Strategic Planning Analogy #577: What do you March To?

THE STORY

John Philip Sousa (1854-1932) was considered to be the best composer and conductor of American marches who ever lived. His nickname was the “American March King.”

When I was in college, I heard a story about a time when Sousa had visited my college. He supposedly told the heads of the college that he thought our college fight song was one of the best marches he had ever heard. That made me feel proud.

However, now that I am older, I have heard many additional stories about Sousa. As it turns out, John Philip Sousa visited a lot of colleges over his lifetime. And each college tells a similar story about how Sousa told them that their college fight song was one of the best he had ever heard.

Suddenly, Sousa’s stated opinion of my alma mater’s fight song seems a lot more meaningless.

THE ANALOGY
Strategists talk a lot about how companies should try to please their customer. But you hear far less about how customers often try to please the company…and this is a bad thing.  Sousa is a perfect example of this phenomenon.

Think of the college as being like a company and their fight song is their product. Sousa is the customer. In an attempt to try to please all of the “companies” Sousa tells them all that he loves their “product” (the fight song). So, in his attempt to please all of the “companies,” Sousa’s opinion of their “product” becomes worthless.

Customers in today’s world are often giving as worthless an opinion to companies as Sousa did to colleges—all in an attempt to please (not offend) the company. This desire to be nice and no-offensive results in consumer opinions which are as worthless as Sousa’s.

Many companies today use customer opinion surveys as a Key Performance indicator (KPI) to judge their strategic success. Unfortunately, there is often a Sousa-like bias in the customer to please the company and give opinions which turn out to be meaningless. KPIs with meaningless data can be very dangerous.

THE PRINCIPLE
The principle here is that even though it is important to please the customer, don’t judge your success by asking customers if they were pleased. There is too much bias in the desire of many customers to please companies, making answers to those types of questions worthless.

One example which comes to mind are the quick auto oil change companies. After you get your car’s oil changed, they send out a survey to ask you if you were pleased with the service. This sounds reasonable until one digs deeper.

As it turns out, many of the mechanics will tell their customers about the survey they are about to receive. Then the mechanic tells them that if they rate him with anything lower than a perfect score, the mechanic will get no credit towards his performance bonus. Many customers don’t want to keep their mechanic from getting a bonus and besides, who wants to return to a mechanic who is upset at them for giving him a low score? You want your mechanic to like you. So all of the sudden, almost all the mechanics are getting superior grades (the Sousa phenomenon—worthless information).

To remedy the situation, on a recent oil change survey I saw a new question asking if the mechanic told you in advance how your ranking would affect him. I guess that was put in there to “weed out” some of the bias. Unfortunately, just putting that question in the survey creates more of that same bias. Who wants to get their mechanic in trouble for talking about the scores?

Preference is Better than Opinion

One way to get around opinion bias is to stop asking people’s opinion about your product. For example, you could instead ask about preferences. Using our analogy, that would be like instead of asking Sousa about his opinion of your fight song, you would ask him to rank order the top 25 fight songs from favorite to least favorite. Sousa may still like them all, but at least now you will know which ones he likes more.

Knowing customer preference (compared to numerous options) is more important than opinion about a single product, because we don’t always buy what we like, but are more likely to buy what we prefer.

I might like nearly all cars, but I don’t buy nearly all cars. I am more likely to buy the car I prefer. Therefore preference among choices is a better indicator of future success than mere opinion on a single item.

Behavior is Better than Preference

But even here biases can creep in to distort the results. In a desire to please the company, I might rank it higher in preference than I should. Therefore, an even better question is to ask about past behavior. For example, I could have asked Sousa how many times he listened to each of the college fight songs in the past two years. Past behavior is less prone to bias. Looking at what Sousa actually listens to is probably a better indicator of what he actually likes than asking his opinion.

I would have far more confidence in a KPI measuring behavior than one that measures opinion or preference.

SUMMARY
KPIs are a key part of strategy. Choosing a KPI that gives inaccurate or distorted information can be very dangerous. KPIs based on asking customers if they like you is one such dangerous KPI. It is better to ask for preferences against competition. Better yet, just ask about past behavior.

FINAL THOUGHTS
This problem is even worse if you are asking customers about new concepts or products for which they have to prior experience. As Steve Jobs of Apple used to say: “You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.”  And when commenting on what kind of consumer research Apple did for the iPad, Jobs said, “None. It is not the consumers’ job to know what they want.” In other words, KPIs on future concepts should steer clear of consumer opinion even more than others. When it came to the future, Jobs marched to the tune of the future, not to the obsolete marches still in the heads of the customers.

Link to Great Strategy Article

One of the best strategy articles I have seen in a long time just came out from McKinsey. The summary of the article is this.

1. Most companies are in the middle of the pack.
2. Nearly all the profit is made by the top quintile.
3. To get from the middle to the top, you need to make a combination of bold moves (much more dynamic than your peers) in the following areas:

• Programmatic M&A. You need a steady stream of deals every year, each amounting to no more than 30 percent of your market cap but adding over ten years to at least 30 percent of your market cap. 

• Dynamic reallocation of resources. Winning companies reallocate capital expenditures at a healthy clip, feeding the units that could produce a major move up the power curve while starving those unlikely to surge. 

• Strong capital expenditure. You meet the bar on this lever if you are among the top 20 percent in your industry in your ratio of capital spending to sales. That typically means spending 1.7 times the industry median. 

• Strength of productivity program. This means improving productivity at a rate sufficient to put you at least in the top 30 percent of your industry. 

• Improvements in differentiation. You need business-model innovation and pricing advantages that result in raising your gross margin to the top 30 percent in your industry. 

It sounds pretty basic, but that's what makes it so powerful. Abandon the status quo, make bold moves in five areas, and the odds of improved outcome go up dramatically.

You can find a copy of the article here.

Strategic Planning Analogy #576: How Strong is Your Foundation?

THE STORY

I think the scariest commercials on TV are sponsored by the companies that rebuild house foundations. They talk about how—if you neglect your house foundation—it will collapse and your house will be ruined. That sounds pretty scary to me.

THE ANALOGY
Businesses are like houses. They are built upon a foundation. The better that foundation, the stronger that business will be. Strategic planning is a tool to help build a strong foundation for your business.

But let’s take this deeper. Even the process of strategic planning is built upon a foundation. If the foundation behind your strategic planning is weak, it will become a weak tool in helping to build the foundation of your business. So if you want a strong business foundation, you first need a strong foundation in your strategy process.

THE PRINCIPLE
To me, the foundational assumption behind long range strategic planning is this:

“By planning, an organization can minimize its risk for failure by taking greater control over how its destiny will unfold.”

This is the foundation behind strong strategic processes. Focus your process on adhering to this foundation and the process will be strong. Focus on anything else and you may just end up wasting your time. And then, your organization’s foundation will also falter.

There are two key words in this foundation that I will focus on here: risk and control.

1) Risk

Nothing is certain in life except death and taxes. Everything else fluctuates in complex, interdependent ways. Strategies are built to be executed in such an uncertain, interconnected world. In fact, the mere exercising of your strategy will change the environment it is being executed in. 

Therefore, strategies cannot be structured in such a way as to guarantee success. There are too many variables. The best you can hope for is a reduction in the risk of failure.

As a result, a good strategic process will spend a disproportionate time focusing on those vulnerabilities where you are at greatest risk. These are chosen based on two criteria:

a) What situations will have the greatest impact on my chances for success?

b) What are the areas most uncertain in knowing how they will unfold?

If something has both high impact and high uncertainty, then it should be a key part of your strategic discussion. After all, a high impact, uncertain situation has the greatest potential for increasing your risk of failure.

Often times, these may be items that fall outside what is traditionally focused on in strategy. Yes, there is a place for mission statements, values, core competencies, goal-setting, metrics, and the like. But if you don’t spend enough time addressing the high risk issues, the other activities will not save you. You will be blindsided by a future that surprises you and you are unprepared for.

That is why scenario planning and contingency planning can be such valuable strategy tools. Scenario planning can help you discover the risky areas to focus on and contingency planning can help you prepare your responses to these risks so that you can minimize any negative impact.

This leads to a second aspect of risk. Because the environment is constantly changing, you cannot address all of your risks in a single, one-time strategy document. The world is dynamic, so the strategy process must be dynamic as well.

Notice that I keep using the word strategy PROCESS. Strategic planning should not be seen as a single annual event, but as an ongoing process which happens whenever there are decisions to be made. If you want to increase your likelihood for success, you need a strategic approach that adapts to the changes around you and helps you make the everyday choices that reduce the risk of failure.

This does not mean that your basic strategy will keep changing every day. A strategy with no lasting impact is worthless. But you may need to switch to different (well thought out in advance) contingencies as the future reveals itself.

As soon as you realize that strategic planning is about minimizing risk rather than about creating a perfect plan, you will see the folly in many strategic processes that spend way too much time trying to craft “perfection.” “Direction” is more important than “Precision” when it comes to planning. If I know my desired endpoint (i.e., direction), I will know what to do when all the changes occur: adapt so that my endpoint is still in front of me. However, if I only have a detailed roadmap as my plan with clear steps on what to do (i.e., precision), my organization can quickly become lost if the future blows up one of my steps.

Don’t waste time trying to create the perfect planning document. Instead, use that time to create the right general strategic framework (which minimizes my risk of failure).

2) Control

The second key word is “control.” Even though one cannot gain full control over the future, it is possible to increase one’s control over the future through planning. As Peter Drucker once said “The best way to predict the future is to create the future.” In other words, the more control you have over how the future is created, the less uncertainty and risk there is in the future. Therefore, one of the most important parts of good strategic planning is planning how to increase your control over how the future is created.

One thing I know for sure is that if your organization is not focused on increasing control, it will lose control to someone else who is  focused on increasing control (on creating a future that is detrimental to your organization).

This really gets down to the issue of power. The more power you have, the more control you have. And if you have both power and control, you can create strategies with less risk of failure.

Power is a relative term. To say one has power means that you have a greater ability to control the future than others who are also trying to influence how the future is created. Therefore, an analysis of power is very external in its orientation. It requires a deep understanding of all the players who can impact how the future unfolds. They may be current or future competitors, legislators, influential consumer groups, or whatever. Don’t limit your thinking here.

Your task is to figure out how to maintain your current power within this environment and increase it over time. This can include topics such as size/scale, public relations, lobbying, alliances/joint ventures, the setting of international standards, control of patents, branding, acquisitions, speed to market, and so on. You need to convince the world to march to your beat and heed to your rules (the ones which give you the advantage). Are these issues/topics part of your strategic agenda?

This idea of building strategies which increase control was a key point of focus in my previous blog, seen here.

This is one of the key advantages of the Blue Ocean strategy. If you focus on building a strategy in a place where there aren’t any rules yet, you have a better shot of gaining control over how those rules are written. There is often a better shot at creating the future if you go to a place where there is not an entrenched competitor who already has control (provided you enter the blue ocean with power).

How much of your strategic process is focused on internal issues versus trying to gain control of the eternal environment? My guess is that your process probably needs to increase the time spent on gaining external control.

SUMMARY
One’s foundational philosophy behind strategic planning will determine the type of planning process you adopt. I believe that the foundational philosophy that creates the best strategic planning process is this:

“By planning, an organization can minimize its risk for failure by taking greater control over how its destiny will unfold.”

This foundation will lead to a greater focus on the external issues of minimizing risk and controlling power. And that has the greatest return on your strategic efforts.

FINAL THOUGHTS
Some say that planning is no longer valuable because the world is changing too quickly. Well, if your strategic process is focused on the wrong foundation, that statement is true. However, if your strategic foundation is focused on minimizing risk, increasing control, and long-term destiny, then it is more important than ever.