Tuesday, August 26, 2014

Strategic Planning Analogy #535: Only the Experienced Need Apply?

Of all the Help Wanted ads out there, I think the most inconsistent ones come from the advertising industry. They wax on about how they want a diverse workforce. They say that creative minds can come from any background and that they want to find all that diversity of creativity in order to serve their clients. Therefore, they claim to be open to looking at people from all walks of life to fill their job openings.

However, at the bottom of the advertising agency help wanted ads they always say that only people with 6 years or longer experience in an ad agency should apply for the job. Some say you need at least 10 years of ad agency experience.

How can you hire a diverse group of creative people from all walks of life if you only look in one place (inside other ad agencies)?

I pointed this inconsistency out to an ad agent executive who was hiring people, and her response was, “Yeah, we tend to do that.”

She didn’t say it was wrong, or a mistake, or apologize for it. She only admitted the hypocrisy was true.

It makes you wonder how an industry so full of professional advertising copywriters could write such bad Help Wanted ads.

I understand that there are some benefits to hiring people who already have experience within that industry. But there are also some drawbacks. This is especially true if the key criterion for success is diversity in creative thought.

If you keep drawing your talent out the same pool of candidates, who are trained in doing things the same way, you are never going to get diversity. It’s like inbreeding. That leads to nothing but disease.

And if everyone is creative in exactly the same way, is that truly creativity or is it just repetition of the way things have always been done in the past?

I think a similar dilemma can occur in strategic planning. Great strategic planners are skilled in strategic thinking. This is a skill somewhat akin to creativity. It is a particular way of approaching problems that really isn’t related to a particular industry. Strategic thinkers can come from all sorts of diverse backgrounds.

Yet, when you look at Help Wanted ads for strategic planners, they almost always put a high premium on finding people who spent a large part of their career within the industry of the hiring company. Just because I spent a long period of time in an industry does not mean that I can think strategically about that industry.

Strategic thinking is either a skill that you have or a skill you do not have. If you have it, then you can help a business with its strategy, pretty much no matter what industry it is in or where your background is. Conversely, if you don’t have the skill, then you cannot help the business do strategy, even if you have decades of experience in that industry.

So why do so many firms look for strategists within the industry pool rather than the strategic thinking pool?

The principle here is that if the critical success factor in strategic planners is strategic thinking, then hiring companies should put a higher priority on finding strategic thinkers then on finding people who know their industry.

Yes, I know…everyone will tell you that their industry is different. It has all sorts of quirks and idiosyncrasies, so you need to hire someone familiar with all of that.

Well, I’m here to tell you that it is a lot easier for a person gifted in strategic thinking to figure out your industry than it is for an industry veteran to learn strategic thinking if they are not naturally gifted in it. So go with best thinkers, regardless of their industry, because they can usually pick up the industry part pretty quickly once they are hired.

It reminds me of an old saying in the retail industry: “It’s better to hire someone naturally gifted in customer service and teach them retailing than to hire a retail veteran who doesn’t get customer service.” The idea is similar. If you get people with the right natural skills for success, you can teach them the industry. But if the natural skills are missing, then industry knowledge isn’t very useful.

Change Agents
I think this principal is especially true for strategic planners because of their common role as change agents. It often falls to the strategic planner the responsibility of figuring out how to change a business, so that it no longer continues the status quo.

This change can take many forms:

  1. Diversification or transformation from a declining industry to a growth industry.
  2. Reinventing the business model to be more in tune with a changing environment.
  3. Looking for ways to positively differentiate one’s business from the competition by doing something different than what everyone else is doing.
  4. Looking for competitive “white spaces” or “blue oceans”, i.e., new places where industries have not previously operated.
In all these cases, intimacy with the status quo is not of much use, because success is created by leaving the status quo to move in a new direction. If fact, too much experience in the status quo might blind you to all the new possibilities. Spending too much time perfecting one way of doing things may make it harder to think of other ways to do it.

By contrast, hiring a strategic thinker with a more diverse background may be better able to envision new ways to break away from the status quo. Because they are not bound by conventional industry wisdom, they are freer to envision better possibilities for change.

The Innovator’s Dilemma
In The Innovator’s Dilemma, Clayton Christensen talks about how most industries are revolutionized by those outside the industry rather than those on the inside. Those currently in the industry tend to focus on how to do the status quo better. Those from outside the industry look for radical new ways to better serve the customer. The outsiders then become the agents of change.

In the transformation from analog businesses to digital, it is the rare exception of a company that successfully maintained its leadership both before and after the transformation. Instead, the typical path was that the incumbent was replaced by an outsider.

The leaders in travel agencies were replaced by outsiders like Orbitz and Expedia. Kodak was replaced in imaging by outside firms like Apple and Instagram. Status quo brick and mortar retailers are losing out to outsiders like Amazon. One of the rare exceptions would be Staples, who is transferring its leadership from one space to the other. The rarity of exceptions tends to prove the case.

Given the preponderance of evidence that change tends to originate on the outside, why would you want to hire a change agent (strategist) whose majority of experience is from the inside? Looking outside seems to make sense.

When hiring a strategic planner, there is often a bias to hire someone with industry experience. This can be a mistake for three reasons. First, strategic thinking for a strategist is a more critical skill than industry knowledge. Therefore, hire for strategic thinking and then teach them the industry.

Second, strategic planners are often the agents of change. Experience in the past is not very relevant when looking for ways to reinvent for the future. In fact, it may be a hindrance.

Third, history shows us that most revolutionary change comes from industry outsiders rather than insiders. Therefore, it can make sense to bring some of those outsiders into your company, so that you can better adapt to revolutionary change.

You probably don’t want an entire company to be filled with outsiders, but if there is any place where outsider thinking is beneficial, I would think it would be in strategic planning. Therefore, be careful of what you ask for in your Help Wanted ad. You may get what you ask for rather than what you really need.

Wednesday, August 13, 2014

Strategic Planning Analogy #534: You’re Older Than You Feel

According to a study reported in the Psychonomic Bulletin and Review in 2006, adults tend to feel younger than their chronological age. Beginning around age 25, people start reporting a sense that they don’t feel as old as they really are.

The gap between their subjective and chronological age continually increases between age 25 and 40. By the time adults are 40, most adults report feeling about 20% younger than they really are. This 20% gap tends to remain for most of the remainder of their years.

So if we are “only as old as we feel,” then I guess we’re not that old.

Perception is a powerful thing. If we feel younger than we actually are, then we will act younger than perhaps we should. This could lead to foolish behavior and get us a trip to the emergency room at the hospital.

I dare say that the same phenomenon can occur in the business world. I think a lot of executives feel that their company (or business model) is not as old as it really is.

There’s this sense that maturity doesn’t apply to their business. They feel like their industry is still young and growing and that their company is still a growing youngster, too.

But let’s face it. Businesses and industries have life cycles, just like humans. They may start out young and growing, but eventually they reach maturity and then decline. You may not always feel like your company is progressing through these life stages, but it is. And it is probably further along on this path than you think.

The problem is when you manage your company based on the way you feel about its age rather than what its age really is. Each stage of a business’ life requires a different type of strategy. If your company has reached maturity and you still feel like you are in your growth phase, you will be using the wrong strategy. And just as adults when not acting their chronological age can do foolish things that get them into the hospital, managers who do not manage to their business’ actual life stage age can get their companies into serious difficulties.

The principle here is that although the growth phase of an industry may appear to be the most fun and most desirable, the truth of the matter is that in most mature economies, most of the industries are mature as well. Therefore, most of us should be focusing on mature industry strategies.

IBIS World Data
This was really brought home to me when I was looking at a report produced by IBIS World. IBIS World produces reports on a wide variety of industries. To give a perspective, each report shows where that industry fits on the industry life cycle. They do this with a comparative scatter plot showing where about 700 industries fit on the life cycle path. I’ve put a sample of one of these charts in this blog.

As you can see in this chart, the largest number of industry dots are in the mature phase. And although the later growth phase gets the next largest number of dots, the decline phase is not all that far behind. Early growth has the fewest number of dots.

This chart shows just how old most industries are. Mature and decline together dominate the landscape.

The Disconnect
Yet when one looks at business literature and strategic discussions, it seems that the topic of growth dominates. There appears to be a disconnect between the reality of maturity and the desire to act as if maturity has not yet occurred.  Just as our society is preoccupied with youth culture, our businesses are preoccupied with younger business stages.

We may feel younger, but the disconnect between that perception and reality can get us in trouble. Talking like we are in the growth phase or acting like we are in the growth phase does not alter the reality that for many of you, you are already in the mature or declining phase. And by not acting your age, you could be doing your business a disservice.

The Downside of Not Acting Your Age
Here is a list of the major negative consequences from managing to growth when you should be managing for maturity.

1.     Overinvesting in the industry: Because you over-estimate the growth and life expectancy of your industry, you tend to value investment opportunities within the industry as higher than they really are.  This leads to paying too much for bad deals. Hence, you destroy value by overinvesting in areas where the returns will never cover the cost of capital.

2.     Working too hard to grow the top line: If you think there’s still a lot of growth in the industry, then you will have high expectations for what your own growth should be within that industry. However, in maturity, those high growth expectations may be quite unrealistic. Therefore, the only way to hit those high sales goals is to start a price war rampage in order to steal sales from the other mature competitors. This destroys the profit margin for you and the entire industry. If competitors follow your downward pricing, you may not end up with any additional business—just lower margins. But even if competition does not follow you in this downward spiral and you get some of their sales, you may still end up as less profitable because of how you destroyed the margins in order to get the business.

3.     Under-investing in future business models:  If you think there is still a lot of growth and vitality in the current business, then you will see little incentive to investigate or invest in the next big thing that will make your status quo obsolete. The problem is that your business model’s obsolescence is probably a lot closer than you think. By ignoring that, you will be unprepared for when that day comes. You will end up like Kodak, who saw their entire world fall apart because they delayed making the transition from analog film to digital imaging until it was too late. For more on Kodak, look here.

So, as you can see, acting as if your business is younger than it really is is not a small issue. At best, it will cause you to destroy value. At worst it will cause you to destroy the company.

A Better Approach
To avoid these negative consequences, consider the following:

1.     Continually monitor your life cycle using objective tools: Don’t rely on your feelings. They can deceive you. Use objective tools to monitor your path through the business life cycles.

2.     Act Your Age: If you are in maturity, then use the appropriate strategies for maturity such as:

a.      Moving the focus from top-line growth to process efficiency and cost control.
b.     Focus on reaping the maximum return from prior industry investments rather than creating new ones.
c.      Consider shifting emphasis to pockets where maturity is further away, such as emerging nations.
d.     Examine the relative merits of consolidating the industry versus selling out to someone else who wants to consolidate the industry.
e.      Invest in the next big thing that will replace the status quo.

I love what I see in the packaged food industry. P&G realized that its corporate culture and business model were optimized for growth industries. P&G also realized that its food products portfolio had moved on to maturity. Therefore, it sold its mature food businesses to other companies, like Pinnacle Foods. It was a win-win. It freed up money so that P&G could invest in growing industries like health and beauty. And, since Pinnacle Foods has a corporate culture designed to excel in mature businesses, the food businesses were under better management.

In fact, it worked so well that P&G is considering a more massive divestiture of brands.

The business world is a dynamic place, where new business models replace the old. As a result, businesses do not stay in the growth phase forever. Maturity and decline occur. Unfortunately, many business leaders think their business model is younger than it really is. This leads them to manage for growth when they should be managing for maturity. By using the wrong strategies (growth strategies instead of mature strategies), these leaders destroy value. The better move is to align your strategy with the reality of where your business model lies in its life cycle.

You can use this disconnect to your advantage. If you know that your business is in maturity or decline and someone else still thinks it is in its growth phase, you can sell your business to them for more than you think it is worth.