Friday, October 14, 2016

Strategic Planning Analogy #569: Strategic Multivitamins

My most recent blood test showed I was low in vitamin D, so I went to a healthy food store to look for vitamin D supplements. The man at the store said that to get the maximum benefits of vitamin D, you need a supplement that also includes vitamin K. Others say that vitamin D needs to be paired with calcium, because calcium is absorbed better when paired with vitamin D.

There are lots of other pairings in vitamins and supplements. Folate needs to be taken with B12 if you want it to work properly. Potassium needs to be paired with sodium to keep things in balance in your body. The list of pairings go on and on.

As a result, I did not leave the store with a vitamin D supplement. Instead, I got a multivitamin supplement.

Many of the tools used in strategic planning, like KPIs and tactical outcome targets, are a lot like vitamins. They help make a business stronger and healthier. Regular emphasis on them keeps a business from feasting on the bad “junk food” which leads to poor performance.

The problem with that these strategic vitamins is that we tend to focus on only one or two at a time. When that happens, a company can get out of balance. Just as some vitamins need to be paired with other vitamins to work most effectively, most KPIs and targets work most effectively when paired with other KPIs/targets. The singular focus can get a company out of balance and turn a good tool into a business health nightmare.

Therefore, companies need to apply strategic multivitamins, so that everything stays in balance.  

Yes, it’s true that one of the key benefits of strategic planning is the advantage of getting a company more focused.  However, there are dangers in getting TOO focused.  Vitamin A is important for health, but if all you take is vitamin A, you will suffer in two ways:      
  •  You will starve yourself of other vital vitamins;
  •   You will get vitamin A poisoning.
Similarly, if you narrowly focus a company on achieving just one thing, you can starve it of other essentials and turn that one good thing into a poison for your company. KPIs and targets need to be balanced and paired.

Although Warren Buffett did not use the vitamin analogy, he said something very similar at the latest annual meeting for Berkshire Hathaway. Buffet said that profits need to be paired with growth. If you only focus on profits, Buffet says that you will take too much money out of the company today and starve it of future opportunities. For a healthy business, you need to pair the two (profits and growth). That way, a company is healthy both today and tomorrow.

Pairing Efficiencies With Investments
A similar pairing would be efficiency and investment. A focus on efficiency is a good thing. It helps root out waste. It makes your efforts more productive.

However, if too much effort is placed on efficiency—at the expense of everything else—then problems occur. It moves beyond rooting out waste and starts eliminating or delaying every expense possible in the organization. Maintenance is postponed and investments are eliminated. This can result in increased injuries and product failures. The Samsung smartphone disaster may have been caused by eliminating too many costs associated with testing in the mistaken guise of getting to market more efficiently.

The irony is that by eliminating virtually all expenses today, we just create problems later which cost even more in the future...or even cause business failure. That would be efficiency poisoning.

That’s why efficiency needs to be paired with investments. We can’t simply cut our way to prosperity. We also need to invest in our strategic future. We need to invest in maintenance, equipment, safety, new lines of business, advertising/promotions, etc. A healthy future requires balanced nutrition from both efficiency and investments.

Pairing Internal With Extermal
Another important strategic pairing would be a combined focus on both internal and external factors. It is easy to fall into the trap of getting too focused only on the internal. After all, the internal is far more under our own control. It’s easier to achieve our targets in places where we have more control. And don’t our executives want achievable goals?

As a result, we can put on blinders and only worry about perfecting our internal business model. But what’s wrong with perfecting our business model you may ask? Well, if you do this while ignoring external factors, you can miss shifts in the customers or in what competition is doing. Customers may no longer want what your model offers or competitors may have come up with a superior business model.

Consequently, an internal-only focus can lead to perfecting an obsolete business model. No matter how grandly you’ve perfected the obsolete, it is still obsolete and worthless.

Just look at Blockbuster. It was trying to perfect the traditional movie rental business model. Unfortunately customers were moving to better business models offered by new competitors (Netflix and Redbox). Now Blockbuster as we knew it is gone.

And what about the current disaster at Wells Fargo? Wells Fargo has been so internally preoccupied with a focus on its culture of pushing its model of multiple accounts to the extreme that it lead to corruption and a public relations disaster. Had they balanced this internal focus with an external focus, they would have understood better how the internal tendencies were hurting their external relationships with their customers. That would have led to a stronger long-term strategy.

Balanced Scorecard
This is where tools like the Balanced Scorecard come in. Although I have never been the biggest fan of the particulars surrounding the balanced scorecard, I do appreciate its intended goal.

The goal of the balanced scorecard is to create a more balance blend of KPIs/targets. It takes into account a lot of pairings, like internal and external, efficiencies and investment, profits and growth. It forces a company to stay away from being too narrow in its focus. You can look at the balanced scorecard as being a company’s multivitamin.

Just as there are many types of multivitamins, there are many ways to achieve balance in the KPIs and targets you focus on. The important thing is to get on the multivitamin approach.

One of the benefits of strategic planning is getting a company focused on where it needs to be. And that’s a good thing. However, if we get too focused on the tactics we use to get there, we may never reach our intended destination.

Life is complex. To make it work properly, we need a balance of nutrients. In a similar fashion, the business world is complex. To make our business work properly, we need a balance of KPIs/targets. If we get these out of balance for too long, disaster is almost inevitable.

Examples of balance would be pairings like profits and growth, efficiency and investment, & internal and external.

When I bought my multivitamins, the label said I should consult my physician before taking the pills. Similarly, I believe companies should consult a strategist before taking a strategic multivitamin.