Friday, March 27, 2015

Strategic Planning Analogy #549: Toughest Investments to Make

It’s interesting to watch the debates between developers and preservationists. The developers say that if you invest a bunch of money to develop a wilderness area, you get a lot of measurable benefits:
·       Jobs
·       Economic Growth
·       New Tax Income
·       An Infrastructure that can lead to additional growth

The preservationists have a tougher sell. They say that if you spend a lot of money to preserve the wilderness, you only get what you already have—a wilderness. It’s hard to put a measurable return on an investment which returns nothing new. “What is to be gained by that?”, respond the developers. The only persuasive reply the preservationists have is that without investment in preservation, things (like trees and animals) will go away and possibly become extinct.

It can be tough for humans to mathematically compare the relative merit of using private money to create jobs and boost the economy (which both help humans) versus using public money to preserve a wilderness (which mostly benefits the animals under threat of extinction).

However, I suspect that if you asked the animals under threat of extinction, the decision wouldn’t be tough at all.

A large part of business strategy revolves around investment decisions. The idea is to use strategy to determine where the best investment opportunities lie for a particular company.

Many times, these decisions can get framed to look like the wilderness example. The choice is between investments that:

1.     Create great new development opportunities with great new measurable sources of economic return; or
2.     Don’t really create anything new but just “sort-of” preserve the status quo.

When the decision is framed that way, the capitalist mindset will typically lean quickly towards option #1, the investments with a lot of measurable new benefits. After all, isn’t investing for a big new return better than investing just to stay about the same?

Here’s the problem. Without preservation, there is extinction. And that extinction could be your entire business. And if your core business goes bankrupt, all those other investment opportunities tend to disappear as well.

Therefore, we often need to look at these wilderness decisions from the perspective of the animal under threat of extinction, because we may, in fact, be the one that goes extinct if preservation investments are not made.

The principle here is that incremental growth investments often rely on having a core foundational business for these incremental investments to leverage. It can be called synergies or scale or brand power or industry insights or distribution capabilities or funding cash flows or a host of other things. The point is that without a strong foundation to provide these benefits, there is no strategic benefit to making the incremental growth investment.

If all you bring to the investment is money, then you’d better be able to out-invest the professional investment funds which do this for a living and are competing against you for that same opportunity. Good luck with that. Your money is no better than their money, so you bring no advantage.

On the other hand, strategy is about leveraging current strengths and assets. It’s about more than just bringing money to the table. It’s also about all the skills, knowledge, power and infrastructure you have to leverage. Strategy is the process of assessing all that you have to determining where that bundle of infrastructure can create the greatest advantage. This increases your likelihood of success, because now you bring far more to the investment than just money (which is all the same). You bring all that has made your core business uniquely prepared to excel over others in the new investment.

Therefore, it is critically important to invest a portion of your money into preserving these core attributes, even if those investments do not create any additional returns. Their value is not in adding something new, but preserving something old—avoiding extinction. That’s valuable, because if your competitive advantages go extinct, you are back to having nothing but money (if you are lucky). In reality, you may be left with nothing but debt. Now, none of those investments look good.  

Example #1: Sears
I will illustrate this principle with two examples from retailing, starting with Sears. When Eddie Lampert took over control of Sears, he saw his investment opportunities as being like the wilderness example. On one side, he saw this wonderful new opportunity in bringing Sears into the forefront of internet commerce. There were lots of positive new returns on his spreadsheets by diversifying into internet commerce.

On the other side were investments in preserving the Sears retail store foundation. When he ran those investments through the spreadsheets, Lampert didn’t see any additional returns. Lampert reasoned that it was foolish to invest in a place where there were no new returns when he had other incremental opportunities where there was the potential for large new returns. Therefore, Lampert essentially stopped investing in the foundation and poured the money into internet ventures.

The problem was that by not investing in preserving the Sears core, the core was starting to go extinct. The stores became ugly and undesirable. The merchandising suffered. And worst of all, the image of the brand suffered. Customers were abandoning Sears and all that it stood for.

As the Sears brand suffered, its connection to the internet ventures created a negative influence rather than a positive influence. The connection made people less likely to embrace the internet venture. In addition, when the core deteriorated to the point that it became a major cash flow user rather than a cash flow provider, there was no longer any money to invest in the new venture.

By letting the core approach extinction, Lampert not only destroyed the core, but lost any benefits the core could bring to the success of the internet ventures. Without the synergies, his internet ventures had no advantage in the marketplace. In fact, now they had the disadvantages of being associated with a “loser” brand and being stuck in a place that no longer had any cash flow to fund it. Now, the situation is so dire that manufacturers are reluctant to ship any product to Sears. The end of the entire company may be near.

By contrast, if Lampert had diverted some of that investment money into preservation, he might not have seen a lot of new returns in the core, but the core would have been preserved to the point where it could be an asset to internet venture and given that strategy more of a competitive edge.

Example #2: Target
The technology and equipment necessary to convert from magnetic stripe credit cards to chip-embedded credit cards has been around for years. It has been up and functioning in Europe for years. But retailers and banks in the US failed to make the investments in the chip technology, even though it provided far superior security.

Why? When they ran the numbers through the spreadsheets it didn’t look good. A lot of investment money was required to make the switch, but there really weren’t a lot incremental returns. They didn’t think that converting to chip credit cards would create any meaningful additional sales. No new benefits were seen that would justify the expense. Therefore the investments weren’t made.

What they failed to take into account was that without the investment in chip credit cards, their credit operations were at high risk of being hacked by criminals. Yes, there may not have been any new benefits from the investment, but without the investment, the core was at risk.

Eventually that day of risk came. The hackers started attacking the old style credit cards. Target was probably the retailer which suffered the most from the hacking. Not only did Target immediately suffer huge financial losses, they suffered losses to the brand image. Customers were more fearful of shopping at Target. They were less likely to want to pay any extra money for the privilege of shopping there.

These losses to the strength of the core reduced Target’s longstanding competitive advantages. So now, Target has been faced with abandoning Canada (at great loss) and laying off thousands of employees and struggling to find a new position of strength in the US marketplace. Of course, Target’s current problems were caused by more than just the credit card hacking. But, by not investing in this core, they certainly made the problem worse than it would have been, both in terms of cash flow, management distraction, and image.

Without strong competitive advantages, a company brings nothing to an investment except money. And most of the time, just bringing money is not enough, because others can also bring money plus their own set of competitive advantages. Therefore, it is important to continue to make investments which preserve and strengthen those core competitive advantages, even if the investments themselves create no direct additional return. For without the preservation of these advantages, the entire company is put at risk of extinction.

Investments in preservation can be the toughest investments to make. They are extremely difficult to justify on a stand-alone basis via spreadsheet analysis. Yet, without them, the entire foundation of the business may crumble. You have to continually remind yourself that these investments may not create something new, but they can keep you from extinction—and that is worth a lot.

Thursday, March 19, 2015

Strategic Planning Analogy #548: Strategy with Claws

I have two cats. One cat has none of its claws. The other cat has all of its claws. If you want to pick up and move the cat with no claws, it is relatively easy. You just pick her up.

If you want to pick up the cat with all of its claws, it is much more difficult. Immediately those claws come out and grab onto the spot where he is lying. This makes it almost impossible to pry him away from that surface. First you pry one paw away. Then, when you start on the second paw, the claws on the first paw reattach themselves. It becomes a major struggle.

Think of your product as being like those cats. The surface they are on is your customer. The one trying to take the cat away is your competition.

The easiest one of your products for your competitor to take away from your customer is the one with no claws. They can just pick up that product, toss it away, and substitute their own product.

However, for the product with claws, it is much more difficult for the competition to displace you. Those claws dig into the customer. They hold on tight. Normal competitive efforts are not enough to dislodge those claws. You get to keep that customer. So, the moral of the story is that we want to have products with claws.

Although cats are naturally born with claws, business offerings are not. You need to create strategies that put claws on your product. Unless you proactively design claws into your business model, you will be far more vulnerable to competitive attacks and far more likely to fail.

The principle here is that your product must not only satisfy your customer, but do so in a way that makes it hard for competition replace you.

Customer Satisfaction Not Enough
Customer satisfaction is a good thing, but usually not good enough to ensure customer retention. The competition also wants to satisfy your customer. In fact, your customers probably have many options, all of which are reasonably good at satisfying their needs. So, just satisfying your customer’s needs is not good enough to ensure that you will keep them as a customer. Others can do the same. All they may have to do is just trim their price a little and, like picking up a cat with no claws, toss you aside.

I suppose you could get into a price war to get the customer back, but that leads to an endless cycle which leaves nobody with any profits. Yes, the customer will be highly satisfied with the ridiculously low prices. But you will go bankrupt trying to serve them at that price. So satisfaction alone is not the answer.

Designing Claws
A better approach is to design claws into your product. Claws would be anything that makes it harder for the customer to switch to a competitor’s offering. An example of “No Claws” would be a relatively generic product indistinguishable from the competition (similar features, similar performance, similar delivery, etc.). These would be things where—if you took off the name—you wouldn’t be able to tell which brand it is. It’s hard to hold onto customers in that environment.

But here are some ideas which can even put claws into relatively generic offerings:

  1. Add Service: Products alone are more interchangeable than products plus service, because services can be more customized and personal. They can change a commodity into something special—unlike the competition. And if there is a service component, then there is often a people component. And it’s a lot easier to say good bye to a faceless product than to a service person who has become your friend. In an earlier blog, I talked about how even something like selling gravel can get claws if you add the right type of service.

  1. Add a Network Effect: It’s hard to switch away from businesses like Linkedin or Facebook, because you are not just leaving that business—you are leaving all the connections that business brings you. Someone else might have a superior customer interface or more features, but if they don’t have the connections to the network, then there is little reason to switch to them. It’s like a talent agent who has all the right connections within the entertainment industry. Why would you ever leave that to go with someone with fewer connections, even if they are a better negotiator or take a smaller fee? So work on the value of your connections. Make it so that when they leave you, they are also leaving a lot of others who are valuable to them.

  1. Strategic Pricing: Rather than getting into a self-defeating price war, use pricing to create claws at a higher margin. For example, volume discounts increase the downside of switching, because you lose the accumulated benefits of adding to your volume. It’s like the old punch card where if you buy 10, the 11th is free. You only get the big benefit if you stick around long enough to buy 10. By connecting increasing value to increasing volume, you add claws to your offering.

  1. Bundling: A similar strategy is bundling. Let’s say you sell photocopiers and you bundle the supplies into the sale of the equipment. By bundling, you can sell the photocopier very cheaply, because you know you will make it up on the rest of the bundle. And any competitor who wants to get you to switch on the supplies would have a hard time, because of a contractual bundling of supplies and equipment. You would almost have to get the company to switch equipment in order to get them to switch supplies, a tougher proposition. And if you can make your supplies non-standard, it is even harder to make a switch. Another benefit of bundling is that it is harder to make direct price comparisons on the individual parts, making it harder for someone to quote a lower price on any of the parts. The best situation is if you choose to bundle a mix of items where very few companies carry all the items in the bundle. That makes it harder for them to match your bundle, since they don’t control all the pieces.

  1. Integrated Systems: Henry Schein is a distributor of a wide variety of supplies to dentists. They also sell a propriety computer system for operating dentist offices. About 40% of dentists in the U.S. use this operating system to run their business. It’s hard to get these dentists to completely abandon Henry Schein, because then they would no longer be able to run their business. In a similar manner, some office supply companies and travel agencies integrate their computerized ordering system right into the customer’s operating system. That makes it really hard to get people to switch, because now you have to dismantle operating systems. Who wants to do that? (that’s a big claw)

  1. Deepen the Offering: It’s one thing to replace a vendor who does just one little thing for you. It’s another thing if that vendor is integral to your success because they do so much for your business. Consider Sysco, the foodservice supply company. They’ve deepened their offering to the point that they do almost everything except cook the food and wash the dishes. Besides food, Sysco offers things like: 
    1. Kitchen Supplies
    2. Dining Room Supplies
    3. Cleaning Supplies
    4. Business Management Tools
    5. Technology Solutions
    6. Dishes/Silverware/Glasses 
Switching away from that many things at once is extremely risky, so you are far more hesitant to change vendors.

  1. Auto Upgrading: One is most vulnerable to losing business when a customer finds themselves out-of-date with aging, inefficient equipment. A new vendor comes in with the latest shiny-new product with all the latest features and technologies and your customer’s jaw drops. They feel they’ve got to switch the get the latest wonder. You can stop this switching by having an automatic updating program. You automatically keep upgrading the customer to the latest thing. That way, they are never far enough behind that a competitor can lure them away by merely showing them a shiny new product.  
This is just a small sampling of ways to put claws in your offerings. Brainstorm on adding claws when dreaming up your strategy and business model. It will pay great dividends later.

Customer satisfaction strategies take you only so far in a world where all the competition are also trying to satisfy the customer. To keep your customers, you need to add claws to your offering—features that increase the downside risk for switching and/or increase the upside potential for staying. There are a wide variety ways to add claws to your strategy. Choose some.

Don’t automatically assume that claws will naturally occur for your product. If you want them, you have to design them into your business model from the start.

Saturday, March 14, 2015

Strategic Planning Analogy #547: Tasks or Goals

Earlier this week, I was working out at my exercise club. They have a sign at the club asking everyone to wipe down the exercise machines after using them. To aid in the task, they have a table with wipe-down cloths and bottles of disinfectant spray.

A young gal was using a machine next to mine. When she finished using it, she took a cloth and just barely touched it to the machine. So I guess, technically, she “wiped the machine when finished.”

But she missed the point. The purpose of putting the sign and the cloths in the club was not to see if people would wipe, but to help prevent the spread of germs in the club. She accomplished the task, but completely missed the goal.

So, before using the machine after her, I gave it a more thorough wipe-down.

There is usually a purpose behind what we do. Depending on our purpose, we will do act differently. If your purpose for wiping down an exercise machine is just to say you did the task, then you will do a quick, half-hearted effort (like that girl). If your purpose for wiping down the exercise equipment is to prevent the spread of germs, then you will do a more thorough wipe-down (like me).

This applies to all the actions in our life. We can either be task-oriented in our purpose (I wiped down the machine) or goal-oriented in our purpose (I prevented the spread of disease).

For example, children may be told they have to brush their teeth, so they barely touch the brush to their teeth—just enough so they can tell their parent they did the task (the task oriented approach). They missed the goal of brushing one’s teeth—to prevent cavities and tooth decay. Had they been pursuing the goal, the brushing would have been more thorough.

Unfortunately, I see this same dichotomy in the business world. Some people approach strategic planning with a task-orientation—they see it as a series of tasks that have to get done. Other business people approach strategic planning with a goal-orientation—a desire to move a business to a more desirable position in the marketplace.

As one would expect, these two orientations tend to lead to different behaviors and outcomes. The task-oriented approach to strategy may result in pretty PowerPoint decks, but little more. Unless one has the larger goal in mind while doing strategy (i.e., business transformation), it will probably never happen.

We need to go beyond just “touching” our business machine with a strategy “cloth” to really wiping it down so that we can keep the company healthy and strong.

The principle here is that unless you focus on the goal when doing the task, doing the task won’t get you to the goal. That sounds simple enough, but it can be so easy to get off track.

For example, there are a lot of tasks associated with strategic planning. Some of these include:

  1. Environmental Analysis
  2. Internal Analysis
  3. Competitive Analysis
  4. Business Missions/Visions
  5. Goal-setting
  6. Opportunity Screening
  7. Creating long term financial statements
  8. Determining KPIs (Key Performance Indicators)
  9. Creating Action Plans
  10. Communicating the Strategy to the Organization

None of these tasks are bad per se, if you are using them to proactively transform the company. But if they are only seen as a list of unrelated tasks that need to get done, then you will have an organization full of people like that girl I saw at the exercise club. They will put in the minimal effort to say the task got done and miss the entire reason for doing the task in the first place.

There is no magic to just doing a few strategy tasks. You won’t suddenly have a transformed company just because you “got a few strategy tasks done.” It’s no different than at the exercise club. There is no magic to touching an exercise machine and suddenly having it disinfected. The tasks are merely tools to help people think and act more strategically. If the strategic thinking and acting doesn’t accompany the tasks, then you are wasting your time.

1. Focusing on the Goal During Set-Up
Therefore, when it is time to undertake a new planning cycle, make sure everyone is focused on the goal rather than the tasks. This includes both the professional strategists and the rest of the company.

It’s easy for a professional strategist to get caught up in task-orientation on strategy. After all, strategy is their job…it’s what they get paid for, right? The strategy tasks are listed in their job description. So to do their job, they have to do the tasks, right? If they don’t do the tasks well they will get a bad annual review.

That’s ineffective thinking. It leads to perfecting the activity rather than improving the company. The real role of a strategist is to be a catalyst in moving the company to a better position. All those tasks are merely tools to help make it happen.

Here’s my way of looking at all those tasks. I ask myself, “How thorough and complete do all those tasks need to get done?” My answer, “Only to the point where we know where to direct the company and how to get there. Anything beyond that is a waste of time.”

So instill in your planning staff the notion that their primary job is to improve the company, not perfect the tasks of strategy.

This also applies to the rest of the company which participates in the planning cycle. Since running the strategy cycle is not part of their job description, it is easy for them to write it off as just a silly task they have to do which gets in the way of their “real” job.

And you know what? If all they do is halfheartedly participate in the task like that girl at the club, they’re right. It’s a silly waste of time.

You need them to see that the activities are a step to transforming the company. And that can have a big impact on their “real” job. In fact, if the strategy is done wrong, the company may suffer to the point that they no longer have a job. And if the strategy is done right, greater job opportunities may present themselves.

By personalizing it in this way, participation will go up and the company will be better off.

2. Focusing on the Goal During Hand-Off
The second place where goal-orientation is important is at the point of hand-off—when the strategy development ends and the strategy implementation begins.

If the implementation tasks are seen as just a bunch of committees or task forces assigned to do something, then those groups may do the something they were tasked to do. However, it probably won’t transform the company. After the committees and task forces are disbanded, the status quo will tend to return. No major transformation will have occurred, because nobody was really trying to transform. They were just trying to get the assignment done so they could go back to their “real” job.

Therefore, we need to help these committees and task forces see that their real role is to transform the company. Their real task isn’t completed until the transformation takes root. Stopping before that is not an option.

And we need to empower these groups so that they have the ability to fight the forces trying to maintain the status quo. Without power, the tasks lose their ability to transform.

Strategists can help with the hand-off in two ways. First, they can help set up the hand-off so those participating in implementation understand the greater goal and are empowered to make it happen. Second, strategists can act as watchdogs to ensure that these groups stay on track and continue through to the completion of the goal.

Strategy isn’t to be done just because it involves tasks that are interesting tasks to do. It is to be done in order to find a better direction for the company and a way to make this transformation come to life. If this larger purpose is not consistently put in the forefront of the minds of those working on the process, the process can denigrate into just doing a bunch of unrelated tasks. Then they become worthless, even if well done, because they did not lead to company transformation. Focus on the goal, not the task.

They should change the wording on the sign at the exercise club. Instead of asking people to “wipe down the equipment” (a task) they should ask people to “leave the machine in a sanitary condition for the next user” (a goal).