has been poor, but you just wait. The magic is about to happen! Soon, everything will suddenly become wonderful and money will come pouring out of the sky!

Just look at the social media world. There are companies who have never made a profit and are actually increasing their burn rate through cash as losses ever widen. Yet they are going public at astronomically high valuations. Why? Because, supposedly, the magic is about to happen when profits will skyrocket. They’ve sold people on the idea that the company is about to experience a “hockey stick” performance.

Given the high valuations placed on these companies, I suspect that their hockey sticks make the one I saw in Eveleth look very small indeed, by comparison.

The principle here is that just because you can fill a spreadsheet full of projections and make all sorts of fancy charts about the future does not mean that your scenario will come true. Adding extra decimal points to a wildly optimistic guess does not make the guess any more accurate.

Studies have shown that people are more likely to believe a wild guess is more accurate if the last digit in the number is either a 3 or a 7. But changing a wild estimate from $32,665 million to $32,667 million only gives the illusion of more accuracy. It’s still just a wild guess.

So don’t automatically believe a projection just because it is presented in a way that appears objective and well thought out. People can dress up inaccuracy to look like respectability.

One should be especially skeptical when presented with a hockey stick future. After all, if it is going to be so easy to rapidly improve performance in the future, why is today’s performance going in the other direction?

Where Does the Magic Come From?
There’s an old saying that the definition of insanity is doing the same thing over and over again and expecting a different result. That’s insane because the only way to get a different result is to do things differently.

Hockey sticks assume a wildly different result in the future. So a fair question to ask is what has made things so different to cause a different result. If a truly wonderful and believable change is presented that reinvents the rules dramatically in your favor, then maybe the hockey stick makes sense. Otherwise, the change is nothing more than hoped-for magic. And I’m not going to bet the future on some mysterious magic.

In the social media space, the magic is often referred to as “monetization.” In other words, they say “We currently have no idea how we’re going to make a profit, but once we amass a huge bunch of people, we will ‘magically’ come up with a way to monetize them. Trust us. We’ll find it later.”

I’m not sure I trust the magician.

And even if there appears to be a credible scenario for why a specific type of change will reinvent the rules in my favor, there is still reason to be skeptical. As I mentioned in an earlier blog, I once asked a group of executives what they would do if competition suddenly found a way to take a lot of share from them. They replied that they would get aggressive and do whatever it takes to get the share back. In other words, they would fight to reverse the effect of the change.

Remember, you are not the only one trying to write the rules of the future. So is the competition. Competiton WILL retaliate and try everything they can to pull the line of your hockey stick down. Even if the only thing they can do is copy your change, it gives them a chance to take away about half of the benefit of your hockey stick as they share the benefits of change with you.

What are Their Motivations?
Another thing to look at is the motivation behind the one showing you the hockey stick. How do they personally benefit from having you accept a hockey stick scenario? Is it just a lie so as to advance their career? Is it just a distraction to make you forget about how badly they’ve managed the business in the recent past?

Hockey sticks are hard enough to believe in the hands of those with noble intent. They are almost impossible to believe in the hands of those whose motivations cannot be trusted.

What is their Supporting Data?
All the numbers and math behind the hockey stick can be accurately calculated. But that doesn’t mean that they are accurate conclusions. All the inputs to that math are based on assumptions. If the assumptions are lousy, than it doesn’t matter how accurately you do the math. The answers will still be wrong.

Therefore, instead of arguing the math, you should focus the discussion on the assumptions behind the math. Are the assumptions:

  • Believable?
  • Doable?
  • Able to Withstand a Competitive Response?
  • Capable of Creating a True Advantage?
  • On an Identifiable Path to Profits? 
Or is it just a bunch of magic?

Many presentations of the future include a hockey stick—a rapid and large improvement to the business after years of weak performance. Since hockey sticks rarely occur in real life, seeing one on a chart should set off warning bells in your head. Work extra-hard to determine if the scenario should be believed. Look for believable and achievable change in the environment to your advantage. Make sure the presenter has the right motivations. And double check the assumptions.

Hockey is just a game and hockey sticks are a tool to advance that game. Be wary of business people who use hockey sticks to advance their game of deception in order to wrongfully advance their selfish cause.

Friday, March 21, 2014

Strategic Planning Analogy #525: Budget Madness

Well, here we are in the middle of March Madness, when Americans go nuts over college basketball. Millions of people choose who they think is going to win all the games. Warren Buffet is giving out a billion dollars to anyone who chooses the correct outcome for every game in the NCAA basketball tournament.

The Wall Street Journal has come up with their own version of how to pick the teams. They put together a site where the names of the colleges are eliminated. All you have to look at are statistics. Over the years, they have found that people are more accurate at choosing winners if they are not biased by seeing the team name before making their choice.

They call it the “blind” bracket. I guess sometimes we see better when we are blind.

We all have built-in biases. These biases affect our objectivity. Eliminate the bias and we make better choices. This is true in picking the winning college basketball team. I believe it would also be true in business budgets.

Most companies have horribly uncreative budget processes. They consist of little more than just taking last year’s numbers and tweaking them a little (sales go up a little and costs go down a little). And even with that, the budget targets are often missed.

I think the problem has to do with too much familiarity with the company divisions. This creates biases anchored around the status quo (what we know). I believe we would get better budgets if we could do it more blindly (like the Wall Street Journal Blind Brackets).

Why do I say this? Look at how most companies do M&A work. The M&A folks tend to know less about who they acquiring than what their company knows about their own divisions. Yet the M&A people tend to do a much better job of thinking through their forward forecasts than the budget folk.

The M&A crew tends to look as much as 10 years out and do sophisticated discounted cash flow (DCF) analyses. They try multiple scenarios, with different levels of investment and synergies. They look at ways to change the business model in order to justify the acquisition premium.

All this for an outside company they are somewhat blind to. Yet, for our own divisions, which we should know far more intimately, we take a far less sophisticated approach—just look out a year or so and do a small tweak on what was done last year. Something here just doesn’t seem right.

The principle here is that budgeting processes won’t dramatically improve unless we find ways to reduce the bias towards the status quo. There is no reason to believe that the status quo optimizes the current portfolio. We don’t expect the status quo for acquisitions. Why should we expect any less for our divisions?

Short Time Frame
The problem with a one year budget time frame is that one year is usually too short to complete a radical transformation of a division. In a radical transformation, the first year typically has added investments and a disruption of sales. As a result, if you are only looking one year out, the budget for a radical transformation scenario looks awful.

What executive wants to accept a budget where sales go down and costs go up? They know that the status quo looks a lot better than that, so they opt for a minor tweak of incremental improvement rather than the first stage of a radical transformation into a far better future.

That’s why companies like Kodak couldn’t make the radical transformation to digital imaging. The bias towards the status quo looks so much better only one year out. Unfortunately, as you string together a series of these “one year out” budgets, you never get around to making the transformation. It keeps getting tabled for an unknown future date until it is too late.

I’ll bet that if Kodak had not already been in the photography business, and had their M&A team examine the business (more blindly), they would have come back with an aggressive transformation to digital imaging as a condition to purchase.  

Go Blind
Is there anything we can do to reduce the bias and budget our divisions more blindly? Sure, perhaps we could make the budgeting team act more like an M&A team that looks at outside businesses more objectively on a longer DCF basis. Or maybe you could disguise a few of your divisions (without the division name) and give it to the M&A team to look at as an acquisition and see what they come up with.

I know that many investment bankers (and activist investors) look at companies from the outside (somewhat blindly) and make proposals about how a company can do something radically different with their assets. I’m not saying they are always right, but at least it can stimulate some non-status quo thinking.

Right now, a lot of these suggestions come unsolicited. What if you proactively sought out more of these less-biased points of view from trusted outsiders?

Even something as simple as benchmarking and best practice analyses could provide a new perspective on what to do differently. These potential budget-line inputs are not biased by what YOU do, but by what best-in-class do. And it could be something radically different.

The Importance of Pursuit
Over the years, I have continually stressed the threefold strategy requirements of:
1.     Positioning (A place where you can win)
2.     Pursuit (Having the Competencies and Capabilities needed to win)
3.     Productivity (A business model that can earns an optimal profit off the winning position)

In the typical one-year budget cycle, it is usually assumed that the positioning stays about the same and the focus turns towards getting more productivity out of the status quo model. The issues of pursuit are rarely discussed.

But pursuit is a critical component to success. If you want to grow, you need to build the capacity to effectively handle that growth. This includes the size of your sales force, the limits on your current supply chain, the capacity of your IT systems, and so on. If you don’t plan in radical changes to capacity, then you won’t effectively be able to capture that growth.

You also need to build in radical improvements to competencies. The world is changing. Today’s status quo is tomorrow’s obsolescence. Are you staying on top of what you need to know to win in the future? How’s your R&D spending? How about educational programs? Are you pro-actively bringing in new talent with the new knowledge you will need?

We can often miss these pursuit issues in a typical budgeting process because of that bias towards the status quo. It makes us falsely believe that we already have the capacity required and competencies needed. After all, we are only tweaking the status quo for the next year.

As a result, the needed step-wise leaps in capacity and competencies never get into the budget. Eventually, that chokes the division’s ability to do what is needed. Then, even the status quo no longer works any more.

I dare say that if we were looking at are divisions more blindly, as we would an acquisition, we would do a better job of factoring these types of investments into our analysis.

Biases tend to cloud our judgment and make us less objective. This is particularly true when it comes to annual budgets. The bias towards the status quo keeps us from seeing a more radical—and much brighter—future. By changing up the typical budgeting process and adding blinder, more objective eyes, we can find these radical transformations and incorporate into the budgets the radical “pursuit” changes needed to make them a reality.

Most vision statements talk in some way about being leaders or best-in-class. Achieving exceptional results like that don’t come from perpetuating the mediocre status quo past. So why accept a budgeting process which encourages perpetuating the mediocre status quo past?

Monday, March 17, 2014

Strategic Planning Analogy #524: Forgetting Our Spouses

Back when I was a young boy, my dad used to spend a lot of time driving across the state of Michigan to take care of things for his mother (my grandmother). Sometimes he would take the trips alone. Sometimes he’d take me and my sister along. Sometimes my mom would come along.

I remember one time when we were done visiting my grandmother. My dad was getting ready to begin the two to three hour drive back home. As he started to back down the driveway, I yelled, “STOP!”

My dad stopped the car. Then I said, “Aren’t you forgetting something?”

As my dad sat there trying to figure out what he was forgetting, my mom came out of the house and headed towards the car to go home.

If I had not been there, my dad would have gone home without my mother. And I’ll bet she would have been pretty mad about it.

Businesses can cover a lot of topics as part of their strategic planning. They can look at internal strengths and weaknesses. They can look at their industry, their competition, the economy, and so on.

But how often do they look at the spouses of their key leaders?

Businesses can be like my dad, who was so focused on getting the job done that he was going to forget his wife and leave her feeling abandoned. In the long run, you know that would not have been a good thing for their marriage. And it could curtail the number of future trips my dad made.

The same idea applies to businesses. If they shut-out the spouses and act as if they do not exist, they can create an environment where their leaders are under unnecessary additional stress and become less productive. Their spouses could even talk these leaders into leaving the company if it gets bad enough.

It’s hard enough to implement change in a company when everything else is running smoothly. But if your leaders are undergoing significant stress in the rest of their life, it will impact what they can contribute to the company.

Therefore, don’t forget the spouses as you drive the company down new roads.

The principle here is that strategies are implemented by people. And if the external lives of these people are all messed up, then they will be less effective at implementing the strategy. Therefore, do not create a strategy process which needlessly contributes to the stresses of the external lives of those implementing the strategy.

1) The Entrepreneurial Test
Two stories come to mind when I think about this principle. The first story is about a time when I was considering leaving the corporate world and buying a franchise to run. A franchise broker gave me a test. The purpose of the test was to see if I was a good candidate for running a franchise.

After taking the test, I added up my score. If I got an extremely high score, it meant that I would be such a successful entrepreneur that I would not need a franchise to succeed. If I got a score in the wide middle ground, it meant I could succeed in my own business, but only with the help of a franchise. If I got a low score, it meant that I was not cut out for business ownership and should remain an employee in the big corporate world.

One of the more important factors which helped determine your score had to do with friends and family. If you thought you would have the full support and endorsement of friends and family in your business venture, you score went up. If not, your score went down.

The point was that it can be stressful and time consuming to start up a business. If you do not have the support of the people in your lives, you probably succumb to the pressures and quit. Failure is more likely to be your outcome.

I think a similar effect can take place with leaders in a business undergoing strategic change. It is a stressful and time consuming event. If the ones doing the work are not getting support from their outside circle of influence, they will be more likely to fail in their part of implementing the strategic change.

2) Best Buy
My second thought turns to Dick Schulze, the founder of Best Buy Co. Starting by selling audio equipment out of the trunk of his car, Dick created a large and successful corporation. Dick would tell you that a large contributor to that success was the love and support of his wife Sandy.

To quote from Dick’s autobiography, “Without Sandy, and her unflagging support of me and her participation in every aspect of our operation, Best Buy would not be the company it is today.”

Two important aspects of Best Buy’s success can be seen here. First, Dick did not forget his wife as he drove the company forward. Sandy was kept in the loop so that she had an emotional attachment to the business as well. Second, Sandy supported her husband in a way that made it easier for Dick to do what it took to succeed.

For example, when Dick was about to mortgage everything he had to start his business, he went to his wife for support. Sandy responded by saying, “You’ve learned a lot already. You’ll land on your feet.” That support allowed Dick to put together the seed money to get his business started and that support got him through the long hours and stress that come with building a business. I dare say that if Dick did had not kept Sandy in the loop and gotten her support, there would not have been a Best Buy Company.

3) Implications
So how can we apply this to taking a business through strategic change? First, we need to identify ways to make sure our leader’s spouses are partners in the effort rather than enemies of the effort. We need to find ways to get them emotionally involved with what is going on…so that they have a vested interest in its success. They need to feel like partners in the car going on the journey rather than forgotten like what happened to my mom.

How much do you even know about the lives of your leaders outside the office? Are you aware of the support (or lack thereof) that they are receiving at home? Have you ever met their spouses? Have you ever personally acknowledged and rewarded the spouses for the support they gave to their spouse?

Second, we can help rectify some of the issues which can cause unnecessary stress in the lives of the employees we count on. How many company policies do you have which can help minimize life stresses and free employees to be more productive? Benefits like on-site daycare, flex-scheduling and concierge services could make a world of difference in keeping the type of life balance needed for healthy, productive employees.

You wouldn’t want to fill your factory with broken-down tools. Similarly, you wouldn’t want to fill your company with broken-down people. Help them heal. The gratitude will pay back itself many times over.

Strategic planning often has to deal with implementing major change initiatives. These efforts can be very stressful and time-consuming. If the lives of the people implementing the change have too much stress in their lives and lack the proper support at home, the change effort is likely to fail. Therefore, companies have a stake in ensuring that home life and stress levels are kept healthy. This requires an active effort to reduce stress and increase support from spouses.

An idea may look good on paper, but it really isn’t useful until successfully implemented. Pay attention to ALL the impediments of implementation, which include the emotional well-being of your employees.

Friday, March 14, 2014

Strategic Planning Analogy #523: Why Let Facts Get in the Way?

A retailer once asked me to look at the data to see how much sales increased after his stores were remodeled. After examining the data, I concluded that for most of the remodeled stores, sales did not change at all as a result of the remodel.

The response by the CEO of the retailer? “I don’t believe the data.” He went on to spend a bunch of money on further remodels.

Another retailer asked me to study their idea to add a new product category to their stores. I wrote a memo—with lots of facts and numbers—showing that adding this product line would be an incredibly stupid idea.

The response of the retailer. “We had no intention of ever not adding this category. We already signed the deal and are going to do it anyway. We just wanted some paperwork in the files to help justify the deal we already intended to do. If your paperwork won’t support the project, then we’ll just do it without support documents on file.”

I’m reminded of the Mark Twain quote, “Never let facts get in the way of a good story.” Or in this case, it should read “Never let facts get in the way of a pre-conceived notion.”

Business leaders have to make a lot of decisions. Most claim they want their decisions to be based on facts. The problem occurs when those “facts” contradict the pre-conceived notions of the business leader.

Do you ignore the facts and go with your gut (as they did in my stories)? Or do you ignore your gut and go with the facts?

As we will see in this blog, there is no automatic answer that works in all cases, but there is a process to figure out what to do in every case.

The principle here is that there is a difference between facts and insight. A fact is an isolated nugget of truth. Insight is having sufficient understanding of the situation in order to make the proper decision.

Not all facts lead to insight. For example, I might have a fact that my grass is tall. From that fact, I might conclude that it is time to cut the grass. But true insight would have also known that at that very moment my grass was wet, the ground was soft & mushy, and that it was a pitch-black night outside. Under those conditions, it was not a good time to cut the grass.

Was my fact on grass length incorrect? No, but that fact did not give enough insight to make the right decision.

My gut intuition can also be insufficient for insight, particularly if my experience is not very relevant for the current decision.

So how do I gain insight when facts and intuition disagree? Here are three suggestions.

1) Question the Fact-Giver
There’s a Samuel Butler quote which says “Figures never lie, but liars often figure.” In other words, a person with a personal agenda can selectively use facts to promote their agenda rather than true insight. They present a false insight, distorted by what they choose to disclose and what they choose not to disclose.

It has been said that you can prove just about anything with the Bible if you are willing to take the words out of context. And that’s what these “liars” (people with an agenda) do. They start with their preconceived agenda and let that bias dictate how they present the facts. Their goal is to sell their position rather than provide true insight into what is going on.

You see this all the time in politics, where each extreme position uses facts to “prove” their agenda is true. How can the use of so-called “true facts” come to such different conclusions? It’s all in the packaging.

Several decades ago, U.S. News and World Report Magazine looked at some of the political hot-buttons of that time, like abortion and gun control. They showed that, depending upon how a survey question is worded, you can get a majority of the people to agree with either extreme.

Therefore, when the facts contradict your gut, one can start by questioning the motives of the one presenting the facts. Do they have a hidden agenda? Is their objective unbiased insight or something else?

Ask yourself these questions:
  1. Are ALL the facts clearly moving in only one direction? (Rarely is the world that neat and tidy—there are probably relevant facts not being shown)
  2. What does this individual gain or lose personally depending on how the decision goes?

Actions you can take:
  1. Ask for all the data collected (not just what is in the Powerpoint deck).
  2. Have an independent third party (with no agenda) look at the data.
  3. Spend less time discussing the conclusions in the deck and more time discussing the assumptions behind those conclusions.

2. Question the Fact Receiver
The feelings of your gut are based on a lifetime of experience. This experience has exposed you to a lot more facts than just what is in front of you with today’s Powerpoint deck. This experience can help expand your insight and provide a better context for making decisions than just dealing with facts presented at the moment. The gut may indeed be more insightful than the facts.

But, then again, your gut may be way off base. You may have your own hidden biases, which impact your gut (even if you are not aware of them). Perhaps your experiences are irrelevant to the question at hand. Perhaps you’ve spent so much time living detached from the real world and surrounded by “yes-men” that you are out-of-touch with how your customer really lives (I spoke more about that here).

Often times, situations when facts and intuition are add odds with each other occur when a company is going through a crisis. Things are going badly. The old approaches aren’t working any more. Is this really a good time to rely on past-based intuition when the successes and tricks of the past don’t appear to be working?

Therefore, before going with your gut, ask yourself these questions?
  1. Is my past experience really relevant for today’s decision?
  2. Have things changed enough that the rules of the past no longer apply?
  3. Do I have a hidden bias? Does my personal situation change depending upon how I decide?
  4. Is my gut based on true insight or desperation and panic?

Actions you can take:
  1. Have some confidants outside the industry that you can bounce ideas off of.
  2. Spend more time out in the field talking to customers and seeing how the world works out on the front lines where your business interacts with the marketplace.

3. Look for the Story Behind the Facts
An individual fact is like an individual word. It can only tell you so much by itself. However, if you can string a bunch of words together into a story, then you really have something—insight.

All of that intuition you have has been strung together into a wondrous story of how the world works. The problem occurs when the new facts don’t fit into your story of how things work.

The problem may be that the facts have been distorted (as mentioned earlier). In that case, it may make sense to stick with the story in your gut.

However, times may have changed and your story may no longer fit how the world of today (or tomorrow) works. It may be time for a new story of how the world works.

So, when looking at facts which don’t conform with your story, ask yourself these questions:
  1. Is there sufficient proof that times have changed enough to make old assumptions irrelevant?
  2. Do the new facts string together to make a coherent and believable alternate story more in tune with the times? (or is there no story found within the facts).

Actions you can take:
  1. Try to build an alternative story that holds the new facts together and compare that story to your old story.
  2. Spend more time discussing what has changed in the environment and WHY.

I knew a company who held a story that the disgruntled customers who complain a lot are at high risk to leave because they are the ones most frustrated. They ran their business based on that story. However, facts showed that it was more often the quiet customers who left. This puzzled them until further analysis came up with a new story. They discovered that the noisy customers really wanted the relationship to work and were actively making noise in order to make the relationship better. The quiet ones had given up on the company and were ready to move on to the competition. Since the new story better fit the facts, they adopted the new story and ran their business accordingly.

Many times, decision makers are faced with facts that disagree with their gut. Rather than always going with the gut or always going with the facts, do some further investigation. Check to see if the fact-presenter has a biased agenda. Check to see if your intuition is relevant to the situation at hand. Check to see if the facts tell a better story than the story you already cling to. Based on this further analysis you can determine when to go with the guts and when to go with the facts.

In the case of the store remodel research mentioned earlier, the CEO had a story in his head that if you make a store better, customers will like you more and reward you with more sales. In most cases this is true. And that is why he stuck with his gut and ignored the facts. But times had changed and this store concept was becoming irrelevant. This created the need for a new story: When you make an irrelevant store nicer, you don’t make it relevant. You just have a prettier irrelevant store. This new story fit the facts. Today, this retailer no longer exists because of its irrelevance.