Planninga from Nanninga: A Strategic Planning Blog

Strategic Planning Analogy #434: Want More, Get Zero

2012-01-26T15:23:00.003-05:00

THE STORY
I was talking to an executive recruiter (also known as a “headhunter”) today. He says that he runs into a peculiar phenomenon when talking to many unemployed senior executives who are looking for a job.

The recruiter will ask these executives about what kind of financial compensation they want in their next position. Often, the answer goes something like this:

“At my last job, I made $250,000. I refuse to take anything less at my next job.”

Unfortunately, this unemployed executive is confronting some harsh realities. First, the great recession has changed how companies value certain skill-sets. His skill set isn’t valued as highly as it was prior to the great recession.

Second, the longer this executive remains unemployed, the larger is the perception that his skill-set is becoming outdated. By not being currently employed in this rapidly changing world, his skills may become obsolete.

Therefore, although he might see an offer of $200,000 for his skills, he will probably never see another offer of at least $250,000. So by refusing to take anything less than $250,000, he ends up with nothing. I don’t know about you, but even though $200,000 is less than $250,000, it is sure a lot more than nothing. In that situation, I’d take a $200,000 job if it were offered to me.

THE ANALOGY
It’s human nature to not want a reduction in our wages. We like to believe that our income should continue to rise each year until we retire. Unfortunately, harsh reality does not always make that possible. In fact, I read recently that it is normal in the US for a worker’s wages to peak when they are in their late 40s and plateau or decline thereafter (in real terms). If the worker refuses to take a pay cut, their only alternative may be no pay at all.

A similar situation can occur in business. The harsh reality of a new, disruptive technology can have the potential to render a company’s current business model obsolete. However, a company may stubbornly refuse to migrate to the new technology, because it provides less income than the prior technology. By refusing to accept the lower returns of the new technology, the company eventually ends up with no returns at all.

Take Kodak, for example. Back in 1975, Kodak claims to have invented the first digital camera. However, Kodak did not bring the product to market. Why? As it turns out, there is a lot less profitability in digital imaging than there is in film-based imaging. The profit loss from no longer selling film or developing equipment/services is far larger than the replacement profits from digital imaging. By refusing to accept a new business model because it was less profitable than the old one, Kodak ended up with neither and had to file for bankruptcy.

Or how about Ford? They invented the minivan, but did not bring it to market because they thought it would merely cannibalize their highly profitable station wagon business. Splitting the market between two vehicle types would be less profitable. Of course, Chrysler brought out the minivan because they did not have a large station wagon business. In the end, the station wagon business virtually disappeared, and Ford was never a major player in minivans. By refusing to accept less up front, Ford ended up with almost nothing (no station wagons and no meaningful share of minivans).

I personally experienced this problem at Best Buy. During the early days of the transformation of music from CDs to digital files, one of my jobs at Best Buy was to look for a way to exploit this transformation. I looked at the music and entertainment industry from all possible angles. I created countless scenarios and strategies. The problem was that every strategy I examined in the new music space was less profitable than what Best Buy was making in the old music CD world. This made Best Buy somewhat reluctant to make fast, bold moves into the new space.

Apple, however, was earning nothing in the old CD world. Therefore, everything in the new transformation would be additional profits for them. As a result, they were fast and bold with the iPod and iTunes. And Best Buy is becoming increasingly irrelevant in music.

The newspaper industry was hesitant to move fast and bold into digital news because it was so much less profitable than the analog newspapers. By not wanting to cannibalize the more profitable printed paper, the newspaper industry let others take the lead in the digital space. Now, most newspaper firms are struggling to stay afloat.

So businesses can fall into the same trap as that unemployed executive. By refusing to accept less, they can end up with practically nothing.

THE PRINCIPLE
So this is the strategic dilemma. What do you do if you realize that the next transformation in your industry will make your industry less profitable? How do you convince your stakeholders to make bold moves into the new space, when those bold moves appear to destroy more profits than they create? What is the right way to handle the transformation? How do you keep from being like the unemployed executive who refused to take less, which resulted in getting nothing?

Here are some principles to consider when confronted with this type of situation.

1) Make the Right Comparison
The unemployed executive in the story was making the wrong comparison. He was comparing new job offers to his prior job. Instead, he should have been comparing new job offers to his current unemployment. By comparing job offers to the old job, he was rejecting opportunities which were far better than the current unemployment.

The same is true in business. You cannot stop these business transformations. If nobody inside the industry wants to do it for fear of earning less, then someone from the outside will cause the transformation, because they have nothing from the old status quo to lose. Sony had no stake in film photography, so it rushed into digital photography. Apple had no stake in the CD business, so they rushed into iTunes. And so it goes.

Therefore, the real comparison is not today’s business model versus tomorrow’s. No, the real comparison is tomorrow’s business model versus nothing. That makes the need to adapt look more appealing.

2) Manage the Timing
Although the transformation may be unstoppable, you may be able to slow it down a bit. Kodak did not need to immediately abandon the film business back in 1975 and immediately plow every effort behind digital. They had room to wait a bit.

Delays can be good, because they help you build up a war chest of cash to use during the transformation. However, don’t wait too long. Eventually the race will get underway and if you wait too long, you will never catch up.

3) Keep Your Powder Dry
A delay is not an excuse to ignore the transformation. It is time to prepare for the transformation. Back when rifles were loaded with gunpowder, there was a saying to “keep your powder dry.” The idea was that you never knew when you would need to fire a shot, so you’d better prepare your gunpowder so that it could be used immediately (as a dry powder).

The same is true in business transformations. Eventually, you can delay no longer. Then you need to act quickly, strongly and boldly in order to remain relevant in the new world. You need your rifle to shoot immediately. Therefore, use the time of delay to “keep your powder dry” by working behind the scenes to prepare to win in the new space. Keep up the R&D. Develop prototypes. Invest in start-ups. Hire the proper talent. Do what it takes to get ready to win in the new space. That way, when it is time to move, you can move immediately, with great force.

4) Consider Creative Reorganization
To pull this off, you may find it beneficial to rethink your organizational structure. For example, you may want to place the old business model and the new business model into separate business entities. This can ease the resistance to self-cannibalism since you are different businesses with different leadership, different goals, and different compensation.

A separation also makes it easier to spin off either business. The old business can be sold while it still has some value (before it goes to zero). The new business can be spun out separately, so that all its growth is plus business rather than a decline from the past (since the past was not a part of its separate structure).

Separation also allows the new business to achieve a better (i.e., higher) valuation in the marketplace. These reasons help explain why so many businesses these days are splitting the growth part of the portfolio from the rest of the portfolio.

5) Switch
Another option is to consider switching industries. Fuji could see that the photographic film business was going away. It discovered that the chemical reactions with film are similar to the chemical reactions with skin. Therefore, Fuji redeployed its film knowledge to the cosmetic industry to create a significant new profit center to help replace some of what was being lost in film. So check to see if your core competencies provide opportunities to shift to better industries.

Firms like GE and Nokia have been successful for generations because they are willing to abandon core industries in decline and add on new initiatives in growing areas. In essence, GE made its core competency to be running business portfolios, which allows it to adapt to negative transformations by shifting the portfolio in a new direction.

6) Get Out Early
If the transformation looks bad and you can see no viable way forward, then sell out early, when others still see value in your business. The longer you wait, the worse it gets. Don’t wait so long (like Kodak) that nobody wants you anymore and the only option is bankruptcy. Those who sell out first usually get the highest price.

SUMMARY
Often times, business transformations can result in new business models which provide less profitability than the old model. If you are a leader in the old model, this reduction in profitability may create resistance to migrate to the new model. However, by resisting the lower profits, you can end up with nothing, because the old business model will cease to exist. Fight the resistance and come up with a plan for dealing with the transformation.

FINAL THOUGHTS
A lifeboat is a lot smaller and less glamorous than a large ship. However, if that large ship is sinking, the lifeboat is a better place to be. Stop clinging to the sinking ship and swim to the lifeboat.

Strategic Planning Analogy #433: Constructive Energy

2012-01-18T17:40:00.003-05:00

THE STORY
Although construction and destruction are opposite results, they can often come from the same source. For example, a nuclear power plant uses the same basic principles of nuclear physics as a nuclear bomb. Yet, the output from a nuclear power plant is constructive while the output from a nuclear bomb is destructive. Same source, but radically different outcomes.

In the same way an axe provides radically different results, depending upon how it is used. In the hands of a lumberjack, an axe is very constructive. In the hands of an axe murderer, the results are very destructive.

So is the power of the axe or of nuclear reactions good or bad? Is it a force for construction or destruction? In reality, it is just a source of power; an input. The outcome depends on how the power is controlled.

THE ANALOGY
Another source of power, besides axes and nuclear reactions, is management. Over the years, I have seen examples of management doing things which are very positive and constructive to a business. I have also seen management do things which are very destructive to a business.

Sometimes, we are quick to place a value on the input based solely upon the outcome. We will say that all the managers who provided constructive outcomes were “good” managers and all of the managers who provided destructive outcomes were “bad” managers.

Now in some cases, this is true. There are some really good and really bad managers out there. But in general, I’d say that management tends to follow a bell-shaped curve, with most of the management in the middle rather than at the extremes of good or evil. I think this is particularly true at mid-management levels. Therefore, if we want good outcomes from the core of our business, we need to consider the lesson of the axe and nuclear reactions.

An axe is not inherently good or bad. The value of the axe is determined by the one using it (lumberjack or axe murderer). In the same way, most managers are not automatically always either extremely good or extremely bad. The outcome, good or bad, is highly influenced by how the company uses its management.

In a toxic business culture, it is difficult for any manager to be very constructive. Conversely, in a healthy culture, it is far more difficult for a manager to be destructive. So if you want good outcomes, it takes more than just finding good managers. You also need to place those managers in an environment where good outcomes are more likely to occur.

Just as the holder of the axe has to take some of the responsibility for the outcome of the axe, a business has to take some of the responsibility for the outcome of its management

Therefore, we should not automatically and hastily replace a manager just because the results were bad. Unless the environment changes, the next manager may be no more successful in his/her results than the last one. For example, I worked with a company division that went through about 4 presidents in a nine year period. Yet, despite frequent changes in management, the results continued on the essentially the same poor path. The bad corporate environment was more influential on results than the character of the leader.

So, before making a quick value judgment on a manager, consider the way in which the manager was used by the business. Perhaps the best way to improve results is not by replacing the manager, but by replacing the environment the manager is put in. And, as we will see in this blog, an increased emphasis on strategic planning can be an easy and effective way to improve that environment and allow your management to be more constructive in its outputs.

THE PRINCIPLE
One of the biggest problems facing the strategic planning profession is the growing image of Strategic Planning as being irrelevant. The logic of those who believe in the irrelevance of strategic planning usually goes something like this:

a) The world is moving too fast; constant change makes it impossible to effectively plan the future.

b) Those annual planning meetings produce documents that are ignored and go on the shelf, and have no relevance to everyday decisions.

c)If we adequately empower the people on the front lines, they can get the job done without needing the advice of strategists stuck in the ivory tower away from where the action is.

As the image of strategic planning declines, so does the number of strategic planning jobs inside businesses. Just go and look at all those job boards on the internet. Titles like “VP of Strategic Planning” are disappearing. If you click on one of the drop lists of job types on these sites, strategy usually isn’t even on the list.

If you, like me, still believe in the benefits of strategic planning, then this is not good news. In response, one can try to change these people’s minds by attacking those three points above (and I think good rebuttals can be made). However, that may not be the best approach.

My suggestion is to counterattack on a different front. One such counterattack is to say that strategic planning makes all of those empowered people more effective. In other words, a small investment in strategic planning can increase the quality of the output of management, leading to far better financial results. Like the axe and the nuclear reactions, you can turn management output to greater good because you place them in a better environment.

Most Managers Are Ineffective
This can be seen in a study by academics Heike Bruch and the late Sumantra Ghoshal as reported by CBS Moneywatch. Bruch and Ghoshal defined managerial success as “decisive, purposeful action.” For them, good managerial output is action which results in leading the company forward.

What they discovered was that only about 10 percent of the managers they studied created decisive, purposeful action. In other words, about 90% of managers are not effective.

The rest of the management was classified as follows:

a) Approximately 40% energetic, but not focused (effort wasted);
b) Approximately 30% had low energy, little focus and tended to procrastinate; and
c) Approximately 10% were focused, but not very energetic.

Businesses should not be happy when approximately 90% of their managers are ineffective. This should be a call for change.

Strategic Planning Can Create Effectiveness
The largest segment of ineffective managers was those who had the energy, but not the proper direction (no focus). These are like the people who have the nuclear energy but make destructive bombs rather than constructive electricity. They have the capacity and the desire to do good work, but the effort is dissipated due to lack of proper focus.

Well, guess what is the best way to give managers focus? It is through strategic planning. Strategic planning provides focus and direction. It tells people what the goal is—where the vision lies and how to get there. Strategic planners can not only help set that focus, but help communicate that focus to all the managers and show them how their role fits into that focus.

If a company makes a relatively small investment in strategic planning, they can turn that 40% who are energetic and not focused into productive, focused managers. Suddenly, a typical company goes from having only about 10% of their managers productive to having about half of their managers productive.

What other similar-sized investment could a company make that could have such a dramatic increase in management effectiveness? I can’t think of any. It’s a no-brainer. Invest in strategic planning because it turns unproductive managers into productive managers.

This is an outstanding return on investment. And for that alone you can justify having strategic planners in the organization.

SUMMARY
Success does not come from merely having powerful tools. Powerful tools can be both constructive or destructive, depending upon how they are used. In the same way, managers can be effective or ineffective, depending upon whether or not the company provides them the proper focus. Strategic planning can provide such a focus. Therefore, you can justify an investment in strategic planning merely by looking at its ability to turn ineffective management into effective management.

FINAL THOUGHTS
You can be the best strategist in the world, but if nobody wants it, then you cannot use your gift for good. Therefore, we need to continually defend the value of the discipline.

Strategic Planning Analogy #432: Shifting to Stay in Place

2012-01-16T15:09:00.002-05:00

THE STORY
The university where I got my MBA used to send me annual updates of what the school was up to. My favorite statistic was the one showing which jobs the current graduating classes were taking. Over the decades, the top jobs kept shifting.

In the early 1980s, the most popular jobs taken by MBA graduates were in working for large industrial corporations. Then, starting in the mid 1980s, the most popular destination was in working as management consultants. During the 1990s, the most frequent career path moved to dotcom entrepreneurism. Then, after the dotcom market blew up, the most popular career path was investment banking. Now that investment banking has seen a bump, it seems that the shift is moving to international.

I learned two things from watching these statistics over the years. First, I learned the constant—no matter which year you looked at, the students flocked to where the money was. Second, I learned the non-constant—where the money was shifted over time.

So the irony is that if you want to stay in the same place (where the money is), you have to keep moving (since the money keeps moving).

THE ANALOGY
This idea does not just apply to careers. It also applies to strategic positioning. Successful strategic positions are located where they optimally satisfy some high consumer demand. This high demand could be for something like “status” or “convenience” or “self-worth” or “freedom” or some similar basic need or emotion. These, like the MBA’s desire for a high-paying job, are a constant. They never go out of fashion. Just as you can count on most MBA graduates to desire a high-paying job—decade after decade—you can count on a large number of customers seeking one of those basic needs and emotions mentioned earlier.

However, the primary means by which these basic needs and emotions are satisfied does change over time. For example, what constitutes status changes frequently like fashions. In rapidly-developing third world countries, status in the past might have been best indicated by how many goats you had. Now, it may be the type of mobile phone you have.

So, just as the type of job which pays the most for an MBA shifts over time, the best way to achieve status or freedom shifts over time.

Therefore, strategists are stuck with the same dilemma as the MBA graduate. If they want to keep their positioning in the same place (in the middle of satisfying a core need), they have to keep moving the position (since the way people satisfy core needs keep changing).

THE PRINCIPLE
The principle here has to do with positioning. The dilemma is determining what to do when your formerly solid position begins to move out of step with a shift in how consumers want to satisfy that position. Do you shift your offering to retain hold of the former position or do you reposition the offering to something more appropriate after the shift?

At first, one might think that the easiest option is to try to make minor adjustments to your offering in order to keep the old position. Unfortunately, some of the shifts are so dramatic, that minor modifications are not enough to hold the position. Instead you are forced to either completely change the offering or completely change the position.

Example #1: Clothes Vs. Gadgets
Let’s look at three examples. First, it used to be that one of the key ways for teens to establish status was with their clothes and their hair. Wearing the right fashion labels in the most current styles was the primary way to establish that teen status.

But then there was a shift. The primary indicator of status shifted to digital gadgets. The type and brand of smart phone or digital pad became a stronger driver than the brand of jeans. Just watch the status buzz when a teen has a newer, better gadget than their peers.

So what do you do if you sell teen clothing and your old position was to own the best solution for teen status? You cannot make minor modifications to a pair of jeans to turn it into the hottest smart phone. Many teen-based apparel manufacturers and retailers have been suffering because a lot of the teen status money which used to flow their way now goes to Apple brand stores. For the price of a wardrobe of fancy jeans, you can get a lot of cool gadgets with more status power.

Some of the more popular young fashion retailers today (like H&M and Forever 21) are shifting the positioning of teen clothes from high-priced status to value-priced fun (save money so you have more to spend on gadgets). This may be the easier move than trying to go head-to-head against cool gadgets (which is now a direct competitor for status money).

Example #2: Cars Vs. Facebook
Second, let’s look at young adults and cars. An article in the January 16, 2012 issue of the Detroit News talked about how a shift was hurting cars sales with youth. According to the article, cars used to be a key way for teens and young adults to satisfy their need for freedom, a way to get away from parents to be with friends. It fit that position well. However, recent research has shown that more than half of this consumer group now would actually rather meet up with their friends in cyberspace than face to face. The car is no longer needed to obtain the freedom they want.

In the article, John McFaland, senior manager for global marketing at Chevrolet said, "There's simply new and better and, frankly, more efficient alternatives to communication and getting that freedom that [young adults] used to rely on the auto industry to provide."

The car was losing out at being the best alternative for freedom to the internet. You cannot make minor modifications to a car and make it a superior Facebook. The auto manufacturers needed to consider taking a new position.

The article says that GM decided to shift its young adult position from being the powerful symbol of freedom to being the more practical way enable you to do things with friends. The new emphasis is on practicality and fuel economy, not flash or power.

Example #3: Malls Vs. Words with Friends
There was a time (especially back in the 1980s), when people loved to spend hours and hours every week in the shopping mall. Why? It was the best solution at the time for social entertainment. You could hang out with friends at the mall and be entertained by window shopping, eating in the food court, playing games in the arcade, and people watching.

Now, there are far more efficient ways to have social entertainment. Between You Tube, Netflix, home entertainment centers, 300 channels of cable TV, Facebook, and apps like Angry Bird, Farmville, or Words with Friends, you can have a lot better social entertainment by staying at home. The old mall arcade is inferior to the X-box in the living room.

Malls are left with only the primary function of being a place to buy something. And even there they have lots of competition from stay-at-home shopping options like Amazon. That is why the mall industry is in so much trouble today. Can malls take back the position of being the best social entertainment site from today’s digital home? I doubt it. They need to look elsewhere for a position of superiority.

So What Should Strategists Do?
Given this dilemma, what should strategists do? First they need to look ahead to see if shifts are starting to make your solution to a problem inferior. Is a wholly different offering starting to replace your offering as the best solution? Are you the clothes losing out to gadgets, or the cars losing out to Facebook, or the malls losing out to smart phone apps?

If that is beginning to occur, then one needs to make a choice. Do you:

a) Change your offering to recapture the solution? or
b) Shift your offering to meet a different solution? or
c) Sell out quickly, before the shift has made you obsolete.

SUMMARY
Although basic, core needs and desires never go away, the way people satisfy them changes over time (like getting freedom via the internet instead of via a car). As a result, your offering, which may be best positioned to satisfy that need now, will eventually fall out of favor. Usually the replacement is not a minor variation of the past, but a radically different offering. Thus, it may be difficult to change enough to recapture your position. The better alternative may be to either find a new position/solution or to sell out before the shift fully takes place.

FINAL THOUGHTS
Movies often do a great job of capturing the culture of the time. However, if you look at that movie decades later, it can seem so out of touch with today’s culture that it is laughable. I remember laughing at an old movie where a teen got status and was the envy of the neighborhood because he was one of the first to have the old Atari game and could play Pac Man. Now, such a teen would be laughed at as out of date rather than be seen as having superior status. If you don’t want your business to be laughed at as out-of-date, then keep modifying your offering to be more appropriate for the times.

Strategic Planning Analogy #431: More Efficient "Bribery"

2012-01-09T14:31:00.005-05:00

THE STORY
Moneyball is the story of Billy Beane, the general manager of the Oakland Athletics baseball team in the early 2000s. Billy’s problem was that he managed a team in a small market. As a result, he did not have as much money to spend on baseball talent as teams from larger markets. For example, his total athlete salary budget was about a third the size of teams from large markets like New York.

Since Billy Beane could not outspend the other teams to attract talent, he needed to be smarter about how he spent his money. To become smarter, he turned to detailed statistics and analytics. Billy learned that certain athlete statistics were better correlated to baseball success than others. Then he went after signing up players who were great on those statistics but would otherwise be overlooked by the big-market teams (because the players appeared weak on subjective issues not well correlated to success).

As a result of becoming smarter on talent, Billy Beane was able to put a competitive team on the field while spending a lot less money than the big-market teams. The story is so remarkable that in 2011, it was made into a movie.

THE ANALOGY
Most athletes are not very loyal to their team. They will go play for whoever is willing to pay them the most money. The money is like a bribe. Whichever team bribes them with the most money gets the player.

This is a lot like the retail business marketplace. Consumers are not very loyal when it comes to where they shop. Instead, they shop at whichever store gives them the best deal. That is the bribe which gets them to the store.

This was pointed out in an article in the January 9, 2012 edition of Marketing Daily. The article talked about a study of 6,000 shoppers by Pricewaterhouse Coopers. The study found that consumers really don’t care much about retail loyalty programs. Loyalty programs were ranked last in a list of reasons for choosing a store. Only 1% of the shoppers cited loyalty programs as a reason for their store choice.

What was the #1 reason for store choice? It was price, mentioned by 55% of the shoppers. In other words, shoppers are like those athletes—not very loyal and can be bribed by being offered a better deal.

Yet about 92% of retailers have a loyalty program and many spend huge sums of money on their program. My keychain has three keys on it, but seven loyalty cards. I should probably call it a “loyalty chain” instead of a keychain. My wife is even worse. She carries two wallets—one is for credit cards and money and the other just holds loyalty cards.

Now, smart phones are making it even easier. They allow you to store all that information digitally, so you can, in essence, conveniently carry an infinite number of loyalty cards. If you are carrying a card for every store, then those cards are not making you very loyal to any particular store.

So what should retailers do? They should take a tip from Moneyball. Instead of offering ever larger “bribes” (deals) in the futile attempt to create loyalty, they need to get smarter. They need to use statistical analytics to make their spending more efficient.

THE PRINCIPLE
The principle here is that many marketing expenditures have more in common with bribery than they do with loyalty. This is particularly true in retailing. Therefore, when creating marketing strategies, we should be more focused on increasing the “efficiency of the bribe” than the “effectiveness of the loyalty.”

Principle #1: Just Because it Looks Like Loyalty Does Not Mean it is Loyalty
At first, great bribery can look like great loyalty. Great bribery allows you to lure people back to the store, time after time after time (each time caused by a great bribe). Great loyalty means that customers voluntarily come back to the store, time after time after time. Since the behaviors appear similar (repeat purchasing), one may look at the behavior and mistakenly think that they are witnessing great loyalty when in fact they are witnessing great, sequential bribery.

Why is this distinction important? If the motivation is bribery, then the favorable behavior will stop when you stop the bribe, or a competitor offers a better bribe. If the motivation is loyalty, then you are better insulated from competitive attacks and less reliant on bribes for success.

If you get these two motivations confused, then you may create the wrong marketing strategy. For example, if you think you are building loyalty, then you may create a strategy with unaffordable discounts in the beginning, which you justify by saying that those discounts create long-term loyalty. Once loyal, you can then cut way back on the deals later and still keep the customer.

Terms like “lifetime value” are used to justify this approach. They say you can lose a lot of money up front if it creates a lifetime of loyalty. Then you make up for the losses in the beginning during the later years of the lifetime by cutting back on the size of the deals.

Of course, if your tactics are only creating a series of bribes, then you can never stop the bribery. If lifetime loyalty is a fallacy, then you will not only lose a lot of money up front under such a program, but you will lose it forever if you want return visits.

Therefore, if behavior is more bribe-induced than loyalty-induced, you need a way to bribe over the long term which is profitable. That requires a focus on bribe efficiency rather than lifetime loyalty value.

Principle #2: Loyalty Programs Aren’t Bad, They Are Just Misnamed
So, if loyalty is virtually non-existent, does that mean that loyalty programs should be abandoned? In general, I’d say no. They can still have great value as a bribery tool. It isn’t that the tool is bad; it is just misnamed. They should be thought of as “bribery programs” rather than loyalty programs.

Think back to Moneyball. Billy Beane could afford to pay less for quality baseball players because he was smarter about how he pursued players. He studied the statistics related to success and used that knowledge to find valuable players who could be lured with a lower bribe.

You can do the same. Those loyalty cards can provide a lot of data. They can help you get smarter about your customers. You can learn from their behavior. Analytics around this data can provide knowledge about which bribes are most effective with that customer. Using this knowledge, you can offer bribes more appropriate and more luring to that individual. And, in most cases, because the bribe is more specifically targeted to that individual, it will be more effective at a lower cost.

For example, you may find that a particular customer is easily lured by a small discount on cat food. Therefore, instead of offering huge bribes on lots of things, you can narrow your expense to a small bribe on cat food to get pretty much the same end result.

In other words, by using the data from loyalty programs, you may not make the customer more loyal, but you can make your bribery more cost efficient and more profitably effective. And that makes the program worthwhile.

Now, if you are NOT using the data from a loyalty program to get smarter, then you may be wasting a lot of money on that program. You’d probably be better off shutting down the program and using all that money to pay a bigger bribe to people at the cash register when they check out.

Principle #3: Metrics Are Valuable Only if You Use the Right Ones
In Moneyball, Billy Beane was successful because he focused on the right metrics. He looked at the statistics which really lead to wins and ignored the rest. By contrast, the big market teams were often evaluating the wrong metrics, things like how a player looked or their demeanor. By looking at the wrong metrics, the big market teams were paying too much for the wrong players.

The same problem applies to marketing. If you are looking at loyalty metrics instead of bribery metrics, you may end up rewarding the wrong behavior. Set up metrics to measure and reward efficient bribery rather than nearly non-existent loyalty.

SUMMARY
Although businesses want loyalty from their customers, usually the primary customer motivation is not loyalty, but bribery. As a result, we should convert our loyalty programs into bribery programs. That requires using data and analytics to discover the most efficient ways to bribe, and then keep using the bribes forever in order have superiority over the competition.

FINAL THOUGHTS
Just because bribes may be the most effective motivator, that does not mean that you can ignore all the other operational variables. Bribes are more efficient when the other operating factors are working well, because then you have less negativity to have to overcome with a bribe (so the bribe can be smaller).

Income Inequality

2012-01-04T16:11:00.004-05:00

THE QUESTION
The Harvard Business School runs a website called “Working Knowledge.” The site has links to current research and thinking at the Harvard Business School. One of Harvard’s professors, Jim Heskett, asks a question on the site each month for the readers to comment on. This month’s question was on Income Inequality.

Although the article discussed the question in more detail (you can see the full question and all the responses here), the shortened version of Prof. Heskett’s question went like this:

“Does income inequality promote or stunt economic growth? Inequality can serve capitalism as an incentive, but too much of it is not good for markets...What's the right amount of income disparity?”

I thought I'd share with you my answer to his question.

MY RESPONSE
Three Short Stories come to mind:

1. I was talking to a top executive of Enron shortly before their collapse. I said that Enron had a reputation for working its employees through insanely brutal hours and pressures--all for a potential shot at insanely high stock options. I asked if they had trouble finding people to put up with such a harsh work environment. I was told that they had lots of applicants, especially from investment bankers.

2. I saw a survey once which asked investment bankers if they would stay in the profession if their insanely high levels of compensation went away and they got more "normal" wage levels. Somewhere around 75 to 80% of the investment bankers said they would leave the profession under those circumstances.

3. I was to interview for a job at one of the largest banks in the US shortly before the banking collapse. The headhunter wanted to pre-screen me because she said the bank had "a particular culture" which is not a good fit for many people. In the course of the pre-screening it became apparent that the "particular culture" was people focused on greed, status and conspicuous consumption.

And of course, Enron, the banking industry and investment banking have since gone into terribly poor situations. As Willie Sutton said, he robbed banks because that was where the money was. In the same way, modern-day "robbers" seek out jobs with obscenely high rewards (where the money is). And they leave destruction in their path.

What you want is people running businesses because they want to run that business. If they are only there for personal gain and really do not care about the profession, then you get the Enron and banking collapses. Pay less and you only get the people who want to be there and want to serve (rather than those who are bribed to be there—and would not otherwise be there).

What is that amount? It varies by person. The idea is to look at when motives switch from serving to grabbing.

FINAL THOUGHTS
An executive at a company told me they had to pay such high salaries in order to get that caliber of executives. Since I was not impressed by the caliber of his executives, I responded, "Does that mean that if you paid less, you'd get a different—and better—caliber of executives?" I still stand by that statement.

Strategic Planning Analogy #430: For the Birds

2012-01-03T19:11:00.004-05:00

THE STORY
For Christmas this year, my wife got another bird feeder for our backyard. The old bird feeder was vertical in design. It brought finches and woodpeckers to the backyard. The new bird feeder is horizontal in design. It is bringing cardinals and blue jays to the backyard.

Now that we have both in the backyard, we are getting both types of birds to visit us. That makes for a pretty view from our window overlooking the backyard.

That is, until our cat goes into the backyard and sits next to the bird feeders. Then the birds go away.

THE ANALOGY
We can think of those bird feeders as being like go-to-market business models. And we can think about the birds as being like customers. The interesting point is that different birds desire different types of bird feeders. Similarly, different customer segments are lured by different business models.

Finches and woodpeckers only eat from the vertical feeder. Cardinals and blue jays only eat from the horizontal feeder. If you don’t have the right kind of feeder, that type of bird won’t show up. In the same way, if you don’t have the right kind of business model, a particular customer segment won’t show up.

And if I tried to appeal to all birds with a single bird feeder, tilted at a 45 degree angle (the average of vertical and horizontal), I would most likely end up with no birds at all. In the same way, an “average” business model which tries to appeal to everyone will most likely fail, because consumers will “flock” to your competitors who do a better job of customizing to individual segments.

THE PRINCIPLE
The principle here has to do with context. In particular, we are talking about the context of customers. It is impossible to know what the right business model to offer is unless you also know what the customer context is.

For example, if I live in an area without any horizontal feeding birds, my strategy will fail if I build a horizontal bird feeder. And if my goal is to reach finches, I’d better build a vertical feeder. In the same way, my strategic decisions about business models cannot be made in isolation. I must simultaneously consider customer issues during business model formulation. Otherwise, I will build a model inappropriate for the customer environment.

Learning #1: Don’t let Technology Be the Driver
With modern technology, we can do just about anything. But just because we can create just about anything does not mean we should. Not everything has a natural consumer draw. If your motivation is merely technology-driven, you will most likely fail.

Consider Sony. They were driven to exploit technology to develop robotic dogs and robotic servants for the home. These projects were costly failures, because they did not serve a specific segment better than the alternatives. Real pets provide greater satisfaction and can cost less.

Years ago, I was working with companies who were trying to create a “digital kitchen,” an attempt to bring the latest computer technology to kitchens. These companies came up with all sorts of inventions, from a refrigerator with a computer in the door to a kitchen-only computer (with a dishwasher safe keyboard!). All these products failed, because they were focused on doing something cool with technology rather than meeting real consumer needs.

Compare this to Dyson. They were driven by a consumer desire—to have a vacuum that does not lose suction. As it turns out, they used a lot of sophisticated technology to solve that problem. But the technology was secondary. The main goal was the consumer context—providing a higher suction cleaning machine, something consumers really wanted.

Apple makes cool technology, but that is not what makes Apple successful. Apple’s success is from customer context—building devices and systems which intuitively work with the customer in an easy manner. Without that intuitive ease of use, Apple would not have had such success.

Technology may allow me do build an exotic bird feeder, but if the birds don’t want it, it is a waste of time. Similarly, exotic products not anchored in providing a clear consumer advantage will fail. Are your R&D efforts focused on exploring the limits of technology or in solving real consumer issues?

Learning #2: Niches are Niches
The bird feeder story shows the value of targeting niches. For example, if I target only birds who want a vertical feeder, I can build the ideal vertical feeder and attract a lot of this niche segment.

The risk is that once you have the success with that niche, there will be a temptation to grow beyond that niche. The thinking usually goes something like this: “If we just add a couple of features to this product, we can broaden its appeal.” Therefore, additional features are added.

Subtly over time, these added features start compromising the superiority of the original product with the original niche. Either they add costs for features unnecessary to the original niche (causing the product to become too expensive for the original benefit), or the new features actually hurt the functioning for the original niche purpose. It’s as if that vertical feeder over time becomes a worthless 45 degree feeder.

This is the dilemma for the Honda Civic. Originally, the Civic was designed for a particular niche—people who wanted a cheap, simple, but reliable car. It was a great success with that niche. Then Honda tried to broaden its appeal by gradually making the Civic larger and offering more features.

Over the years, these changes meant that the Civic was no longer the best choice for those looking for a cheap, simple, but reliable car. There were better options from cars that kept to the original principles. At the same time, the larger, more feature filled Civic was not as good as other large, feature-rich cars. The Civic became the equivalent of the 45 degree bird feeder. And now the Civic is not as successful as before. By losing the context of the original niche, it made something not particularly suited for any niche.

If you want to broaden your appeal, do like my wife did in the backyard—put out two different bird feeders, one vertical, one horizontal. This is the idea of having a portfolio of niches. This is the Proctor and Gamble approach. They do not try to win everyone over with only one type of laundry detergent. They have a portfolio of cleaning products, each specifically designed to optimize a particular niche. All the birds flock to P&G because they have a specific lure for each niche.

Learning #3. Even the Masses are a Niche
Yes, many companies succeed by appealing to a “mass” audience, like Wal-Mart. But even the so-called mass market is not for everyone. Even the most popular bird feeder is not liked by all birds.

In many ways, the mass acts like a large niche. For example, Wal-Mart, for all its size, rarely gets more than a 35% share of any category it carries. There are still lots of people who refuse to shop a Wal-Mart and try to keep them from building a store in their neighborhood.

So just because you have a large, “mass” share, it does not give you the right to try to appeal to everyone. Whenever Wal-Mart has tried to go beyond its base to add higher-priced, more fashionable apparel, it has failed. This went beyond the scope of the “mass” space given to Wal-Mart. It was too much of a niche addition which was out of context inside a Wal-Mart store.

Similarly, when Wal-Mart added groceries to its general merchandise to broaden its appeal, the added size of the store turned off some of the original core. Hard discount dollar stores like Dollar General have been gaining market share from Wal-Mart because they are not burdened by the big size of a supercenter. These dollar stores can provide a level of convenience no longer available from Wal-Mart. Wal-Mart lost that feature in the attempt to broaden the mass.

So there are even limits in the mass realm.

SUMMARY
When designing a go-to-market strategy, one needs to simultaneously consider how it impacts one’s consumer base. For example, a strategy driven by cool technology does not always translate into consumer acceptance. Technology needs to be subservient to the desires of a particular segment if it is to be accepted. In addition, once a niche is appealed to, be cautious about trying to expand the niche. By trying to appeal to new people, you may alienate some of your core. It is usually better to build a portfolio of highly targeted niche brands than to try to appeal to them all with a single offering.

FINAL THOUGHTS
There is a difference between trying to increase market share and trying to increase market satisfaction. If your attempt to increase share decreases satisfaction with the core, you may end up with neither.

Strategic Planning Analogy #429: Musical Chairs

2011-12-29T20:30:00.002-05:00

THE STORY
When I went to parties as a child, we played a game called Musical Chairs. The game used a circle of chairs. There would be one less chair than the number of children playing.

As music played in the background, the children would walk around the circle of chairs. When the music stopped, everyone would try to sit in a chair. Since there was one less chair than children, one child would not get a chair. That person was called “out” and was no longer allowed to play the game.

Then, one of the chairs would be removed and the music would start again. The process would be repeated until only one child was left sitting in the one chair that was left. That child was declared the winner.

Sometimes the game would get very active when two children would fight over a single chair. Although both would try to claim rights to that chair, one of them would lose out. After all, the rules stated that only one person could sit in a given chair. Since there were fewer chairs than children, by definition someone would lose out in each round.

THE ANALOGY
The chairs in Musical Chairs can be thought of as being like business opportunities. And the children can be thought of as being like companies who want to take advantage of those business opportunities.

Like in the game, there are more companies trying to take advantage of the opportunity than there are opportunities. As a result, companies lose out and can no longer play the game in that arena.

You can see this happening all the time in business. Whenever there is a “hot” business space, there will be tons of businesses trying to exploit it. Unfortunately, there are too many companies chasing these “hot” spaces. As a result, most companies do not successfully exploit the opportunity. “When the music stops,” and the companies rush for a seat at the business, not all will find one.

Look at the recent “hot” spaces like Solar Panels, Social Media Couponing, iPad imitations, etc. Companies are quickly exiting the businesses or going bankrupt. Yes, the business space may be “hot” but most of the businesses trying to exploit the opportunity fail. There are not enough chairs to satisfy all who want to play.

THE PRINCIPLE
The principle here is that merely finding a good place for your company to play is not sufficient. So-called “good places” attract too much interest relative to the opportunity. As a result, these “good places” quickly become “bad places” for those who cannot quickly secure a solid ownership of share in that space. Like in the game of Musical Chairs, most players are asked to leave the game because they could not find a chair for their business to occupy.

Therefore, strategies require two elements—a viable space, and a way to aggressively fight to win a place within that space.

Best Buy Example
I was reminded of this principle while reading the book “Becoming the Best” by Dick Schulze, the founder of Best Buy. The book talks about the history of the development of the massive Best Buy retail chain. There were several times in the early years when Best Buy was on the verge of bankruptcy. Best Buy could have very easily become one of those companies who could not secure a chair and been told by the marketplace to leave the game.

Yet, Best Buy endured to become the last national consumer electronics retail chain left in America. It won the game of musical chairs in the consumer electronics space. Why? Part of the answer can be seen in the sub-title of the book: “A Journey of Passion, Purpose, and Perseverance.”

Dick Schulze did not just “show up” at the game. He was quick, aggressive, and persevering. He understood that business is a race and that you have to run aggressively, with purpose and endurance, in order to win that race.

A great example was back in the late 1980s when a large competitor, called Highland Appliance, decided to enter Best Buy’s territory in order to drive the smaller Best Buy into bankruptcy. Realizing what was going on, Best Buy reacted quickly and aggressively. First, Best Buy acted quickly to grab market share in markets where Highland was committed to grow, but moving slower.

Second, Best Buy was the first to realize that the old commissioned sales model (which Highland, Best Buy and everyone else was using) was becoming obsolete. Therefore, Best Buy quickly changed its approach and became the first in the industry to own the superior business model which was an approach more like a supermarket (no commissioned salespeople). They called the new business model “Concept II.” Because of these quick and aggressive tactics, Best Buy survived and it was Highland Appliance who soon went bankrupt.

In other words, with Concept II Best Buy developed a superior position where they could win (a great space) and then quickly and aggressively did whatever it took to own that space before anyone else could get there (a great race). By doing both tasks, Best Buy won the game of musical chairs in its industry and reaped the rewards of being the leader of consumer electronics when all the money was being spent to convert from the analog to the digital era.

Sure, everyone knew that there were great rewards to be had if you were in the digital space when that conversion from analog to digital took place. But not everyone who wanted to take advantage of this opportunity succeeded. Best Buy succeeded when others failed because it worked faster, harder and smarter at securing the right position in the space (Concept II) and then did whatever it took to make sure nobody took it away from them. They found a chair to sit in and never let anyone push them out of the chair.

General Motors Example
An example in the opposite direction would be General Motors. In recent years, it was becoming apparent that the old automotive business model of owning a huge portfolio with lots of different brands was no longer the best place to be. The wise business move would be to sell off some the weaker brands and concentrate more effort on the stronger brands.

General Motors understood this, but they were slow in the race to execute the strategy. Compare their speed and aggressiveness in execution versus Ford. Ford acted quickly to sell off its Land Rover brand, which was going out of favor due to its focus on large, gas guzzling vehicles. As a result of acting quickly, Ford was able to exit the business while also getting some cash from the sale of the division.

By contrast, General Motors was slower in reacting with its large gas guzzling Hummer brand. By waiting longer, that gas guzzling segment became even less desirable. And Ford had already sold its Land Rover division to the best potential buyer for such a brand. As a result, General Motors could not find a buyer for Hummer and had to shut it down at a huge loss.

A similar situation happened with their northern European brands. Ford acted quickly and found a buyer for Volvo. General Motors was much slower and more timid in reacting and could not secure a buyer for its Saab division. GM had to shut it down for a loss.

Both Ford and General Motors saw the same good strategy of shrinking their portfolio. Both tried to execute that same “good” strategy. But because Ford was quicker and more aggressive, it was able to execute the strategy far more successfully than General Motors. Same strategy, but different results due to differences in speed and aggressiveness. Just as it takes speed and aggressiveness to secure a chair in Musical Chairs, it takes those same qualities to win in business.

SUMMARY
Strategic planning needs to be more than just identifying places where money can be made. It needs to also develop a path whereby its company can out-hustle the competition and survive the race to become one of the survivors. Great opportunities cause a large rush of firms who try to exploit it. Most of these firms will not benefit from the opportunity because they lose the race to become one of the few firms which can secure a “chair” in the industry. Slow imitators rarely achieve benefits as large as the quick and aggressive innovators. So it you want to win, not only find the right space, but find a way to win the race.

FINAL THOUGHTS
Musical Chairs requires many rounds before a winner can be declared. Just because you survive any early round does not mean that you will survive later rounds. The same is true in business. Don’t get complacent because of early success. This is an endurance race. You have to keep running.

Strategic Planning Analogy #428: Changing Tires

2011-12-24T21:48:00.005-05:00

THE STORY
Let’s assume there are two people driving along in a car. One is the manager and the other is his subordinate.

As they are driving along, the car suddenly gets a flat tire. After pulling off to the side of the road, the two of them just sit in the car doing nothing.

Finally, the manager says, “Well don’t look at me to change that tire. I like the current tire. It successfully got me everywhere I wanted for the last five years. I see no reason to give up on that tire and change it just because it had one little setback.”

The subordinate says, “Well don’t expect ME to change that tire. It’s not in my job description. It’s not a part of my bonus calculation. I’ll file a complaint if you force me to change it.”

So the two of them sat there by the side of the road for hours with that flat tire, even though there was a spare tire and jack in the trunk.

THE ANALOGY
When a tire goes flat, you need to change it. Similarly, when a company’s current business model goes flat (stops working), you need to change it. Therefore, one might think that all one needs to do when business models go bad is to discover a new business model and a migration path and you’re done. Right?

Wrong. In the story, they had the equivalent of the new business model (the spare tire) and the migration path (the jack). Yet those parts just sat in the trunk not being used.

Why? Because nobody was adequately motivated to use the jack to put on the spare. The manager did not see the need for change and the subordinate did not feel personally responsible for making the change. If nobody wants to do the work, then having the parts is worthless. You’re stuck on the side of the road while the other companies pass you by.

Are companies really as silly about change as those people were with the flat tire? Well, consider research by McKinsey and Co. Scott Keller and Colin Price of McKinsey recently wrote a book entitled Beyond Performance. The book is based on research into thousands of executives at hundreds of companies. Here is what they found.

First, about 70% of change programs fail. In other words, most of those flat tires don’t get adequately fixed. That’s not good news.

Second, the primary reason why those change programs failed is not due to a lack of resources or plans. In other words, it wasn’t for a lack of spare tires and jacks that these change programs failed.

Instead, 72% of the failure could be traced to the people in the organization—nearly half of this amount to management failure to support the change and the rest due to employees resisting the change. In other words, most companies are very much like those people in the story. They sit by the side of the road in failure because management won’t support the change and employees resist the change activity.

THE PRINCIPLE
The principle here is that “change” is an activity, not a concept. You can have the concepts of a new vision or a new strategy or a new business model. You can also have the concept of a plan to make that change a reality. But if equal effort is not also placed behind motivating people to act, you will almost surely fail.

Therefore, a strategist’s job is not done when the business model and migration path are devised. It is only done after equal effort is spent creating an internal environment capable of vigorously acting to bring about that change—quickly and fully. Otherwise, all you have done is put a spare tire and jack into the trunk and left the company sitting by the side of the road unwilling to use the tools you provided.

Getting Management Support
So how do you get management to embrace the need for change? There are several approaches.

First, you can try to get them to see that the status quo is truly broken and cannot be brought back to its former glory. In the story, the manager thought the flat was just a temporary setback for the formerly successful tire and that it would eventually bounce back up on its own like before. Therefore, he was not motivated to change that tire. Similarly, you need to show people that the flat is a major change in the condition of that tire. It will not return to its former glory on its own. It must be replaced.

Second, you can try to convince them that even if they liked that old tire, they’ll like a new tire even more. In other words, if you cannot convince them the old model has gone bad, then convince them that the new business model is so much better that it is worthy to change to get the improvement.

Third, you can appeal to their personal motivators. Most managers have something which drives them to reach the top. For some it is greed for money, for others it is greed for power, for others it is leaving a legacy, and for some it is leaving a mark which makes the world a better place. Whatever the motivator, tie it to the change. Tell them that if they make the change, they will get more money, more power or more whatever, than they had before. It’s sorta like telling a guy with a flat tire ,“If a guy puts slick new tires on his car, all the cute girls will want to ride with him.”

I’ve talked about ideas like this in more detail here and here.

Getting Employees to Make the Extra Effort
In addition to getting the managers motivated, you need to properly motivate the employees. It’s one thing for employees to do the minimum required for their position. But if you want to succeed in the transition for change, employees typically need to put in a much stronger than normal effort.

Keeler and Price refer to this as going beyond merely motivating through normal incentives to tap into “employees’ sense of meaning and identity to harness extraordinary effort.” This is effort which comes from deep in the heart.

This means transforming the change agenda from being “additional work” on top of the day-to-day to becoming “the greater work” which gives meaning to all of one’s efforts.

I’ve spoken about this topic in more detail in several other blogs, including this one.

SUMMARY
A large part of strategic planning has to do with enacting change within the organization. The key roles typically given to strategists are to:

a) Help determine what to change into; and
b) Help determine the best path to get there.

However, research has shown that if that is all that is done, there is a high likelihood of failure. To ensure success, one must do more. One must also make sure that:

a) Management believes in promoting the change; and that
b) Employees are deeply motivated to give an extra effort to make it a reality.

Strategists need to help with these issues as well.

FINAL THOUGHTS
Changing a tire is not a glamorous job. You have to get your hands dirty. But the car won’t get moving again unless you change the tire. In business change, not all tasks are glamorous, either. But if you keep the big picture in mind, you can see that the messy jobs are essential if you want the big prize. So don’t shy away from getting your hands dirty by working on getting the implementation done.

Strategic Planning Analogy #427: Reporting Documents Vs. Managing Documents

2011-12-13T16:37:00.003-05:00

THE STORY
Back when I was in college, I was a DJ on the college radio station. Near the end of one year, there was a student who suddenly realized she was about to graduate without any marketable skills. She decided to put in some time on the radio station to get some free experience.

The only position she could get on short notice was to announce sports news. Unfortunately, she knew absolutely NOTHING about sports (her passion was classical music). Before going on the air, she would ask me questions, like which sport did a particular team play, or what was the name of a sports team in a particular city. She literally knew NOTHING about sports.

As a result, her sports reports were the worst I ever heard. All she would do is state the name of a city and its score. One after another after another after another after another, with no commentary, no insights, no additional statistics, no excitement. It was painful to listen to.

THE ANALOGY
Sports scores are important. They tell you who won and who lost. But that’s about it.

They really don’t give you a feel for how the game was played. You don’t know what happened to create the score. You don’t know how many near-scores were prevented by great defense. You have no idea what any of the players did. You don’t know the team strategy. If all you have are the scores, you are missing a lot. And as a result, that woman’s sport’s report was missing a lot—which made it a terrible report.

The same is true in the business world. There are financial metrics which can tell you the results of how well a company did, like Net Earnings or Earnings per Share (EPS). These types of metrics are like the final scores in a sporting event. They are important to know, but they really don’t tell you a lot.

For example, did EPS go up because earnings went up or because outstanding shares went down? Did earnings go up because of increased volume, decreased expenses, or a one-time accounting adjustment? Are the results repeatable, or based on unusual one-time circumstances? None of this can be discerned from just looking at earnings.

What if you had a sport team coach who never watched the game he was coaching and only looked at the score? He wouldn’t be able to coach well, because he would not have any knowledge of what was happening on the field of play. He wouldn’t know how well individual players were playing or how effective particular plays were.

Similarly, how can you expect business managers to execute well if all they do is look at final results? They have no idea of what’s happening out in the marketplace. They don’t know who is performing well. They don’t know which tactics are working. Worse yet, they may be satisfied with final results, not realizing that they were obtained illegally, unethically, or by means of tactics which will destroy long-term performance.

You wouldn’t expect a coach or a sports announcer to only look at final results. Yet, so often we tolerate this in the business world.

THE PRINCIPLE
The principle here is that, by definition, “results” are the result of something which occurred in advance. Results are merely outcomes produced by prior actions. Earnings don’t magically appear by themselves. They are the result of a lot of prior activities. Therefore, if you want to impact results, you have to manage those prior activities.

As we saw in a prior blog, if all a coach does is yell at his players to “Make a higher score,” he has not provided any insight into how to get a higher score. His yelling is fairly worthless. If you want better results (a higher score), you need to dig deeper into how the game is played.

Similarly, if all we tell an employee is to “Get higher sales,” we have not provided any helpful insights. If you want higher sales, you need to dig deeper into how sales are made.

Reporting Tools are Not the Best Management Tools
Part of the problem is that businesses often use the same metrics to manage reported results (outcomes) as they do to manage operations (inputs).

“Results Reports” are the scoreboards of business. They are typically income statements, balance sheets, cash flow statements, or some variation of these. They tell the external stakeholders how well you did. They let the shareholders, debt holders, and government agencies “know the score.”

These are great reports. However, their focus is primarily on the outcome, not what caused the outcome. They let you know the score, but not what created the score.

Sports scores may be great for telling the external world how the team did, but they are not the best tools for helping the team improve that performance. To do that, they look at different data, like who is making errors, how successful are particular plays being executed, are people playing with the proper form, do they know what to do, are they cooperating as a team, and so on. You won’t find those answers in the final score. That’s why sports teams use tools other than the scoreboard to improve results.

Similarly, the reported results in an income statement or balance sheet won’t give an adequate enough picture to know how to improve those results for a business. They tell you the “what” but don’t tell you the “why.”

Therefore, businesses should be more like sports—use one tool to report results and another report to manage the process to get those results.

Example
We can see this in the example of a retailer. One of the key results a retailer wants is sales. Yet, as we saw earlier, just wishing for sales or yelling at employees to get sales will not create sales. Sales are the result of prior activity.

What are the prior activities which create retail sales? The formula looks something like this:

SALES = (# of customers) X (# of trips to the store) X (# of items bought per trip) X (the average price per item purchased)

In other words, if you want to increase sales, you need to do a combination of the following:

a) Get more customers;
b) Get the customers to come more often;
c) Get the customers to buy more items; and
d) Get the customers to buy more expensive items.

You can measure these items by looking at:

a) Customer Counts
b) Customer Frequency (which is easier to measure now that customers have loyalty cards).
c) Size and Composition of the Average Transaction (in units and currency)

Then you can design tactics to improve these activities. And then you can measure your success with these types of metrics.

However, none of these metrics can be found on an income statement. The first line on the income statement is “sales.” The sales are already assumed to exist and are reported as a done deal. It gives the “sales” score, but no insight on how to improve it. The income statement is a miserable way to manage sales. Instead of using that results report mechanism, one needs a management report with these other measures.

How Did We Get Here?
Although it may now seem obvious that different tools are needed to manage a business than to report results, many businesses tend to use results documents for both. Budgets are usually based on result metrics. Bonuses are based on result metrics. Management meetings focus on result metrics. It’s as if everyone is yelling about the size of the sales without ever bringing up the measures which truly impact sales.

How did we get to this situation? I think a lot of it has to do with the tight connection between the accounting function and the strategic analysis function in many companies. They are often the same people or exist in the same department.

The accounting orientation has a predisposition towards result reporting (it is what they were trained to do). In addition, it is a lot easier to report everything if everything uses the same report. Therefore, there is a temptation to force all reporting into a result-oriented template.

Yet this is not the ideal format to understand what is happening in those activities which really create those results. It is not the right tool to manage what causes those results. A different monitoring system is needed…a strategic one.

SUMMARY
Although results reports, like income statements, are useful (particularly for external stakeholders), they are insufficient. If you truly want to manage the important internal activities which cause these results, you need a different tool. You need a tool which monitors how well people are performing on the key inputs to that performance. Otherwise, all you are doing is shouting the score without any clue as to how to improve the score.

FINAL THOUGHTS
Sports media like ESPN, Sports Illustrated, and EuroSport spend only a small percentage of their time reporting scores. Instead, they focus their time on trying to understand the performance behind the scores. Is your reporting approach more like these companies, or more like the woman I knew back at the college radio station (who didn’t have a clue as to what was behind those scores)?

Strategic Planning Analogy #426: The Gotcha Guys (Part 2)

2011-12-08T18:48:00.002-05:00

THE STORY
There’s an old saying that “absence makes the heart grow fonder.” That may be true, but absence certainly does not make the relationship easier.

My son works the day shift. His fiancée works the night shift. As a result, they do not see as much of each other as they would like and that adds difficulty to the relationship.

I can empathize with that. When I first moved to Columbus, my wife stayed back in Minneapolis for awhile (about 750 miles away). That was tough.

THE ANALOGY
For a relationship to thrive, there needs to be interaction. This is not only true with marriage. It is also true with the various aspects of one’s business. In particular, I am thinking about the people in charge of long range strategic goals and the people in charge of monitoring near-term financial targets (like annual budget and bonus targets).

If these two groups are not interacting together on a regular basis, they can get out of sync with each other. It can get as dysfunctional as when married couples drift apart and no longer interact on a regular basis.

If the near-term monitors and the long-term strategists are not in regular communication, their agendas may no longer be compatible. Achieving the near-term targets may no longer move the company towards the long-term goals. They might even do the opposite and move the company further away from the long term intent.

As we saw in the previous blog, many problems can occur when the near-term monitoring of the “Gotcha Guys” loses the context of the long-term goals. The Gotcha Guys can end up rewarding bad behavior and punishing good behavior. They can also stifle the creativity needed to achieve ambitious long term goals.

In this blog, we will look at some suggestions to help avoid these problems (and keep that context in place).

THE PRINCIPLE
The principle here is that long-term goals are only achieved if they are part of the daily discussion when near-term targets are being decided and monitored. Therefore, it is essential to have frequent interaction between the near-term Gotcha Guys and the long-term strategists. Here are some ideas to help make this a reality.

Suggestion #1: Set More Strategic Targets
Most of the near-term targets used by companies are simple financial metrics, like “sales” or “expenses.” As we saw in the last blog, it can be easy for people to “game the system” and use tricks to achieve these types of simple metrics in ways that have nothing to do with achieving strategic goals.

Some try to avoid this problem by trying to make the metrics more complex by using ratios. Then you might have metrics like “Sales per Labor Hour” or “Expenses as a Percent of Sales.” But, as we saw in an earlier blog, even ratios can be abused and lose their link to the bigger strategic picture.

Therefore, I suggest that some of the near-term targets avoid numbers altogether. Instead create some monitoring questions which are more subjective—requiring more of a yes or no type of answer.

In its roughest form, the question would be “Did this area take the desired steps to move the company closer to its strategic objectives?” Now this is probably too vague to use in this form. But if you have a well thought out strategy, you should be able to figure out what types of key activities need to take place to make it a reality. Then you can determine which areas of the business need to participate in each activity and how they can impact it. Some examples of key activities might be:

a) Adding some specific capacity where it is lacking.
b) Adding some specific capability where expertise is lacking.
c) Convincing consumers to believe in the claims of your positioning.
d) Creating superiority in a particular attribute essential to winning in the marketplace.
e) Properly resolving a key strategic issue.

By holding people accountable in the near-term for specific activities directly linked to the long-term strategy, one is more likely to get the long term strategy achieved. These types of questions are more difficult to “game” because you are more directly measuring actual long-term activities.

Now some people will take this one step further and try to create fine-tuned metrics around these activities. This is usually referred to as a balanced scorecard. Although having a balanced scorecard is better than just the simple metrics mentioned earlier, it may still be less ideal than the more vague and abstract version of the question “Did you move us closer to our goal?”

I have two reasons for saying this. First, if you keep the question more vague, it requires more interaction between the long-term folks and the Gotcha Guys in order to interpret the target and the performance. And as we said at the beginning of the blog, more interaction is a good thing.

Second, the more we try to push this into a metric rather than a question, the easier it is to sever the linkage between near- and long-term. The temptation is there to focus on just “hitting the number” rather than “doing what’s right.” Why provide that type of temptation?

Now I’m not saying that all the targets should be in this format. Just do enough so that the near-term and long-term people are forced to work together to ensure that people are rewarded on their activities in a long-term context.

Suggestion #2: Use Scenario Planning
As we said in the last blog, near-term targets can get out of sync with long-term goals when the environment changes (or we learn of a need to adjust our assumptions). One way to get around this problem is to analyze various scenarios in the beginning and think through their ramifications to the desired metrics.

Then, if the situation changes, the long-term people can tell the short-term people to shift the program to the alternative scenario and its alternative metrics. By using this process, it gives more opportunities for the two groups to work together (when setting up the scenarios and when changing scenarios). In addition, it is a quick way to keep everyone in sync when times change.

Suggestion #3: Force Interaction
Finally, if these other suggestions do not create enough interaction, then mandate it through policy.
Mandate periodic cross-functional meetings. Rotate people between the two departments. Put them on project teams together. Make increased interaction one of their goals. Have them sign-off on some of each other’s work. Do whatever it takes to ensure that the short-term Gotcha Guys are confronted with the long-term context.

SUMMARY
It is easy for near-term targets to get out of sync with long-term goals. To help prevent this from happening, it is a good idea for the groups responsible for near-term and long-term to interact on a regular basis. Three suggestions to do this are:

1) Add some abstract action-oriented questions to the near term criteria (“Did you do what was required to get us closer to our goal?”);

2) Use Scenario Planning;

3) Force interaction through policy decisions.

FINAL THOUGHTS
If couples stop communicating altogether, they can end up getting a divorce. Let’s keep our communications frequent between the near-termers and the long-termers to prevent an ugly divorce in our business.

Strategic Planning Analogy #425: The Gotcha Guys (Part 1)

2011-12-06T17:13:00.002-05:00

THE STORY
Many years ago, the US Postal Service ran an advertising campaign to increase the use of its priority mail service. The advertising was a tremendous success—far higher than anticipated. Usage of priority mail skyrocketed. The return on that advertising investment was phenomenal. It paid for itself many times over.

The US Postal Service employee in charge of the advertising was pleased with how well the advertising was working. He could see that each dollar spent on the ads returned high levels of profits. Therefore, he increased the spending on the ads. And the ads continued to perform well.

You’d think that the US Postal Service would be happy with these outstanding results. Instead, they fired the employee in charge of the advertising. Why? The man had overspent his allocated advertising budget. And that was considered an offense worthy of being fired.

THE ANALOGY
In this story, we see two points of view. The employee felt he should be rewarded, because he had dramatically increased the profitability of the Postal Service—far more than what was expected. He saw that as a great success.

By contrast, the US Postal Service saw it as a great failure, because the expense budget allocated for advertising had been violated. Such a gross overspending needed to be severely punished.

The employee understood the “Big Picture”: He knew that the postal service needed to create demand for the more profitable Priority Mail if it was to have any long-term viability. He was fulfilling that big picture purpose. His superiors, however, were focused on the “Little Picture”: The postal service was losing money, so it needed to control each line item of costs on the income statement. By losing sight of the big picture, these superiors made a poor long-term decision regarding the advertising.

A similar situation can occur in strategic planning. Somewhere within the planning process, one usually sets some near-term targets—usually financial in nature (the Little Picture). Then there are people assigned to monitor progress against those targets. If the targets are not achieved, then this violation is brought to everyone’s attention.

I call these monitors of the Little Picture the “Gotcha Guys” because they appear to take great pleasure in catching people in the wrong. When they see a violation, they seem to want to shout “Gotcha!” because they like catching people in the act of violating the rules and want everyone to know that they caught someone. These are the types of people who would take pleasure in firing the US Postal Service employee who broke the rule on advertising spending.

Although one needs people to monitor this near-term performance, one must never forget the larger context of the Big Picture. Remember, the ultimate goal of strategic planning is to improve the long-term prospects of the business, NOT to hit every interim target exactly.

In practice, sometimes you can end up discovering a better path to long term performance which doesn’t exactly mesh with the pre-set interim targets. As long as this better path is consistent with the foundational principles of the strategy, it should not be severely punished.

THE PRINCIPLE
The principle here is that near-term performance always needs to be evaluated within the longer-term context. Otherwise, near-term performance may never lead to the desired long-term results. This blog will briefly look at three problems which can occur when this context is ignored. In the next blog will look at ideas to help keep the context in place.

Problem #1: The Linkage Is Not Ironclad
When the near-term targets are set, there is an assumption that there is a linkage between the near-term target and the long-term goal. In other words, there is an assumption that if the targets are generally achieved, then the goal will be generally achieved.

In a rough sense, that is commonly true—there usually is some sort of linkage. The targets of where to cut and where to invest tend to be made with the idea that they will lead to the right outcomes.

The problem is that this linkage is not ironclad. One cannot assume that there is an unbreakable connection between the two.

For example, sometimes one can find ways to achieve the near term targets in a manner contrary to the long-term goals. Haven’t you ever seen managers find tricks to achieve their numbers (and get big bonuses) which are contrary to long-term intent? They cut needed investments and repairs to hit the near-term expense targets while jeopardizing long-term capabilities. Or they hit a near-term sales target by using tricks which either destroy profits or hurt future sales opportunities. These are the people who are destroying the future, but are wrongly ignored by the Gotcha Guys because they hit their targets.

Conversely, there can be ways to improve strategic outcomes which violate the near-term targets (as we saw with the postal service advertisements). These are the people who are improving the future, but get wrongly punished by the Gotcha Guys, because they missed their targets. In both cases, because the Gotcha Guys are not evaluating near-term performance within the long-term context, they are coming to the wrong conclusion.

Don’t assume an ironclad link. Evaluate each case to make sure the right long-term move was made.

Problem #2: We Learn As We Implement
When the implementation plan and near-term targets are set, we make the best choices based upon what we know at the time. However, as we start the implementation, we learn even more. Sometimes we learn that some of our assumptions weren’t as good as we thought. For example, competition may react differently than anticipated. Or, as we saw in the story, advertising may work a lot better than anticipated.

As we learn, we need to adapt. Sometimes that adapting means that the original targets need to be adjusted. I’m pretty sure that if the Postal Service had known in advance how well the advertising would work, they would have set a higher target for advertising expenses.

In other words, our good intents on target-setting may have lead to the wrong targets. As we learn this, we should adjust the targets. I’m not saying here that we should continually change our Big Picture strategy based on the latest whim. That should be relatively stable. But sometimes tactics need to be adjusted (in light of new learnings) in order to better achieve that same strategy.

The Gotcha Guys tend to ignore learnings and just zero-in their focus on monitoring performance on the original targets. This can lead to not taking advantage of the new learnings and sub-optimizing long-term performance.

Problem #3: Gotcha Guys Stifle Creativity/Innovation
One of the key buzz words these days in “Innovation.” Most of the recent literature seems to promote the idea that great strategic leaps forward require an innovative approach. We need to think “outside the box” in order to find our strategic edge.

The problem with a rigid adherence to the near-term targets is that the targets were probably set with “inside the box” thinking. A truly innovative approach may require severing the linkage between the target and the strategic goal.

If the Gotcha Guys are given too much power to force compliance with the near-term targets, they may inadvertently be stifling any creativity and innovation. Creative approaches which could lead to superior achievement of long-term goals might be abandoned, for fear of upsetting the Gotcha Guys.

SUMMARY
Although there is a need to break down long-term strategic goals into near-term tactics, problems can arise if those near-term tactics take on a life of their own outside the context of the bigger picture. For example, tactics can be achieved using tricks that do not support the strategy. Or, tactics may become obsolete as we learn more through implementation. Or, innovative ways to improve on the big picture may be ignored because they do not fit with the original tactics. That is why compliance with near-term targets needs to be done within the context of the longer-term strategy. That way, we can assure that the right things get done—not only for now, but for the future.

FINAL THOUGHTS
The recent news from the US Postal Service is that they are near bankruptcy and that drastic changes are needed in order to survive. Perhaps if they had spent more time years ago incorporating the big picture into their decisions (rather than punishing creative initiative) they would not be in a mess as large as they are today. Learn from the mistakes of the US Postal Service.

Strategic Planning Analogy #424: Matching Up

2011-11-29T21:06:00.003-05:00

THE STORY
Recently, I was talking to someone who was divorced. After the divorce, she had been using a number of internet dating sites to find a new partner. Her ex-husband was also using a number of internet dating sites at this time to find a new partner.

What was interesting was that these internet dating sites kept making suggestions that these two formerly married people should start dating each other. Given the nature of the negative emotions surrounding their divorce, I can assure you that the idea of getting them back to dating each other is a very, very bad idea.

THE ANALOGY
One of the secrets to a good marriage is a good match between the people getting married. And although computer dating services may help reduce the risk of a bad match, they are not foolproof. As seen in the story, some of their suggestions can be disastrous. That is why extra effort needs to applied to ensure the match is truly good.

The same idea applies to strategies. Like marriages, strategies require good matches between the people involved. After all, strategies are only good if they are effectively implemented. Implementation requires the actions of a number of stakeholders. If these stakeholders are not well matched up with the essence of the strategy, they will stray from the strategic intent. Implementation will suffer.

Yes, there are computer programs and internet sites to help us find the right strategic stakeholders, be that strategic partners, acquisition targets, employees, customers, lenders, equity holders, etc. However, these tools are not foolproof. Extra effort is needed to ensure that all the parties match up well with the thrust of the strategic intent. If we are not diligent and vigilant in making sure we have good strategic matches, we will end up with the equivalent of a strategic divorce…and that is rarely the desirable way to implement a strategy.

THE PRINCIPLE
The principle here has to do with strategic fit. Strategic fit based on how well stakeholders match up with the strategy. Typically, the better the fit, the better the strategic execution.

The logic behind this idea seems pretty obvious. For example, if your employees are strongly opposed to what the strategy is trying to accomplish, then they will rebel and resist. Implementation will suffer (I have witnessed this firsthand). However, if the employees are in strong agreement with the strategy, then they will more heartily implement it properly.

Anyone who has had an activist investor who wanted to move the company in a different direction than the management has also seen how such a mis-match can stall strategic implementation. The worst case scenario is that the two sides (management and equity investor) will get into a nasty fight and neither strategic option will be strongly embraced. The company suffers greatly.

Or ask Netflix about how well their strategy to split the company went after they announced it and found out that it was a major mis-match for their consumers. Customers rebelled, subscriptions dropped dramatically, and the stock price dropped equally dramatically. Netflix had to abandon the original strategy to split the company.

So it would seem to be a no-brainer that companies need to cultivate a strong strategic fit with all their stakeholders—be it employees, investors, customers, or whomever is important to the success of strategy implementation. Yet, like with Netflix, there are so many examples where companies have not been diligent and vigilant in maintaining strategic fit with these stakeholders (and have suffered the consequences).

So what causes companies to stray from this basic principal? To put it bluntly, it usually boils down to either greed or laziness.

Greed and Overreach
Greed can ruin strategic fit in two ways. First, greed can lead to strategic overreach. A great strategy is typically based upon owning a strong position. For example, a position may be based on superiority in delivery an attribute, like quality, speed or service. By definition, these positions tend to be limiting. To strongly own one of these attributes, one typically has to make trade-offs against other attributes. For example, for Apple to truly own coolness, elegance and ease of use, it has had to trade away from low cost/low price.

Limiting can initially sound bad, but it can actually be very good. It is easier to find strategic fit with customers if you stick to your point of uniqueness. Your customers became your customers because they also wanted that point of uniqueness. There was a fit.

But greed can set in. Management may want to expand beyond their point of uniqueness. They want to become much more. As a result, they overreach and destroy strategic fit with their customers.

For example, every time Wal-Mart has tried to expand beyond their low cost/low price position and try to become known for fashion, it has failed. It is a mis-match with how Wal-Mart is perceived by those who want low cost/low price and those who want fashion.

When exclusive high fashion brands let greed cause them to overreach and try to be more relevant to the masses, it leads to long-term disaster. The old customer who loved the exclusivity will walk away quickly. The new masses will eventually walk away as well, because a lot of the appeal to them was in emulating the exclusive customer (who is no longer associated with the brand). Not only is there now a mis-fit with the customer, but also their supply chain. Once the fashion brand appeals to the masses, the exclusive retail outlets will drop the brand because it no longer fits with their strategy.

Or how about Toyota? Toyota had a strong position in producing dependable cars. However, Toyota got greedy and wanted to make all kinds of cars at all kinds of prices. The trade-offs which used to lead to superior dependability started to fade away. Quality and dependability dropped to levels which hurt the credibility of the old position. People were no longer willing to pay a high premium to get the “dependability” of a Toyota, because it no longer seemed worth it.

Greed and Cheapening
Another outcome of greed may be in underinvesting in the core position in order to cut costs and make more money. To own a position, you have to invest in it. Choke off investment in the strategy (in the name of greed), and your actions no longer fit the strategy. For example, another part of Toyota’s problem was that they underinvested in the quality levels needed to create dependability (in order to increase the profits needed to invest in overreach). This lead to less dependability in the cars and a mis-fit with the customers.

In this economy, companies are finding they can get away with paying their employees less. In the long run, however, this is creating a mis-fit between employees and the company. The good employees leave as soon as they can. They ones who can’t leave get angry and become less committed to putting in any extra effort behind the strategy.

If you cheapen your approach enough (in labor, parts or whatever), execution will eventually suffer to the point where you lose the right to own that position. Then your strategy is lost. Greed for short-term bottom-line gains eventually leads to far lower long-term profits.

Laziness
Sometimes it isn’t overt acts like overreach or cheapening which ruin strategic fit. Sometimes it is just a lack of effort to keep fit from eroding away. We can get lazy in our vigilance to maintain fit. For example, we may let mis-fitting employees creep into the business because we do not police that characteristic close enough in the hiring process. We hire them because they have superstar status and forget to do the due diligence into whether they are the right fit for the culture and strategy. When the fit is wrong, they can poison the culture of a company and ruin the strategy.

Many of the Silicon Valley firms like Google, Apple and Facebook realize how important engineering excellence is to their core strategy. As a result, they are not lazy in their approach to getting the best engineers. They do whatever it takes in terms of pay, perks and image to gather this important resource for their company the best they can.

Another place laziness in fit-seeking can occur is when looking for investment capital. We may take equity investment money from someone just because they want to invest in us and not take the effort to ensure that there is a strategic fit between their objectives and ours (and regret it later when they challenge our strategy due to a mis-match). Or we can acquire a company because the financial models look good, but not do additional due diligence into strategic fit. That lack of strategic fit can make the acquisition a disaster. In fact, poor fit is one of the leading causes of acquisition failure.

Recommendations
As we have seen, strategic fit cannot be assumed to be a given. Fit can fade away due to greed or laziness. Therefore, we need to become proactive in aggressively cultivating strategic fit with all our key stakeholders—investors, employees, customers, partners, supply chain, etc. We need to make fit a high enough priority to overcome the impulses of greed and laziness.

Whenever a decision is being made which impacts a stakeholder, we need to ask this question: Will this move strengthen or weaken strategic fit?

Cultivating fit needs to become integral to the strategy itself. We need to seek out investors who agree with our approach. We need to seek out employees who believe in the strategy. We need to find distributors where supporting our strategy is in their best interests. We need to aggressively seek out those customers who are looking for what we are offering. We need to only aggressively go after acquisitions with a strong fit. It cannot be taken for granted. It must be sought out.

SUMMARY
Strategic implementation is strongest when all the stakeholders to the strategy are well-matched to the strategy. Without a strong fit across the board, the strategy suffers. There are many forces (like greed and laziness) which can naturally work against strategic fit. Therefore, we need to be proactive at seeking out and protecting strategic fit.

FINAL THOUGHTS
Sure, not everyone is a good fit for our company. But that doesn’t mean we should give up looking for them. They are out there. We just need to take the effort to seek them out.

Strategic Planning Analogy #423: The Whole Canvas at Once

2011-11-21T19:07:00.003-05:00

THE STORY
Back when I was in college, I spent one year as an art major. I had a professor who tried to teach me how to paint. This professor said that beginning novice painters tend to make the mistake of working on a painting one section at a time.

These new artists try to get one small section of the painting fully completed before moving to another section of the canvass. Then they try to fully complete the painting in the second section before moving to a third section, and so on.

The professor said this was a mistake because all of these little sections rarely fit together properly when the painting is completed. The colors don’t blend together right, the textures don’t blend together, and the overall effect feels disjointed rather than as one flowing statement.

Instead, the professor said that one should paint over the entire canvass all at the same time. First, you rough out the entire painting at the same time. Then you put on the finishing touches across the entire canvas at the same time. That way, everything flows together well and the painting makes a grand, unified statement.

Although this advice was excellent, my painting skills were not. It was soon thereafter that I switched my college major to something besides art.

THE ANALOGY
Painting and Strategic Planning are both creative processes. And, in my opinion, a great strategic plan (when completed) can be just as beautiful as a great painting. But both can appear rather ugly if one does not follow the advice of my art professor.

The strategic process is often broken down into its component parts, like mission statements, five forces analyses, vision statements, scenario planning, goal-setting, tactics, etc. Then, like those misguided painting novices, we can try to perfect each of these parts in isolation before moving onto the next component. It can be like following a check list. You do a strategic task to completion, check it off the list as “done”, and then move onto the next item on the list.

The problem comes when all the items on the list are finally checked off as done. Because each step was done in isolation and fully completed before moving onto the next step, the end result looks ugly. The parts don’t blend together. Everything is disjointed. There is no overall flow to the plan.

Because the pieces are not well integrated, faulty logic can creep into the strategic process, or even no logic at all to tie the parts together. The net result is a failed plan, because not only is the logic weak, but nobody could understand the flow and become committed to making the flow a reality.

Just like in painting, a truly beautiful strategic plan occurs only when you work the entire canvass simultaneously. That way, you can make sure that the logic flows properly and that people can clearly see the vision you have tried to communicate.

THE PRINCIPLE
The principle here is that strategic planning is not a series of isolated events, but an iterative process. You cannot effectively finish one part until you have finished all parts.

Each Part Influences Other Parts
All of the various parts of a strategic plan influence all the other parts of the plan. Therefore, one needs to work through all the parts together in order to take advantage of all the richness to be found in the interaction between the parts. The whole canvass needs to be worked as a whole—in an ongoing basis—allowing the knowledge gotten from feedback in one area to influence all the other areas.

For example, one can do a SWOT analysis (Strengths Weaknesses Opportunities Threats) and come away thinking you really know where your strengths are relative to competition. However, a later scenario exercise (or market test) may cause you to realize that if the environment unfolds in a particular manner, your “strengths” may not be as strong as you originally thought. You may need to go back and modify your earlier SWOT conclusions. And if your original mission was based on a strength you now feel is less secure, you may need to change the mission statement. Either that, or you may need a radical reprioritization of strategic initiatives in order to spend time restoring a strength you realize you no longer have.

Or let’s say you set a goal. Then later on in the planning process, you realize that the only way to possibly achieve that goal is by taking on more risk than you feel comfortable with. Based on this new information, you may need to go back and either change your goal or change your tolerance for risk. The worst thing you can do is not go back and change the goal (because that task is already “done”) and then disappoint everyone when the goal is not achieved, because the goal was never realistic in the first place.

Sometimes, you cannot tell if a vision is a good one until you work through all of its implications in the rest of the planning exercises. You may find out that it isn’t as good as you thought, or perhaps you stumble upon an even better vision. So you should be open to change as you go through the process.

Don’t Be Premature In Wordsmithing
I’ve seen planning processes grind to halt as executives struggle over each individual word in a mission statement or vision statement. Many weeks or months can go by as the simple sentence is edited, then re-edited, then re-re-edited, then re-re-re-edited, and so on. Major discussions envelop the choice of each word.

This is like the painter who labors forever over the perfection of the painting of a single tree in a forest landscape before moving on. So many layers of paint and scrapings of paint may occur on that single tree that it no longer looks like it fits into the rest of the forest. Similarly, so much effort is put into the individual words or a mission or vision statement that the big picture of the whole plan is missed.

Earlier, we saw that as we learn from the planning process, we may need to go back and modify prior efforts. A good idea for a vision or mission statement may not look so good anymore. It may need to be altered. Unfortunately, if you have just gone through this major, time-consuming struggle to perfect each word of the statement, it may not be possible to alter it any more. It’s taken on a life of its own and it would be a political nightmare to open it up for review.

Now, you are stuck with:

a) A statement no longer appropriate for the strategy; or

b) A strategy that matches the statement, but not the reality of the marketplace; or

c) A statement which eventually gets ignored because people know it is not relevant to what is happening (meaning that all that work was a waste of time); or

d) A strategy which eventually gets ignored because people cling too tightly to the improper vision/mission statement; or

e) A poor planning process, because the earlier-written statement blinds the executives from keeping an open mind about the realities in subsequent analyses.

None of these are good options. That’s why vision and mission statements should not be fully locked down into the final words until the full planning process has had a chance to “pressure-test” the statement, to make sure it is still completely relevant. Postpone the “wordsmithing” until you are sure you have a full understanding of the big picture. Don’t do it as a complete, unalterable, isolated event at the very beginning of the process.

SUMMARY
Because all the parts of the strategic planning process influence your knowledge base for all the other parts of the process, you cannot do effective strategic planning in a strictly linear manner. Instead of perfecting each part individually and sequentially (like a check list), one needs to incorporate a little back and forth into the process. New learnings need to be applied to prior strategy tasks to ensure that they are still relevant. Be willing to adjust and modify along the way. Work the entire strategy canvas together.

FINAL THOUGHTS
Just because the strategy process should be iterative does not mean that a plan is never completed. Painters work the entire canvas together in an iterative fashion, yet manage to eventually complete the painting. Everything on the painting gradually gets better together until everything looks great. The same is true of strategic planning. Yes, go back and forth to keep making everything better, but eventually stop when the whole picture comes together. Then start the implementation.

Strategic Planning Analogy #422: Hatching Chickens

2011-11-14T14:46:00.004-05:00

THE STORY
Back when I was a child, the family living next-door hatched chickens in their garage. They had a number of incubators full of eggs. As long as the incubators were kept at the proper temperature, those eggs would hatch. Then the neighbor’s garage was full of cute yellow baby chicks.

Eventually, those chicks would be gone, and they’d have a bunch of new eggs to hatch. I never asked what happened to all those baby chicks…or asked why someone living in an inner ring suburb of Detroit was hatching eggs in their garage…or why they also had a machine to make ceramics in their garage. I guess as a young boy, you just thought it was cool to see a bunch of baby chicks get born and didn’t think about the rest.

THE ANALOGY
Chickens are not the only things which are hatched. Companies try to get strategies hatched which will grow the firm. But just as all eggs do not lead to hatching chickens, not all strategies result in growing a firm. Instead, some just die in the shell.

To reduce the risk of failure, my neighbor put the eggs in an incubator. The incubator had a temperature level which was tightly controlled. There was a thermometer in each one, so that one could make sure the temperature was ideal for hatching eggs. At the right temperature, hatching was more likely to occur.

The same is true for strategies. Strategic success has a lot to do with the characteristics of the company where the strategy lies. If the environment is wrong, then the strategic idea will die (just like those eggs if held at the wrong temperature).

THE PRINCIPLE
The principle here is that even great strategic ideas will die if they are placed in the wrong environment. Therefore, having great ideas is not enough. One also needs to manage environment, so that the ideas have a chance for survival.

1) Don’t Try to Hatch a Strategy Which Requires a Distinctively Different Environment
For example, one time I worked with a company and came up with what I thought was an excellent strategic idea. It leveraged a lot of the company’s core competencies in a way which could reinvent an entire industry, creating huge growth opportunities. Unfortunately, I could never get the idea to hatch within this company, no matter how hard I tried.

The problem was that the corporate culture at this company was centered on helping people have more fun. This new strategy had nothing to do with “fun.” It was more focused on alleviating pain. This incompatibility with the prevailing culture doomed the strategy. It didn’t have a chance of hatching. The corporate temperature was wrong.

As in this case, the temperature was wrong because the energy of the company was focused in a different direction. However, sometimes there just isn’t any energy at all to support change. The incubator is turned off and it is too cold to grow anything.

These are the companies who resist any kind of change. New ideas are shot down quickly. Energy is spent on protecting the power bases of the status quo rather than moving the company forward. Anything out of the ordinary gets vetoed.

We talked about the need for getting power behind a strategy in the prior blog. But if there is no power to harness, then you have what I referred to in an earlier blog as “hard clay.” Once clay has been baked hard in a kiln, you can no longer reform the clay into something new. The hardened shape stays forever. Just as you cannot remold the hard clay into a new form, you cannot remold a cold company into a new strategic reality. The efforts are a waste of time.

If you find yourself in a cold environment with hard clay, don’t waste your efforts on radical strategic change. You won’t get anywhere. Your strategic options are more limited to things like:

a) Milking the old strategy as well as one can on its way down (a harvest strategy); or
b) Divesting the operation (all or in part) (a liquidation strategy).

Although these may not be the most dynamic options, at least they are compatible with the temperature of the company, so that they have a chance of succeeding. I’d rather have a successful harvest strategy than a failed repositioning strategy—no matter how appealing the repositioning at first appeared.

2) Build Strategic Incubators
Sometimes, if the core business is not the right temperature, you can still have success if the company allows you to build separate incubators. For example, when IBM was trying to invent the PC, it was soon apparent that the core business environment at IBM was the wrong place to hatch such a strategy. The structure, the bureaucracy, the culture…they were not designed for such a radical start-up. The PC would have died before hatching. Wrong temperature.

IBM was clever enough to realize this, so they moved the PC development off-site. It was freed from the old corporate structure and allowed to incubate on its own—far away from headquarters in an environment ideally suited for such a start-up. As a result of the isolation, the diversification into PCs was a success. It hatched well because it was allowed to be put in the right kind of incubator—even if it required being separated and held at a different temperature than the core business.

Incubators work on eggs because they properly control the entire environment around the egg. They protect the egg from the wrong environment. The same is true with strategies. If you separate them from the pressures of the core business and nurture them in the right culture, they can hatch into a successful business. Therefore, pre-plan the incubator needs when proposing a strategic move which would die if started within the core. Include the incubator as part of the proposal.

Beyond that, the trick here is how one handles the strategy once it is successfully hatched in the incubator. Eventually, the project needs to leave the incubator and get reunited with the core. Otherwise, the core will never benefit from the strategy. However, the newly hatched business is still young and weak. It can still get stomped on and killed by the core if one is not careful.

Therefore, your great idea may not only need an incubator strategy, but also a post-incubator strategy.

3) Sometimes You Need to Change the Core Culture
If keeping a culture which has either gone cold or is no longer suitable to the future is not acceptable, or if incubation of a small offshoot is not enough, then one is left to change the core culture. This is extremely difficult and highly risky. The likelihood of success is low.

If this is your choice, understand the risks and enter the project well prepared. Start early and expect a long battle. Anticipate resistance and head it off early.

One of the biggest errors I have seen is leaders trying to push a new strategic agenda and think that all they are doing is pushing a strategic agenda. If the agenda is radical, one is not only pushing a new strategic agenda, but one is also pushing through a new culture, a new bureaucracy, a new corporate climate. If all your forces are lined up to push the strategic agenda, then the forces of the status quo culture will resist your effort at the cultural level.

This is a two-front war—a war of strategy and a war of culture. You have to win at both to win at all. That is why trying to change the whole corporation is so difficult and risky.

SUMMARY
Even great strategic ideas will fail if launched in the wrong environment. To prevent this failure, one must either:

a) Limit one’s strategic options to only those options compatible with the current corporate environment;
b) Launch the new ventures in a separate incubator, protected from the core and run with a more appropriate culture; or
c) Launch a risky two-front war to change both the strategy and the culture of the core business at the same time.

FINAL THOUGHTS
When someone outlines a strategy to me and asks me if I think it is a good one, my first response is to ask them who the strategy is for. After all, strategic success depends not only on the idea, but on who is going to implement it. A strategy which is great for one company could doom another, depending on the situation and the culture. Therefore, don’t just try to seek a “good strategy.” Instead, seek out the “strategy most appropriate for me (and my culture).” Find the strategy which will hatch in your incubator.

Strategic Planning Analogy #421: Tapping the Power

2011-11-07T19:33:00.002-05:00

THE STORY
One year for Christmas I decided to put up a larger than normal Christmas light display in my front yard. I bought all sorts of new items to place in my yard, including a metal deer covered in lights with a motor that made its head go up and down.

Everything worked fine for a few days. Then it stopped working. The lights went out and the motor stopped working. I spent many hours over many days going over everything in the front yard trying to get it to work again. I assumed that something in the display was broken, so all I need do is fix the display and everything will be fine.

So I spent hours looking for the brokenness in the display. I wiggled all the wires in the display. Nothing helped. For the rest of the season, the display at my house was dark and lifeless.

After Christmas, I started to take all of the lights and displays down. It was then that I saw a switch in my garage that I had never noticed before. It was a circuit breaker switch. I pushed the button, and all of a sudden the remaining parts of the display began to work.

If I had only spent a second at the beginning of the season pushing that button in the garage, I could have saved all of those many hours wasted in the front yard trying to get that display to work.

THE ANALOGY
My goal was to have a great Christmas light display. Therefore, that is where I focused my efforts. When my goal was not being achieved, I spent my time looking for a solution somewhere in the display.

Unfortunately, the problem was not hidden within the display. It was back behind the scenes in the garage. Had I only taken my eyes off the goal, I would have seen that the display was fine and that the problem was that there was no electrical power getting to the display. Had I spent more time thinking about the power behind the display, I would have had a working display that year.

A similar situation can occur in strategic planning. We can get so focused on our strategic goal that we forget about looking at how well the goal is connected to the corporate energy source. Since the goal is what we want, we look at fixing the elements of the goal when results fall short. This can all be a waste of effort, since the problem often is a result of insufficiently tapping into corporate energy. Turn on the power of the organization, and the results will come on their own.

THE PRINCIPLE
The principle here is about discerning the difference between power and performance. Performance is the output—it is what we want to happen. It is our goal. Power, by contrast, is the input—it is the energy needed to accomplish the goal.

Strategic planning is usually pretty good about managing the performance. It helps us decide what we want to happen (goals) and how we are going to measure the results (metrics). Many times, however, the process comes up short on managing the power. It doesn’t go behind the scenes to ensure that sufficient energy is focused on the plan.

Power is often just assumed to be there. Just set the goal and the work will get done. Therefore, all the effort is spent on getting the right goal and measuring the progress towards the goal. Nobody bothers to go back into the garage to make sure the power switch is set in the “on” position.

The real problem occurs when performance falls short of plan. If you focus only on the performance, you may not be able to fix the problem, because the cause may be insufficient power.

For example, let’s say that you have a goal to achieve dramatic sales growth for a particular product and performance is falling short. To fix the sales problem, you may look for a sales solution. You may look to change the advertising, or change the pricing, or start a new sales promotion, or some such similar tactic. This would be similar to when I tried to fix my Christmas display by tinkering with pieces of the display. And, like with my Christmas display, all those efforts may not work.

However, if you stepped back to consider the power in your organization, you may have found that there was nothing wrong with the original plan (as far as it went). Instead, the problem was insufficient motivation amongst those required to do the selling (not enough power). Perhaps they do not believe in the product. Perhaps they have put their power behind a different product in the portfolio. Perhaps they just aren’t motivated to work hard because they feel no loyalty to the company. If you fix the power, the performance will come all on its own, because highly motive employees can accomplish much.

Problem #1: No Power
There are two ways in which a company can mismanage power. First, they may not create sufficient power. I have personally witnessed how much performance is impacted by the level of power running through the employees.

For example, I worked with a company that used to have a lot of power flowing through the employees. They were highly motivated to “do whatever it takes to win.” They loved the founder and would go the extra effort in response to that love. The place felt like a family and everyone worked hard for the good of the family. The power was huge and performance was outstanding.

Then something happened—the founder retired and the new leadership destroyed the feeling of family. As a result, work became nothing more than just a job. People went from voluntarily working 70 hours a week (because they loved doing it) to working only 50 hours a week. The energy levels during those 50 hours went down as well (because they didn’t love doing it as much and they didn’t care as much). The power of family love was replaced with unproductive in-fighting. Personal goals replaced doing whatever it takes for the greater good. And, not surprisingly, performance started to suffer.

The company is scrambling to find ways to get performance back up. But the focus in on adjusting the tactics rather than the power behind the tactics. As a result, they are fighting a losing battle.

In essence, the company had unknowingly turned off the switch in the garage, not realizing how much impact that would have on the display out front. And now they are trying to fix the problem by tweaking the display rather than turning the switch back on.

By contrast, I had the privilege to work in the past with the employees of Save-A-Lot, a hard discount, low price food retailer similar to Aldi. When you walked into the Save-A-Lot headquarters, you could feel all the energy and buzz around you. The power switch was on full power.

When you talked to the people, the conversation wasn’t around doing a job of pushing groceries at a profit. Instead, people talked in terms more similar to a religious revival. They talked about the pride they had in providing a higher standard of living to those who society tended to overlook. They talked about bringing “greater dignity” to the poor by packaging the food products to look like the brands the rich people ate. They not only wanted to feed these people, but improve their sense of self-worth. It was as if they weren’t grocers, but missionaries on a mission to save the poor from malnutrition and humiliation. They were united in purpose and focused on this larger, more personal motivation. And guess what? This power lead to great performance.

To achieve high levels of power, you need to supply high levels of purpose. This purpose needs to transcend just working for a paycheck. It requires tapping into the inner desires of your people. This concept seems to be taking on greater significance, as the Millennials who are now entering the workforce seem more focused on this greater purpose than the Baby Boomers they are replacing. If you do not provide a greater purpose, you will lose a lot of the power potential in the Millennial segment.

Strategic Planning can help by infusing a higher purpose into the Vision and Mission Statements. Planners can help ensure that strategic processes not only looks at managing performance, but also proactively manages power. They can make sure that power issues get sufficient attention.

Problem #2: Power Unlinked
Even if the company is full of power, performance may still suffer if there is insufficient connection between the power and the performance. My Christmas display only worked when plugged into the power source in the garage. Similarly, strategists need to connect the strategy to the power in the people.

Strategists need to show how the strategy is connected to the higher purpose. They need to show how achievement of the strategy not only improves performance, but improves achievement of the higher purpose. They need to show that putting effort behind the plan gets them closer to the higher purpose that doing something else.

SUMMARY
Often, the best way to ensure that strategic goals are met is to take your focus off the goals and focus instead on ensuring that the organization is powerfully motivated to achieve the goals. This typically requires bonding with employees at a deeper level (than merely meeting the goals) by instilling a higher purpose into what people do. The higher their motivational power, the more likely the effort will be there to get the task accomplished. If you can connect that power to the task at hand, then the results will pretty much take care of themselves.

FINAL THOUGHTS
This deeper bonding can also work with customers. If consumers identify with your higher purpose, then they will want to support your efforts by purchasing from your company. This can lead to higher unit sales volumes at higher prices.

Strategic Planning Analogy #420: Creating the Future

2011-11-04T12:26:00.004-05:00

THE STORY
Back in 1989, a move came out titled “Field of Dreams.” The story is about a farmer who heard voices. One of the voices kept saying, “Build it and he will come.” Eventually the farmer figured out that he was supposed to build a baseball field on his farm. So he did.

After building the baseball field, the players from the old 1919 Chicago White Sox team miraculously come out of the corn and onto the playing field. Many exciting things happen in the movie as a result of building that baseball field.

The movie would have been pretty dull if that farmer had ignored the voice which said “Build it and he will come.” Then all you would have seen is a movie about a farmer harvesting corn.

THE ANALOGY
Exciting things happened in the movie because the farmer was pro-active in building that baseball field. He did not wait to react to the world around him. He built a new world on his farm and his life was forever changed.

This same dilemma occurs in strategic planning. We have the choice of either looking at the world as it is (and finding a way to exploit it), or of envisioning a new world and building it.

Building a new world can be difficult. Scoffers may laugh at you (like they did to the farmer in the movie). But often, the rewards of building that new world can be great.

THE PRINCIPLE
The principle here is based on an old quote by the late business guru Peter Drucker. He said, “The best way to predict the future is to create it.” In other words, the future is full of unknowns. The best way to minimize the unknowns in your future (and maximize your ability to succeed) is to proactively work to create the future of your choice. Rather than react to an uncertain world you did not create, proactively shape the world to your benefit. Be like the farmer and “build it” and the profits “will come.”

Weakness in Reaction Approach
This idea is contrary to a lot of the writing on how to do strategy. These writings will tell you to do an environmental analysis and then look for holes in the current environment to exploit.

Yes, this process of reacting to what the world offers up can often improve performance a bit. After all, exploiting what is in front of you is better than just drifting along and not trying to find a way to exploit the current environment. This process, however, rarely leads to great leaps in success.
The problem is that the current environment is designed to optimize the status quo. The rules of how the game is played are designed to perpetuate the status quo. The current leaders of the status quo tend to hold a disproportionate amount of power and influence. The supply chain is designed to their advantage. Unless you are one of those current leaders, it is hard to make an impact under their rules. Barriers to entry and exit keep the status quo in and you out. You are left to look for the small niches that the leaders ignored.

Another problem with the reactive approach is that you are always in a “following” or “chasing” mode. The world is constantly moving, and if you are merely trying to exploit what is in front of you, then by the time you get your strategy up and running, the world may have already passed you by. This is why Steve Jobs ignored the voice of the consumer. He said that by the time you got around to satisfying that voice, the consumer would have already moved on to something else. You’d never catch up by reacting.

There is a lot of truth to the idea of “first mover advantage,” where those who lead in creating a new world have inherent advantages over the companies which follow them. For example, look at all the companies trying to follow the success of Apple’s iPad. They can hardly make a dent into the industry built and lead by first-mover Apple. First movers are proactive, rather than reactive.

Strength of Proactive Approach
Look at the companies which tend to be at the top of most admired lists: Apple, Google, Southwest Airlines, Amazon, and Fed-Ex. These are companies which ignored the status quo and built an entirely new world, with new rules which gave them an advantage. They built it, and it (profits) came.

Apple totally reinvented industries such as computing, music, telecommunications, and entertainment. Google changed the way the world thinks about and uses information. Southwest Airlines threw away the rulebook on how airlines are supposed to operate and created a totally different one—one where they had the advantage. Fed-Ex created a category which did not before exist—guaranteed overnight delivery—and used the advantage of the new rules to create a great company. Amazon created shopping tools and a shopping process unheard of before. They rewrote the rules on customer service (via recommendations, customer reviews, and one-click) and created an empire.

These were not followers. They did not look for holes in the status quo. They built new worlds with new rules. By creating their own future, they had greater control over their worlds and how they evolved. They were able to predict how their industries evolved because they invented that future. They invented the rules by which the new world plays—rules which are most beneficial to themselves.

You Have To Build The Whole System
So does this mean that I just need to design the next cool thing and I’m all set? Not really. The forces of the status quo are quite strong. They will fight anyone trying to upset their situation. The best way to overcome this marketplace resistance is to build an entirely new marketplace. In other words, this is not about building new things, but entirely new systems which encompass the entire supply chain.

Consider the iPod. It was not the first attempt at reinventing digital music. Many MP3 players preceded it. They failed because they could not beat the forces of the music status quo. A music player without the cooperation of the music industry is not very useful.

The genius of the iPod was that it was a total reinvention of the entire music ecosystem. There was the cool player which the consumers loved. There was also an easy way to access music through iTunes. And Apple found a way to get cooperation from the holders of the music which nobody else had been able to do before. So this was not just a device play, but a rewriting of the whole system, including where and how music was sold and new rules on how musicians and labels were compensated.

Google wanted to reinvent the way businesses advertised. However, to do that, Google needed to also reinvent the platforms where that advertising took place. Google created the best search engine in order to be the preferred place for the new advertising to take place. They built Google Maps, Blogger, and other such sites so that they could control the way key future advertising venues evolved (and make sure Google got a huge chunk of that advertising).

In order to play in the advertising space in mobile, Google invented Android and gave it away for free. As a result, Google is controlling the leadership in smartphone platforms, giving it more control over how mobile advertising evolves (to its advantage). Google understands that if you want the new rules to benefit you, then you need to have a say in how the entire ecosystem evolves.

Amazon wants to ensure that the rules of digital commerce for ebooks and other such products work in their favor. As a result, they developed the Kindle as vehicle for these types of transactions. Some may complain that Amazon is selling the Kindle too cheaply, but consider the value it creates in helping Amazon reinvent the rules in their favor. Just as Google proved with giving away Android for free, the market penetration which comes from low prices helps one control how the future is built. And that is where the real benefit comes in.

And this is not just a digital phenomenon. In the early days of Wal-Mart, Sam Walton wanted to reinvent the rules about how rural customers purchased goods. Unfortunately, just building stores in rural areas was not enough to get the cooperation of the status quo. To win, Wal-Mart had to reinvent the entire ecosystem via building his own sophisticated distribution and data processing networks. Without that, Wal-Mart would not have been able to gain enough control to rewrite the rules of the future in their favor.

SUMMARY
Great strategic success rarely comes from reacting to the market as it is. Instead, it comes from creating an entirely new market, where the new rules are written to your advantage. The secret is about gaining as much control as possible over your destiny in a volatile world. To ensure that the new rules are written to your advantage, you need to reinvent the entire ecosystem, not just throw a new product into the old system. Build the system, and they will come.

FINAL THOUGHTS
Controlling the system does not usually require owning the whole system. Apple did not purchase the music labels. Google does not own telecommunication companies. Wal-Mart did not purchase the companies which supply its products. However, these companies created enough influence so that these other players were forced into playing by the new rules. And that is the key.

Strategic Planning Analogy #419: Get Into the Flow

2011-10-25T15:52:00.004-05:00

THE STORY
I used to work with a company that would go into a panic the week before the quarterly board meeting. They acted as if they were totally surprised that a board meeting was coming up. They never seemed prepared. As a result, there was always a last minute rush to get ready (with lots of overtime).

I was always flabbergasted by this lack of preparedness. After all, the board meetings were put on the calendar almost a year in advance. They were mandated by law to be held quarterly and they had been holding these quarterly meetings for decades. I wondered why everyone seemed to act as though the meetings were a surprise.

I used to joke that these people are so out of touch with the rhythms of the business that they are probably shocked every morning when the sun rises in the east. They probably say to themselves, “Wow! The sun rose in the east AGAIN. What a surprise! I wasn’t ready for that. Didn’t it just do that yesterday? I wonder when it will do it next time.”

THE ANALOGY
There is usually a rhythm or flow to a business. It is the way things get done on a recurring basis. Some activities seem to effortlessly mesh with the flow of the business. Others seem like a major disruption to the flow.

At the company mentioned above, board of directors meetings were treated as a disruption to the business flow. The normal flow had to stop while panicked people altered their routine and rushed to get the director’s meeting job done. After the board meeting, the normal flow returned and people acted as if the board had never met.

When it comes to strategic planning activities, we have a choice. We can either build a structure where strategic planning meshes into the regular flow or we can have it appear as a disruption—like those board meetings. As we will see below, strategic planning is better off when part of the normal flow.

THE PRINCIPLE
The principle here is that strategic planning is more effective when incorporated into the daily flow of business. This will not occur on its own, since the “tyranny of the immediate” tends to naturally push longer-term strategic issues out of the daily flow. Therefore, if you want strategic planning to be part of the daily flow, you have to actively work to make it so. Otherwise, you will end up with a dysfunctional mess like I saw with those board meetings.

Why Strategic Planning is Less Effective When Seen as a Disruption
There are several reasons why strategic planning is less effective when seen as a disruption. First of all, the reality is that a company moves in the direction of the daily flow. It is the sum of all those little decisions and daily actions which causes a company to become what it is. You can put a business mission or vision statement in a fancy frame and place it on the wall, but if it is not a part of the daily flow, it will have no impact on the business. You may as well frame a picture of a dancing bear and put it on the wall for all the good it would do.

For example, if your strategy calls for radical change and the daily flow doesn’t change, then the change strategy will never take root and become reality. The simple truth is that you are what you do. If the implications of the strategy are not integrated into the daily flow of what gets done, then the strategy will never succeed. So if you want an effective strategy it must move beyond disruption status and get integrated into the flow, where the real decisions are made.

The second problem with strategy-as-disruption is that it is often not taken seriously. After the disruption of an annual strategy session, people go back to their routines. It’s sort of like taking a vacation or going on holiday. It can be a fun diversion—a pleasant disruption of the routine—but afterward, the old routine returns. Or it can be seen as an unpleasant disruption, like getting the flu. Once the illness is over, the goal is to get back to the normal routine as soon as possible. Either way, the connection between the disruption and the routine isn’t made because the disruption is not taken seriously enough to cause any real lasting change.

It reminds me of what the civil servant government employees in Washington DC are known for. Tradition has it that they frequently say, “Government administrations come and go. Sometimes they are Democrats; sometimes they are Republicans. They make all kinds of pronouncements about grand new programs and new ways of doing things, but in a couple of years they are gone. Then another administration shows up with their own pronouncements. Well, we were here before these administrations, and we will be here long after they are gone. So we will keep doing whatever we want, just like we have always done before.”

In other words, the government doesn’t change much, because the everyday workers of the bureaucracy reject the disruptive calls which come from the outside politicians. The daily flow stays the same because the pronouncements aren’t taken seriously, and the grand strategies go unimplemented.

Steps to Get Strategy Into the Flow
Since it is critical to get strategic planning into the daily flow, it is prudent for the strategist to take steps to ensure that happens. The first step would be to create visibility at the point where daily decisions are made. If the key decision-makers only see the strategists once a year at an annual planning meeting, then the strategists will only be a small, maningless distraction. If you want to impact the daily decisions, you have to be visible all the time—to be there when the regular decisions are being made.

Get on the calendar of as many of the decision making bodies as you can. Go to the meetings. Steer the discussions to consider the strategic implications of what they are considering. If they won’t let you into the meetings, get to the meeting members prior to the meeting. Make sure the strategic context is top of mind and part of the normal decisions within the flow.
The second step is to provide a link between the conceptual and the practical. Business Missions and Vision Statements can provide a great conceptual framework for where you want to take the company or brand. But that doesn’t mean that everyone can intuitively understand how it impacts their own day-to-day actions.

For example, let’s say that your strategy is to become a leader at providing some functional attribute, like service, or quality, or speed. That sounds nice, but how should a salesman do his or her daily task differently in order to expedite this strategy? How should someone on the shop floor act differently as a result of that mission statement? Where should R&D efforts be directed to make the strategy a reality? How should a secretary answer the phone as a result of this strategy?

Unless you can provide a link between the words on a paper and what the average person does on an average day, they may never make the link. Don’t assume people will figure this out on their own. Help them to make the connection. Help them to see that the everyday actions of everyday employees impact strategic success. Help them to find ways to act in support of the strategy rather than (unknowingly) against it.

Ask people to visualize how the daily flow should look when the strategy is fully operational. Then help them figure out how to change their processes in order to get in line with that visualization.

Finally, pay attention to metrics. Metrics are the way we measure the daily flow. If you want the daily flow to move in concert with the strategy, then use tools which measure how well the flow is moving with the strategy. Don’t expect the daily flow to support the strategy if the measurement tools and benefit packages reward a different type of performance. For example, if you want to win on quality, don’t focus on cost control metrics and rewards

Some people use a version of the Balanced Scorecard to accomplish this. However, it might just be as simple as making sure that once everybody sees the link between what they do and the strategy, to measure how well that link is getting done.

SUMMARY
Strategic execution is most likely to be successful if the strategic planning process is integrated into the daily flow of how things get done in the business. Otherwise, you end up with strategic planning as being a minor disruption which gets ignored when the real work is resumed. To ensure that the strategy is integrated into the daily flow, consider the following actions:

a) Increasing the visibility of strategists and strategic thinking throughout the year at the places where routine decisions are being made.

b) Helping employees at all levels of the organization see the link between their everyday activities and the overall strategy.

c) Using metrics to measure and reward how well the daily flow is reinforcing the strategy.

FINAL THOUGHTS
There’s been a lot of talk over the years about how ineffective many Boards of Directors are. I think a lot of that has to do with the fact that they are often seen as a disruption rather than as part of the daily flow (as we saw in the story above). Unless you want your strategic planning

Strategic Planning Analogy #418: It’s the Same Distance

2011-10-20T15:47:00.004-05:00

THE STORY
Back when I lived in urban Minneapolis, I had a commute to work by car of about 14 miles. Although it wasn’t the greatest time of my day (I was in traffic tie-ups every day), I didn’t think a whole lot about it. It was just something I had to do every day.

By contrast, when I was living in Green Bay (a much smaller market), I was considering a job in Appleton. Appleton was one county away. The commute from my house to that new job would have been about the same distance as my commute in Minneapolis (around 15 miles). In fact, because of the nature of the traffic, the time of my commute from Green Bay to Appleton would have been shorter than the commute I had in Minneapolis. Yet, my desire (if I got that job) was to relocate from Green Bay to Appleton in order to shorten the commute.

Why did 14 miles of commuting seem okay in Minneapolis, but not between Green Bay and Appleton? I think it has to do with what I saw outside my car window during the commute. In Minneapolis, the entire drive was through a dense, urban environment. The view really didn’t change during that commute. All I saw was a built-up urban view. It was as if I didn’t go anywhere, because the view didn’t change.

By contrast, to get from Green Bay to Appleton, I would have left the urban view of Green Bay and driven into rural farm country (complete with barns and grazing dairy cows). Then I would have left the rural area to enter the urban area of Appleton. This contrast in views made me feel as if I was going on a very long distance because I was leaving one environment to go through two more visual environments. That made to commute seem so much longer and more dramatic.

Visually, the Minneapolis commute felt like I was staying in the same place. By contrast, the Green Bay to Appleton commute felt like I was leaving one world to go to another. As a result, I was willing to accept the commute in Minneapolis but not the commute in Green Bay, even though the distances were about equal and the travel time in Minneapolis was actually longer.

THE ANALOGY
One of the main purposes of strategic planning is to help get a company from where it is today to a better tomorrow. That journey into the future is a lot like my commute to work.

If the view on that strategic journey stays the same (like my Minneapolis commute), then people are content to stay on that journey. They are content, because it doesn’t feel like much of an effort—everything seems the same.

However, if that strategic journey includes a dramatic change in view (like commuting from Green Bay to Appleton), then it feels like the journey is much longer and much more difficult. There is more resistance to taking the trip.

Yet the reality is that the future comes at the same pace, whether the view changes or not. The working time is the same, regardless of what work is being done. Even though a change in work may make the work seem harder and more time consuming, the reality is that it is merely another way to occupy the same length of time. And, as we shall soon see, it may actually be easier work.

Therefore, if your strategic vision requires significant change for your organization or its position, expect increased resistance due the perception that a change of view makes for a more lengthy and difficult trip. But remind people that this perception is not necessarily reality. Just because the view outside the window changes does not mean that the effort in driving the car is all that different. All you’ve done is just point that effort into a new direction—a better direction.

THE PRINCIPLE
The principle here is that change is often not much more difficult than maintaining the status quo. It only seems that way because it is different. As strategic leaders, we need to help people see that beyond the false perception to the reality of the situation.

Here are three points to consider when persuading people to accept the journey of change.

1) Trying to Maintain Status Quo When It is Out of Sync is Very Difficult
Moving forward doing the status quo sounds easy. After all, it’s what we know and it is what gave us success in the past. But if the environment changes, then the status quo may not be as easy as it used to be. The effort to make the status quo still relevant in a changing environment can become a lot harder than expected.

Consider, for example, a conventional supermarket which suddenly has a big Wal-Mart supercenter built across the street. All of that status quo work which made the conventional supermarket successful in the past now has less of an impact. Doing the same old thing leads to lower sales and lower profits, because the Wal-Mart supercenter has taken away a large chunk of their business. The conventional supermarket has to work a lot harder just to try to lose only a little bit of past glory.

The supercenter has a natural superiority in price and selection. It takes a mammoth effort to try to overcome the resulting natural inferiority at the conventional supermarket. Unless the conventional supermarket changes its strategic approach, it can triple its effort on the status quo and still come up short. So sticking with the status quo may not be as easy as it first appears.

Change in the environment is inevitable. Eventually, the actions of the past will become out of sync with the marketplace. Their effectiveness will go down. Therefore, you will have to double or triple the effort in order to get the same impact as in the past. That doesn’t sound easier to me.

2) Getting in Sync With the Future May be Easier
I was hesitant to take the commute from Green Bay to Appleton because the scenery changed. What I didn’t take into account was the fact that because the commute would take me out of the city, I would be heading away from heavy traffic. The commute is easier in the country, because fewer cars are there. This would have been a much easier commute than the congested one I had in urban Minneapolis.

The same is true in strategy. If you change your strategy and head for a brand new position, you can end up moving in a direction which is far less competitive. There are far fewer cars on the road (competing entities) trying to reach that spot. As a result, this move into new territory is actually easier.

This is the principle behind the Blue Ocean strategy. By moving to uncontested new locations, success is actually easier to obtain.

In the example above, instead of working harder at the status quo, the conventional supermarket could have repositioned itself as the premier store for healthy, fresh, organic and wellness products. Using Whole Foods as an example, this type of concept can peacefully coexist against a Wal-Mart Supercenter and even provide the opportunity to successfully raise prices and margins.

Yes, that would require a change is activity. But it might provide a greater return for the effort than trying to make the status quo still work. And it would probably be even less effort in the long run to make that change than to continue the fight with the ever less effective conventional tools.

3) Changing Early Has its Advantages
There are many advantages to being an early mover when the environment changes. You get to own a position before it is contested (the easiest way to get a position). And it is easier to keep a position already owned than to take a position away from someone who already has it.

First movers get to define the category (and define it in a way most advantageous to themselves). First movers can lock up the supply chain to their advantage. First movers get customers in the habit of choosing them (and habits are hard to break).

All companies get the same amount of time. We all get only 24 hours in a day. If you spend most of your time driving in the status quo, you will be in the wrong location when your time is up. It is the one who redirects the car towards the new view early who gets there first (and gets the advantages of being first).

Trust me, if you wait until the end to realize that you drove in the wrong direction (towards status quo) and then try to catch up to those who took an early route to the future, you have a very difficult task in front of you. You will get to the future late and at a competitive disadvantage. That sounds like an awfully lot more work than just steering your company towards the future early on.

SUMMARY
People tend to resist change because at first it appears to be harder and more time consuming. However, the reality is that early adoption of change can actually be easier and less time consuming than sticking with the status quo. The problem with the status quo is that eventually it will become out of sync with the changing environment. As a result, you have to work ever harder at it while getting ever less benefit. By contrast, early movement into uncontested areas of the future can be easier to attain and easier to defend. As a result, status quo is usually the harder and more time consuming approach.

FINAL THOUGHTS
I knew someone who moved from Chicago to Green Bay. He noticed that most of his co-workers had a home in Green Bay and a cottage further out in the country on a lake. So he did the same. Then he started thinking. He realized that the length of time it took to get from his cottage on the lake to his job in Green Bay was about the same length as the commute he used to have in Chicago. Therefore, he sold his house in Green Bay and lived full time at his cottage on the lake. This made him much happier, because the commute took him to a happier place. If you accept the idea that a changing view is okay, then you can become happier, too.

Strategic Planning Analogy #417: It also works for B2B

2011-10-16T18:00:00.003-05:00

THE STORY
Lately, we’ve been hearing a lot of stories about Steve Jobs. One of my favorites is an interview he had with journalists at the time the iPad was being first introduced.

One of the journalists asked Jobs what kinds of consumer and market research Apple had done to guide the development of this new and different product.

Jobs response? He said, “None. It isn’t the consumers’ job to know what they want.”

And based on the tremendous response of consumers, the Apple iPad has been a great success, even though the customers weren’t consulted on its development.

THE ANALOGY
Steve Jobs didn’t believe in letting customers drive innovation. He didn’t see that as being their job. In fact, on another occasion, Jobs said, “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.”

No, Jobs felt it was HIS responsibility to get out IN FRONT of the customer and develop solutions customers were not clamoring for yet.

In a prior blog, I spoke at length on the pitfalls of seeking innovation via consumer research. This is not to say that consumer research is worthless. It’s a great way to get the consumer’s response to the here and now. It’s just not very insightful if you want to find great, out-of-the-box innovation for tomorrow.

Now some of you may be saying, “Okay, I get that. It is not the consumer’s job to innovate, but to consume what the professional innovators come up with. But that’s the business to consumer world. It does not apply to the business to business world. After all, those business customers are professionals at buying things. They’re paid to do what is best for their organizations. It really is their job to know what they want—for today and for tomorrow. Isn’t it?”

Well, based on some research we will soon talk about, it appears that Steve Jobs approach is just as relevant for the business world as it is for the consumer world. If you want breakthrough sales successes in the business world like Steve Jobs had in the consumer world, copy his approach.

THE PRINCIPLE
The principle here is that B to B customers aren’t much better about knowing what they want/need than B to C customers. Therefore, a B to B strategy of giving the customer what they want can be inferior to a more aggressive approach like Steve Jobs—of giving the customer what they haven’t asked for yet.

Research by Dixon and Adamson
This can be seen in some recent research by Matthew Dixon and Brent Adamson. Dixon is Managing Director of the Corporate Executive Board's Sales and Service Practice and Adamson is Senior Director of the Sales Executive Council, a division of the Sales and Service Practice. Their research is based on interviews with over 6,000 B to B sales reps in nearly 100 companies. The full results of their research will be in their new book, The Challenger Sale: Taking Control of the Customer Conversation, to be issued November 10, 2011. But they let on to some of the key results in a recent HBR blog.

In essence, Dixon and Adamson found that all B to B sales reps fall into one of five categories.

1) Relationship Builders - They focus on developing strong personal and professional relationships and advocates across the customer organization. They are generous with their time, strive to meet customers' every need, and work hard to resolve tensions in the commercial relationship.

2) Hard Workers – They show up early, stay late, and always go the extra mile. They'll make more calls in an hour and conduct more visits in a week than just about anyone else on the team.

3) Lone Wolves – They are the deeply self-confident, the rule-breaking cowboys of the sales force who do things their way or not at all.

4) Reactive Problem Solvers - They are, from the customers' standpoint, highly reliable and detail-oriented. They focus on post-sales follow-up, ensuring that service issues related to implementation and execution are addressed quickly and thoroughly.

5) Challengers - They use their deep understanding of their customers' business to push their thinking and take control of the sales conversation. They're not afraid to share even potentially controversial views and are assertive — with both their customers and bosses.

The Conclusion
Dixon and Adamson then looked as the sales success for of these five groups. What they discovered was that the Relationship Builders were the least successful sales people and the Challengers were the most successful B to B sellers.

At first, this seems counterintuitive. After all, most sales training organizations are set up to help reps become better relationship builders. Conventional wisdom in the B to B world is that if you build a strong relationship, find out what the customer wants and then give it to him, you will sell more. Apparently, conventional wisdom is wrong.

The problem is that B to B customers are a lot like B to C customers. They understand the difference between what a good and a bad version of the status quo is. However, they are not always good at envisioning the potential for something radically different. Therefore, if all you do is build relationships and give your customers what they want, you are not really differentiating much from the crowd. You’re just supplying the status quo, pretty much like everyone else. A closer business relationship, in that situation, doesn’t add that much value. So sales don’t go up much.

No, if you want great leaps forward in sales with business customers, you need to innovate in advance of what your customers even realize they might desire. Apple has sold a ton of iPods, iPads, and iPhones. Customers weren’t begging for them before they existed. The idea did not come up through talking to the customers. Steve Jobs was innovating in advance of his customers.

The same applies to the business world. The reason why the Challengers group in the study sold so much more than the other reps is because they acted more like Steve Jobs. They didn’t try to give the business customers what they were asking for. They didn’t try to get close by doing a lot of relationship building. Instead, they tended to be more confrontational. They challenged the businesses to think differently about their business. They offered solutions which the business customers weren’t asking for.

The Challengers would rethink the whole business of their customers and offer revolutionary answers unlike anything else on the market, like Steve Jobs. The offerings from the Challengers would be true innovation that gave the businesses a true competitive advantage. Naturally, once the business customers realized how much better these innovations were, they clamored to buy them even though they never asked for them (like consumers clamored for iPads). Sales would skyrocket (like the iPads).

So, rather than try to do a better job of what everyone else was doing, the Challengers did something entirely different. The differentiation was what made them stand out and outsell all the other groups.

SUMMARY
If you want to be an exceptional seller to businesses, act like Steve Jobs did with consumers. Challenge the customer with great solutions they aren’t asking for.

FINAL THOUGHTS
Back when Steve Jobs returned to Apple, he wanted to rejuvenate Apple’s image. So Apple came up with a campaign with the slogan “Think Different.” Sales reps for business customers need to follow that advice. And B to B business strategies need to help the sales reps do this.

Strategic Planning Analogy #416: Would You Build This?

2011-10-07T15:42:00.005-05:00

THE STORY
There’s a story from decades ago about the Sears department store company. The company was going through some difficult times. A team of executives was put together to try to rescue the company.

Eventually, one of the executives on the team supposedly said something like this: “If we were starting from scratch, would we try to build something like Sears? If not, then why are we working so hard to preserve it?”

THE ANALOGY
Most strategic planning falls into one of two broad categories. Either one is trying to extend/exploit a winning business model or trying to repair a broken business model. As we can see in the story, Sears was working on the latter approach. Its business model, a middle of the road department store, was broken.

A natural reaction when one sees something broken is to try to fix it. But eventually one of the executives at Sears decided to question that assumption. His point was that the business model was broken for a reason—it was obsolete. The middle was not the right place to be anymore—success was at the extremes. Either become a low end discount store or a high end department or a specialty store. Even if you fixed the model to become the best middle of the road department store possible, it is still not the place you want to be. So why try to be there?

Often times, I think executives rush in to fix things before taking the time to ask the question “Is this worth fixing?” A lot of wasted strategic effort could be avoided if we spent more time asking ourselves if the broken business model is worth fixing in the first place.

THE PRINCIPLE
The principle here is that not all strategic pursuits are worth pursuing. Before spending a lot of time and effort running down a strategic path, make sure it is a path worth running on. Although this advice seems obvious—especially when working on new ventures—it can be overlooked when working with core legacy ventures. We want to preserve the core so badly that we forget to ask ourselves if the core is worth preserving.

Example of Intel
Consider the story of Intel. Back in the 1980s, Intel was trying to fix its core legacy business of memory chips. Nobody at Intel wanted to give up on the business, even though the legacy business was not doing well. Emotionally, people wanted to hang on and try to fix it. Andy Grove, COO at the time, finally went in to see President Gordon Moore and said something like this,

“What would a new management would do if we were replaced? [which was a real possibility if they couldn’t fix things] The answer is clear: They would get out of the memory business. So we go through the revolving door, come back in as if we were the new management, and just do it ourselves.” You can read more about this story here.

Andy Grove stopped to ask the tough question: Is the legacy core worth fixing? As a result, he stopped trying to fix it and moved on to building on Intel’s new strength in processing. And instead of being fired, Andy Grove eventually was made CEO of Intel.

When meeting resistance to abandoning the core, keep these principles in mind:

1) All Strategic Initiatives Eventually Fail
Sometimes strategies fail due to mistakes in execution. Other times they fail because the marketplace has changed to the point where the core strategy is no longer valid. For example, the digital era has made the core photographic film business of Kodak obsolete, no matter how well it is executed.

When you have a problem with your core, start by asking what the source of the problem is. Is it from poor execution or from obsolescence? If obsolescence, then don’t waste a lot of time trying to fix it. If poor execution, determine if it is too far gone to be salvageable before trying to salvage it.

Remember, all strategic initiatives eventually fail, because a changing environment changes what is most appropriate. There is no shame in admitting that the old core is no longer in sync with the most recent changes. It is inevitable. The real test is whether simple modifications can get it back in sync or if its time has passed and it can no longer be brought back in sync. And that should be the focus.

2) Most of Your Other Stakeholders Don’t Care About the Past
Lenders, shareholders and customers are probably nowhere near as attached to your legacy as the people inside the company. Lenders and Shareholders get their returns from future cash flows, not past cash flows. If abandoning the core leads to better cash flows, then they are usually quite okay with that. If you stick too long with a legacy that is no longer producing cash flows, then they are typically quite okay with changing the management (as Andy Grove feared). If the new management would abandon the core anyway, why not do it yourself?

Customers are typically not enamored with the past, either. They want to purchase what is the best thing to purchase right now, not what was the best thing to purchase in days gone by. If an iPhone is available today, why purchase an old rotary dial desk phone? Providing what customers used to want is not a formula for success, even if they used to want it a lot. And if your customers no longer want your offering, there isn’t much reason to try to preserve that offering.

Therefore, resistance from the outside to abandoning your core may not be as large as you fear. In fact, the outside world may cheer you on for abandoning the core.

3) The earlier you ask these questions, the better you can resolve them.
If you wait until a core business is fully obsolete before changing, you are working from a severe disadvantage. By that time, the core has no value, you have no cash flow to use for a transformation, and your reputation may already be tarnished.

It is better to consider abandoning the core earlier, when it may still have value to sell off, or at least provide enough cash flow to fund the transition to a replacement business. Transitions are always easier when moving at a time of strength. Customers are more likely to follow. Your best employees are still around. There is more money to fund the shift.

Therefore, start asking the questions early, even when the present looks good, because the future may not be a repeat of the present. Negative change may be just around the corner.

SUMMARY
Even though there may be a strong emotional attachment to the legacy core business, that does not mean that one should always try to preserve that business. The core may no longer be relevant today, or perhaps your execution of that strategy has drifted too far to be repairable. Therefore, before embarking on a massive program to fix a broken legacy business, ask yourself these questions: If I were starting over from scratch today, is this a business worth trying to be in? If not, why work so hard to be in it?

FINAL THOUGHTS
After Eddie Lampert’s investment company (ESL Investments) bought Sears, a lot of analysts were angry because Eddie Lampert was not pouring a lot of time, effort or money into preserving its core. They wanted him to fix the core business. However, Eddie Lampert was smart enough to ask the right questions. He knew the answer was not in fixing the core. He was merely using it as a foundation to become a major force in the on-line retail space. That was where he concentrated his efforts. This was where Eddie Lampert could see the possibility of a favorable return on investment. The analysts should have been happy that he wasn’t pouring money down the drain into the core.

Strategic Planning Analogy #415: Good Vs. Better

2011-10-03T17:42:00.005-05:00

THE STORY
There is a movie currently out in the theaters called, “I Don’t Know How She Does it,” starring Sarah Jessica Parker. The movie is about a woman, named Kate, who is trying to be a good mother, a good wife, and a good employee all the same time. The comedy in the movie comes from her difficulties (and occasional failures) in trying to simultaneously do all of these things well.

According to the movie reviews, not only does Kate have trouble doing things well, but so do the people making the movie. The reviews were so bad that I am not going to go see it.

THE ANALOGY
There are many arguments used by businesses to downgrade the importance of strategic planning. One of those arguments goes something like this.

1) Most people know the difference between good and bad.

2) Most people would prefer to do good.

3) Therefore, if businesses would just eliminate the barriers on their employees, people would naturally do good things. This would create great success all on its own. Therefore, you do not need strategic planning.

The problem with that logic can be seen in the plot to the movie “I Don’t Know How She Does It.” Kate knew what a good wife, a good mother, and a good employee looks like. She was motivated to be good at all these tasks. Yet she was not performing these tasks very well.

Kate was drowning under the pressure of trying to do so many good things at the same time. She was learning that knowing good and desiring good does not necessarily lead to achieving good in all areas. Something was missing.

The same is true in business. Releasing the barriers on employee behavior may only lead to anarchy rather than success. Thousands of employees rushing around randomly trying to do good in too many areas, with too little coordination, can actually lead to bad performance—failure instead of success. Something is missing, and that something is strategic planning.

THE PRINCIPLE
The principle here has to do with tradeoffs. Successful businesses are not usually the ones who try to be good at everything. Instead they are the ones who make good choices. They examine the tradeoffs between strategic options and choose a narrower area to focus on.

Here are three points to consider on this topic.

1. Better is Better
Successful companies realize that the goal is not to be good, but to be better. Customers aren’t usually looking for a good alternative. They want the best alternative. Your success depends on how your offering compares to alternatives. To win a customer’s business, performance must be viewed as superior relative to other options.

At a given point in time, consumer decisions tend to center around a key attribute. Perhaps lowest price is most important…or maybe quality…or maybe service. Then the choice is made based on that attribute. You’d better be better on that attribute if you want to be chosen.

Now, over a long period of time, a customer may desire many different attributes. However, decisions are made based on which attribute is important at a particular point in time.

For example, let’s look at grocery shopping. At the beginning of the month after just getting paid, one may want to stock up on the basics. Therefore, the key attribute may be assortment, so the customer chooses the large supercenter. Mid-week, this customer may need to pick up only a couple of items, like milk and bread. At that time, convenience is most important, so they go to a convenience store. When this person is having the boss over for dinner, quality may be most important, so the gourmet store is chosen. At the end of the month, money may be tight, so this person goes to a hard-discount store like Aldi, because it has the lowest absolute prices.

Yes, all the attributes are important at some point, but they are not all equally important at a particular point in time. As a result, the consumer did not do all their shopping in a single average store that was good at all the attributes (but better at none). No, the consumer chose the superior store for the attribute most relevant at that particular moment. Sometimes, it was the supercenter, sometimes the convenience store, sometimes the gourmet store, and sometimes the hard discount store. It was never the “fairly good at everything store.”

So, instead of aspiring to a lot of good, look for places where you can be better.

2. Better Options Come From Making Trade-offs
Usually, the only way to become the best in one area is to accept a lower performance in another area. For example, trying to offer the best price and the best quality and the fastest service at the same time fails, because it is nearly impossible to excel at all three at the same time.

It is expensive to offer superior quality and speed. These costs make it impossible to offer the lowest price. And if you want it cheapest and fastest, you will not get the best quality (think fast food). And if you want it cheaply with high quality, you usually will have to wait for it (think health care).

In other words, working to do better in one area (like low prices) can work against trying to do better in another (like quality). So if you have people randomly trying to do good in multiple areas, their activities will tend to cancel each other out. You end up better at nothing. And you don’t get chosen by the consumer.

The winners make trade-offs. They choose a place where they can be the best and focus their efforts in that direction. Yes, this may require backing away from other areas, but it is the only way to win in the area chosen.

Wal-Mart may have great prices and a large assortment, but to get there Wal-Mart had to back away from offering a speedy shopping process, or offering high service, or offering product customization. It was a reasonable tradeoff which has lead to success.

Apple offers a great product in a great way with great apps, but it is also one of the most expensive options. It is a reasonable tradeoff, which has lead to success.

Michael Porter talks a lot about this in his excellent article in the Harvard Business Review called “What is Strategy?” (December 1996). To quote Porter, “Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers.”

In other words, without trade-offs, all the competition starts to look the same, so there is no reason for a customer to choose you or prefer you. Businesses then have to resort to “bribes” to get business, by adding more “goodies” to the deal or by lowering the price. This leads to a downward spiral where eventually companies are making offerings they cannot afford. Failure is the ultimate outcome.

There is a reason why Southwest Airlines has been consistently profitable over the years while the other major US airlines have traditionally done poorly. Southwest Airlines chose a distinctive position (low cost point-to-point flying) and made a number of tradeoffs in order to profitably achieve superiority at that position (no seat assignment, no connections with other airlines, standardized fleet, no baggage transfers, etc.).

By contrast, the rest of the industry did not make trade-offs. They all tried to do everything reasonably well. Because they were all doing the same activities, they did not give customers a reason to prefer them (they all looked alike—nobody was distinctively better). Therefore, the rest of the industry ended up in price wars and point giveaways they could not afford. The result has not been pretty

3. Strategic Planning is Needed To Pull This Off
Therefore, in order to win, companies need to make choices. And the best choices are made if a qualified strategic planner is involved to help. Those choices are:

a) Where do I focus to win?
b) What tradeoffs do I need to make to win at this point of focus?
c) What business model optimizes these tradeoffs?
d) How do I get employees to understand the trade-offs, so that they do more in the areas related to the focus and less in the other areas?

Unless you answer these questions properly, you will be searching for good everywhere and have a comedy of errors on your hands, like the movie “I Don’t Know How She Does it.”

So don’t let people win the argument that strategists are unnecessary. The facts are in your favor.

SUMMARY
Even if your people know what “good” looks like and are motivated to achieve it, that does not mean that you will be successful. The problem is that “good” does not win. Only superiority wins. And sustainable, affordable superiority can only occur if you choose a distinctive position and make the hard choices about the trade-offs necessary to win at that point of focus. You have to say “no” to a lot of good things in order to create a few “great” things. And without the help of strategic planning, the proper choices will probably not be made.

FINAL THOUGHTS
In the article “What is Strategy?”, Porter also says, “With so many forces at work against making choices and tradeoffs in organizations, a clear intellectual framework to guide strategy is a necessary counterweight.” Are you filling that necessary role?

Which Comes First—Goals or Strategies? (Part 2)

2011-09-27T12:51:00.002-05:00

REVIEW
In the last blog, we looked at why it can be a mistake to set financial goals prior to setting the action strategy. More specifically, we saw that setting financial goals prior to setting a strategy can increase the risk of:

1) Setting the Wrong Goal (wrong metric and/or wrong level)
2) Taking the Wrong Actions (if the goal is inappropriate than it will lead to doing inappropriate actions)
3) Increasing Undesirable Risks (Unrealistic goals can lead to desperate behaviors)
4) Sacrificing the Long-term to hit Short-term Goals (Sub-optimal Trade-offs)
5) Perpetuating Failed Strategies (Rather than shutting them down)

In this blog, we will look at suggestions for reducing these risks.

CLARIFICATION
Before moving on, I’d like to make a clarification. Thanks to some feedback, I realize that I may have given the false impression that I am against having goals. On the contrary, I like goals. I’m reminded of an old Pogo cartoon. Pogo and his buddy Albert are running through the woods as fast as they can. Pogo asks his buddy Albert if there is any particular destination they are running towards. Albert says no. So Pogo replies, “Then why are we running so fast?”

The idea is that if you have no idea of where you are going, there is no reason to run. Strategy is like that. Strategic planning is the task of finding the best path to a goal/mission/objective. If you do not know where you want to go, you cannot design a path to get there.

My concern is that most of the goals I see are merely financial numbers, like a goal for sales, profits, etc. These are not destinations, they are hoped for outcomes. They provide little to no insight into what the company must become to be successful.

These financial “destination-less” goals are the ones which lead to the five problems listed above (if they are set prior to setting the strategy). In this blog, we will look at alternatives.

THE PRINCIPLE
Here are four suggestions for how to avoid these problems.

Suggestion #1: Set Non-Financial Goals
There is no law that says all goals need to be a financial number. Successful financials do not magically appear out of nowhere. No, they are typically an outcome of a combination of the following actions:

a) Owning the right position in the marketplace.
b) Maintaining/Strengthening the core competencies, capabilities and capacities needed to hold/strengthen a winning position.
c) Leveraging a winning position in the marketplace.
d) Having enough productivity in order to profitably afford to the position.

If good numbers depend on first achieving these types of actions, why not set up goals around these types of issues? For example, you could have a goal of achieving a particular position in the mind of the targeted customer. You can measure this goal via consumer research. Or, if your strategy is centered around quality, you can set a quality level goal (which can also be measured). If success requires international expansion, then set that as a measurable goal.

The point here is that there are a lot of ways to achieve a financial target. These approaches may or may not have any correlation to the desired strategic actions listed above. In fact, some of those approaches can disastrous to a strategy.

For example, I know an executive who hit his financial target by completely ignoring the strategic mandate to invest in a repositioning of his business. Instead of taking cash flow and putting it into repositioning, he let the money fall to the bottom line as near-term profits. He made a great bonus that year because he hit the financial target. Soon thereafter, however, the business was sold at a great loss, because the strategic repositioning never occurred. The business was destroyed, because the leader took the wrong path to achieve the near-term financial goal.

The point is that if you want that repositioning to occur, then make the repositioning the goal, not a financial number that can be achieved while ignoring the strategy. In other words, if you want certain strategic behaviors or conditions to occur, than make these behaviors and conditions the goal. The only way to ensure that the right actions get done is to set the goal around the action. Reward doing the right thing rather than hitting a financial goal the wrong way.

And, of course, you cannot set these types of behavior or condition goals until you have an understanding of the proper strategy. That is why strategy work needs to be done before setting the goal.

Suggestion #2: Separate Planning Cycle From the Budget Cycle
Many companies intermingle the timing of the planning cycle with the budgeting cycle. I think this is usually a mistake.

Budgets tend to be very financial in their focus and goal orientation. And this is not necessarily a bad thing. But by formulating strategy at the same time as budgets are set, one tends to end up with strategies which are often little more than a budget with a slightly longer time frame (a sort of 3-year budget). And this can be a bad thing, leading to all the problems mentioned earlier.

If you want people to think more strategically and create more strategic (less financial) long-term goals, it seems to work better if that process is not done simultaneously with annual budgeting. For example, if you do your budgeting in the fall, then do your primary strategy formulation in the spring. Not only does the separation allow for a better focus on strategy, it provides time between the two processes to understand the true ramifications of the strategy, so that strategy can better drive what is an appropriate budget.

Some of the intermingling is a result of placing strategic planning groups inside of finance or budgeting departments. Finance departments have a natural financial orientation, which can lead to goals that are too financial. If you want to reduce that bias, then you might want to consider taking strategic planning out of the finance group (if that is where it is today).

Suggestion #3: Just Don’t Do It
If setting a financial goal up front gets in the way of making great strategy later, then stop setting a financial goal first. It could be just that simple.

Suggestion #4: Add A Feedback Loop
If your company still insists on looking at financial goals first, then reply by insisting that the company also looks at these goals last. In other words, add a feedback loop to the end of the process to determine whether the original goal is still the most appropriate goal. If it isn’t, then reserve the right to change the goal at the end.

It may be that, after the strategic analysis, you conclude that some of your original assumptions during the goal-setting phase are no longer valid. Perhaps the best strategic path leads in a different direction from where your goal lies. If so, change the goal so that it fits your new reality.

SUMMARY
Many companies use a strategic process where financial goals are set before the strategy is chosen. This approach increases the likelihood of bad results and missed opportunities. Four suggestions for reducing this problem are to:

a) Set Non-Financial Goals
b) Separate Planning Cycle From Budgeting Cycle.
c) Stop Setting Goals First
d) Add A Feedback Loop

FINAL THOUGHTS
Before running off to operate your business, be like Pogo and ask what the destination is. And don’t settle for a mere financial number. Ask for a real destination that is based on prior strategic analysis and rooted in specific activities.

Strategic Planning Analogy #414: Which Comes First—Goals or Strategies?

2011-09-22T18:14:00.003-05:00

THE STORY
Let’s assume that you want to race in the Olympics. Let’s further assume that they way you qualify for the Olympics is by agreeing (in writing) to guarantee achieving a specific time when you race (quick enough to win committee approval). And, if you fail to achieve that time, you will owe the Olympic Committee a large sum of money. Then, to make it even more interesting, the Olympic Committee does not tell you which type of race you will be competing in until after you commit to a specific time.

When making the time commitment, you do not know if the race is a short sprint or a long marathon. You don’t know if the race involves running, speed skating, swimming or bobsleds. Perhaps there are hurdles or other obstacles. Perhaps not.

It seems to me that committing to a race time before you knew what the race was would be an act of insanity. It’s a good thing the Olympics aren’t run that way.

THE ANALOGY
Although the Olympics are not run that way, it seems that many businesses are run that way. When starting their strategic planning process, these companies begin with goal-setting. The goal could be a level of sales, or profits, or a percent return on investment, or a stock price. Setting these goals is a lot like setting the goal of the time you want to achieve in a race.

Then these companies get management to commit to hitting these goals, and tie their bonuses to achieving these goals.

It isn’t until all this is completed that these companies start looking for a strategy which can achieve that commitment. To me, choosing the strategy after committing to a goal is a lot like being told what race you are going to run after committing to a race time. It is often a process of foolhardiness. And, unfortunately, I think a lot of companies are on this foolish path.

THE PRINCIPLE
The principle here is that long-term success is more likely to occur if goals are set after conceiving the strategy rather than before. In this blog we will look at some of the negative consequences of putting goals first. In the next blog we will look at some potential solutions to this problem.

When a company puts goal-setting ahead of strategy-forming they increase the likelihood of six bad outcomes.

Bad Outcome #1: The Wrong Goal is Set
Setting the goal before knowing what to do can lead to two types of improper goal setting. The first is choosing the wrong metrics. For example, at different stages of the lifecycle, different metrics may be more appropriate. Rapid sales growth targets may make more sense during the rapid growth phase but be inappropriate during the decline phase, when cost control may be a more appropriate metric. You cannot know what the most appropriate metric is until you understand the type of plan you are putting in place.

Even if the right metric is chosen, you might choose the wrong target level—too high or too low. How can you know what the appropriate target level is before you know what you are doing? Set it too low and you may miss opportunities (and reward too generously). Set it too high and you may encourage people to take on bad behavior (as we will see below).

Bad Outcome #2: The Wrong Actions Are Taken
People act based on how they are measured, so if you measure the wrong things, people will tend do the wrong things.

If the metric is inappropriate for the circumstances, it might force people to apply strategies consistent with the metric but wrong for the circumstance. For example, if a business has recently reached maturity but the goals are more appropriate for an earlier rapid growth stage, one might try to apply rapid growth strategies in order to try to reach the rapid growth goals. This could lead to investing in over capacity and money-losing sales strategies, in an attempt to try to achieve no-longer-realistic top line growth commitments.

Going back to the story, you might be best suited for running a marathon, but because you promised a quick race, you are forced to run a sprint. So instead of playing to your strengths—a place where you can win—you go with your weakness in a place where you will lose. Figure out the race you are most likely to win before committing to an outcome.

Bad Outcome #3: Undesirable Increase in Risks Are Taken
Many times, aggressive goals cannot be achieved by the core business. You end up with what is commonly called a “planning gap”—the difference between what the current strategy provides and what you want to achieve. The bigger the gap, the more one has to do to fill it. This can lead to taking on a lot more risks in order to fill the gap, such as diversifying further from one’s core or doing some hasty acquisitions.

We know most acquisitions fail, and if they are being done primarily to fill a gap rather than to fill a synergistic strategic need, the risk is even higher. In addition, so much focus could be placed on filling the gap that the eyes are taken off the core, increasing the risk of problems there as well.

Perhaps the only way to narrow the gap is to assume the best case scenario—everything has to go right. The best case scenario is rarely the most likely case scenario. As a result, your strategy takes on added risk for failure if you have to skew assumptions in order to make the strategy fit the goal.

Bad Outcome #4: Long-Term Prospects Are Destroyed
When the numbers come first, people’s priority is to try to hit those numbers—whichever way they can. There are lots of ways to hit a number, and a lot of those ways are destructive in the long run. To hit aggressive numbers in a short time span, one usually has to make trade-offs which hurt the long run. For example, to hit near term profits, future-oriented activities (like R&D or innovation) may get cut too much. To hit aggressive near-term sales, one may create costly promotions which merely steal away sales from the future. To hit near-term return on capital numbers, one may underinvest in long-term capital projects.

One of the first cases I had in business school was about a manager who made his numbers by cutting out all maintenance costs. Eventually, everything broke down and the long term costs of repair were much higher than those maintenance costs which were cut. This is an important lesson which can be lost if aggressive goals are put in place which can only be met by making bad trade-offs with the future.

A lot of Warren Buffet’s success is due to taking the long view. He knows that he will usually get more out of an investment if he manages it for the long term rather than a quick payback. But if goals come first, one can start managing for what’s best for the goals rather than managing for what’s best for the business. That usually means trouble for the long-term prospects.

Bad Outcome #5: Avoidable Failures Are Perpetuated
If you look at a business purely objectively, you might come to the conclusion that it should be shut down or sold. However, if you start with an inappropriate goal, you may be hesitant to retreat from the business, because you feel you need every bit of business possible in order to try to reach the target. For example, I worked with a company that had a business line which they probably should have gotten out of. They didn’t because they told me they “needed the sales” (even though they were unprofitable sales) in order to hit their sales growth targets. I had suggested a more profitable approach, but it produced fewer sales, so it was rejected. Instead, the failed approach was perpetuated.

If people commit to unrealistic goals, then they will not have a realistic way to achieve it. This inevitably leads to not achieving the goal. Disappointment and failure are the most likely result. All the stakeholders get angry. These “guaranteed” failures and disappointments could have been avoided if bad businesses were cut out sooner, and promises were made which had a high likelihood of success, because they were first grounded in doing the right things. If you choose the right strategy first, then you know which goals to promise, and then you can meet them.

Bad Outcome #6: New, Better Options Can Be Missed
If you don’t first have a strategy to help you set your goal, then often times the only thing you have to base the goal on is the past. And as we all know in strategy, the past is often not the best guide for what to do in the future. This backwards orientation (extrapolation of the past plus stretch), may keep us mentally oriented towards modified status quo strategies rather than new breakthrough strategies.

Breakthrough strategies typically come from starting with a clean slate, not extrapolations from the past (which at best, only gives you incrementalism).

In fact, by setting goals prior to setting strategy, management is in essence telling people that the old strategy is good enough. After all, how can you realistically set a future goal before considering strategic change unless you believe no meaningful change is necessary?

SUMMARY
Many companies use a strategic process where goals are set before the strategy is chosen. This approach increases the likelihood of bad results and missed opportunities. Committing to a race time before you know what the race is sounds backwards. The same is true of setting numeric performance goals before you know what strategy will be performed. In the next blog we will look at ways to minimize this problem.

FINAL THOUGHTS
Setting the goals first sounds like wishful thinking. Last time I checked, you don’t automatically get what you wish for. I could wish I was taller or younger, but it isn’t going to happen. No, we should start first by optimizing what is in the realm of the possible and set our goals from there.

Strategic Planning Analogy #413: Should Strategists be Certified?

2011-09-20T16:22:00.004-05:00

THE STORY
What if someone in the Middle Ages had decided that, henceforth, all artists would have to be certified? Under this scenario, only certified artists would be allowed to create art, and the art must be produced exactly in accordance with the accepted style and process found in the Middle Ages.

If this had happened, there would have been no artistic reformation and no modern art. In painting, there would be no Degas, no Monet, no Chagall, no Picasso, and so on. New media and new styles would have been banned—no photographic or digital art. The only music would be traditional classical music. No Rock and Roll, not even creative “classical” works by the likes of Stravinsky. Books would have to be hand written. There wouldn’t be much use for all those cool Apple products, because there couldn’t be much of any digital content. Not allowed, because it wasn’t certified.

Under this certification scenario, there would be a lot less artistic chaos…and a lot fewer artistic experiments gone bad. But think of all the great creativity which would be lost. It’s not a very good trade off.

THE ANALOGY
Certification may be a good thing for accountants, but it’s not a very good idea for artists. And I don’t think it’s a very good idea for strategists, either.

From time to time, someone comes up with the idea of trying to certify strategic planning. I understand the motivation of wanting to eliminate bad strategic planning through certification. But certification implies that it is easy to identify what good strategic planning looks like and to codify a single way to do it for all situations.

That’s like saying that it is easy to identify what good art looks like and codify it, and freeze it for all situations. The quality of art is not based on a particular certifiable technique that can be codified. No, the quality of art is based on how the work of art impacts the emotions of the audience (something that cannot be codified). Similarly, the quality of a good strategic plan is not based on the technique, but how well the strategy is received in the marketplace.

THE PRINCIPLE
There are three reasons why I believe that certification of strategic planning is a bad idea.

Reason #1: There is No Agreement on the Proper Approach to Strategic Planning
There are many different schools of thought on how to do strategy. In the book Strategy Safari by Mintzberg,Ahlstrand, and Lampel, the authors list 10 distinctively different schools of thought on strategy. These are not just small variations on a common theme. No, some of these approaches tend towards being exact opposites of each other. The approaches come from such wildly different perspectives that it sounds like they are all living on different planets.

For example, there are those in the positioning/deterministic camp which is very much a top-down approach. The idea is to first choose a position and then let the tactics follow by default. On the other extreme is the emergent approach where you look for tactical openings which then boil up into a position by default. This is a bottom’s up approach. I talked more about these approaches in an earlier blog. These approaches are so radically opposite that it would be difficult to certify both as correct, for to do one approach is to violate the principles of the other.

Depending on who is doing the certification, there will probably be a bias towards a small subset of the ten approaches (and a discounting of the rest). Otherwise, there would be no guiding principles to certify against. But which ones would you choose?

Strategic Safari also shows that each school of thought on its own has weaknesses. There is no one single best way. Good strategic planning should borrow from them all. This is starting to sound more like an art than a science. Artists are okay with lots of schools of thought. They see no reason to narrow the field to one way of doing things. And that’s why you cannot certify artists.

Can you imagine if accounting had all of these major variations in thought? How would you certify someone as a CPA if the profession had no agreed upon philosophy or approach? No, the CPA works, because there is enough unity in the profession to point to an agreed upon way to get things done. That does not exist in strategic planning, so you cannot apply what works in accounting to strategic planning.

The book Strategic Safari is dedicated to those "who are more interested in open fields than closed cages." Certification tends to close the cage, which is a mistake.

Reason #2: The Best Approach Varies Based on Circumstances
Another problem with certification is the tendency to standardize approaches—a sort of one-size-fits-all prescription. My experience, however, has taught me that different companies can have extremely different strategic needs. As a result, they require extremely different approaches.

For example, let’s consider two different firms. One is in a mature, capital intensive industry with high barriers to entry and exit. The other is a start-up in a rapidly growing new field without barriers to entry or exit. The situations are so different that the strategic concerns would be very different. Therefore, the optimal approach would probably be very different (I spoke about this in more detail in an earlier blog).

For example, the mature company should probably be most concerned with two strategic issues: optimizing the productivity of the core business and watching for activities on the fringe which would threaten the entire core industry. By contrast, the start-up should probably be most concerned with establishing a position, finding funding, and figuring out how to survive the oncoming industry consolidation.

The strategic planning process for the first firm would likely be more regimented and financially oriented. The process for the second firm would be more free flowing and perhaps more marketing oriented.

This isn’t a case of one approach being right and one being wrong. It is a case of which approach is more appropriate for the situation at hand.

There’s a reason why there is a different certification for doctors of humans and doctors of animals. Their patients are too different to make one process apply to both. We have a similar level of differences in the variety of business patients.

Reason #3: Strategic Success is Based on Differentiation, Not Conformity
One of the goals in certification is to create greater conformity in the practice of the profession. Normally, conformity for a profession sounds pretty good. After all, rogue accountants can get you into a lot of trouble. However, we have already seen that strategists cannot agree on what to conform to. Worse yet, conformity itself might be a disadvantage for strategists.

Think about those artists again. If I create one unique painting, it may be highly valuable. However, if you have a thousand artists are all forced to make copies of that painting, you render all those paintings as practically worthless. A great deal of the value in art is the very fact that each piece is unique. Mass production diminishes the value. Therefore, making all artists conform to painting the same item the same way destroys value rather than creating it.

A similar situation occurs in strategy. If you find a unique, differentiated approach to the market, you may create a lot of value. However, if thousands of others identically copy your position and approach to the market, the value of being in that position plummets.

Strategy thrives on differentiation, not conformity. It is difficult for each company to find its unique position if they are all using an identical approach to strategic planning. Conformity in approach tends to limit outcomes, not increase them.

Strategists like Gary Hamel look for strategic success by destroying conventional wisdom rather than by conforming to it. Almost every great leap forward in business has come by those who rewrite the rules. I suppose you could write rules to standardize an approach for how to destroy standardized approaches so that you can re-write the rules, but I think it sort of misses the point of where one should focus their energies.

SUMMARY
Although those who want create a certification process for strategic planning have good intentions, I don’t think certification of strategists is a good idea. The problems with certification of strategists are that:

a. There is no agreement in the industry as to what is the right way to do strategy.
b. The right strategic approach varies significantly between companies.
c. Conformity tends to hurt, rather than improve, strategic outcomes.

FINAL THOUGHTS
Even if it is impossible to certify a strategic planning process, could one perhaps certify a toolkit of strategic planning tools? Maybe, but consider this…great art depends more on the caliber of the artist holding the tool than on the quality of the tool itself. Willam McKnight, former head of 3M used to say, “Hire good people and them leave them alone.” To paraphrase this quote, perhaps we could say, “Hire good strategists and let them use their own approach to strategy.”

Strategic Planning Analogy #412: It’s Rational To Me

2011-09-14T16:13:00.002-05:00

THE STORY
There’s an old story about a champion swimmer who lost one of his little pinky fingers in an accident. After the accident, the swimmer said that he was unable to swim anymore and refused to get back into the water.

His fans thought he was acting crazy. Okay, maybe his swimming might be a tiny bit slower without that finger. But to claim that he couldn’t swim any more at all? This didn’t make any sense to them.

Finally, one of the fans asked the swimmer why he couldn’t swim any more. The swimmer responded, “I use my pinky finger to get the pool water out of my ear after I swim. Without the pinky finger, I can’t get the water out, so I can’t swim anymore.”

THE ANALOGY
To an outsider, a lot of actions look irrational. The fans in the story thought that the swimmer was acting irrational. They didn’t understand how losing a finger prevented the act of swimming.

The problem was that the fans didn’t see the big picture. They were only looking at what happens in the pool. In the pool, the finger loss was not such a big deal.

The swimmer, however, saw the bigger picture. He knew that after he was out of the pool, that finger was essential to maintaining ear health. Without that finger, his ear would get infected and he would not be able to swim in the future.

So, even though the fans thought his refusal to swim was irrational (because they only looked in the pool), the swimmer felt he was being very rational, because he saw the larger implications.

It seems that a similar problem frequently occurs in business. Executives are constantly making decisions. Many times outsiders will look at these decisions and question the rationality of the decision. They will think the executive was crazy or misguided.

Literature in recent years has referred to this supposed irrationality as “decision bias.” The argument for decision bias goes something like this:

1) The decision maker has biases;
2) The biases in the mind of the decision maker triumph over logic;
3) Therefore, the decision maker makes an illogical decision.

However, I’m not so sure this is always the case. Executives don’t make it to the top because of a propensity for illogic. I think there is often something else going on. The ones claiming this so-called illogic are like the swimmer fans. Their view of the decision is too narrow (just looking in the pool). The executive may be looking at a larger scope (outside the pool) and see a reason why his decision is very logical (at least from their larger perspective). So before making a quick judgment about someone’s rationality (or supposed lack thereof), try to understand the perspective of the one making the decision.

THE PRINCIPLE
The principle here is that if you want someone to make the right strategic decision, then you have frame the decision within the context of the framework used by the decision maker. In other words, don’t blame bad decisions on irrational biases. Blame bad decisions on having created a system where the decision maker’s logic is contrary to the success of the strategy.

This is an important distinction. For if you believe the problem lies with illogical beings, you will try to fix the problem by trying to change the way people think. However, if you believe that the person is very rational, but has been put into a system where his/her personal logic is contrary to business goals, then you will try to change the system.

The Pool Example
Think of the business executives as being like that swimmer and the business environment as being like that swimming pool. As an investor in that business, you focus on what is happening in that pool and how well the swimmer is performing in that pool. You don’t care about what happens outside the pool.

The swimmer (the executive), however, has a life outside the work environment (the stuff outside the pool). In the story, this caused him/her to stop swimming.

The investor thinks this is illogical, since they see nothing in the pool to cause concerns. The investor sees the solution as trying to change the way the swimmer thinks about swimming (try to replace the so-called swimming illogic with logic). Since all the investor looks at is the pool, they try to find the solution within the pool (the way the person performs relative to the business). For example, they might focus on telling the swimmer that, logically, the hand stroke in the water still works with a missing finger (and to think otherwise is crazy).

However, had the investor assumed that the swimmer had a logical reason for his/her actions, the investor would have looked outside the pool at the swimmer’s concern for getting water out of the ear. They would have then come up with a replacement for the pinky to get the water out of the ear. With such a replacement, the swimmer would gladly get back into the pool and do what the investor wants. In other words, the best way to fix what was happening in the pool was to take care of a systemic issue outside of the pool. No amount of lecturing on the best way to swim would have fixed that issue.

The Real Example
I was reminded of this concept in a recent article from September 2011 in the McKinsey Quarterly. The article was entitled “A Bias Against Investment?”. The article was based on a recent survey of executives. According to the survey, executives claimed that their companies were not investing enough in their businesses. And the folks at McKinsey felt that underinvesting at this time was illogical.

McKinsey blamed the illogic on “well-known biases.” As “proof” of these biases, they pointed to some hypothetical questions in the survey. One hypothetical scenario was about a doing a deal with the potential of a small loss or huge reward. Many of the executives refused to do the deal. McKinsey claimed that this was mathematically illogical, in what they referred to as the “loss aversion bias”. McKinsey thought this illogical bias was even more tragic when applied to smaller investments (which were also looked at in the survey and had similar results). To quote the article, “Even if it made sense to be so loss averse for larger deals, it still wouldn’t make sense to be as averse to loss for smaller ones.”

But I think there may be a lot more going on here. There may be some sense here after all. I think those executives may be very logical. They are just using logic from outside the pool. These executives are not only worried about the health of the business, but the health of their career (like the swimmer who cared about the health of his ear).

The executive may have logical reasons to believe that being seen as responsible for losses, even small ones, could put their career at serious risk. They may get fired, not get a bonus, or never see a promotion because of that loss. However, if the upside occurs, the amount of the profits on a small deal may not be large enough to cause any personal benefits to the executive. They were already expected to do well, so doing well does not trigger extra bonuses or promotions.

Given that logic, the executive doesn’t just see what’s in the “pool”—big profit gains versus the risk of a small loss. Instead they see it as gaining nothing personally versus potentially losing their job. No wonder executives have a tendency to be averse to these types of options. From outside the pool, rejection of the deal looks very logical.

The Implications
Depending on which of us is correct (me or McKinsey) there is a major difference as to how to solve the problem. McKinsey’s approach would lead to the conclusion that companies should focus on getting people to change the way they think—to root out those nasty biases—or at least downplay them during decision making.

My approach would be to understand what is happening outside the decision at hand (outside the pool) which is causing a logical person to “rightly” (for them) make the “wrong” choice for the business (inside the pool). Once that is determined, then change the system so that the two are compatible. For example, in the scenario above, the company may need to change compensation and rewards/punishment policies which cause people to act contrary to what is in the best interests of the company. The companies need to get personal risks to be consistent with business risks.

Although luck may be a contributing factor, I believe most people make it to the top of a business because they logically made the right choices regarding what it takes to get to (and stay at) the top. The real problem is that the logical choice for getting to or staying at the top is not always consistent with the most logical choice for the business. If you want to fix some of the bad decisions, look at how to get the logic behind personal and business decisions to be more similar.

SUMMARY
Don’t automatically assume that bad decisions are caused by illogical executives. Instead, start by assuming that the executive is being perfectly logical from their perspective. Then try to figure out why the current system is causing personal logic to be out of sync with business logic and fix the system. Otherwise, your “logical” strategy may not get implemented, because it conflicts with the personal logic of the people implementing it.

FINAL THOUGHTS
A personal benefit from looking for a solution by changing the system is that it keeps you from having to go to senior executives and tell them to their face that they are illogical.

Strategic Planning Analogy #411: Strategic Pep Rallies

2011-09-12T16:15:00.001-05:00

THE STORY
Back when I was in high school, we used to hold a big pep rally for our football team. All of the students would leave their classes to go to the gymnasium and sit on the bleachers. The band would play peppy music.

There would be speeches about how wonderful the football team was. The team would come out on the gymnasium floor. The students would scream with excitement. It was a fun time of camaraderie filled with inspiring speeches and things designed to boost everyone’s emotions regarding the coming football season.

These pep rallies were done because it was felt that it built up fan support and made the team feel more confident about winning. All of this was to help increase the success of the football season.

THE ANALOGY
High School football teams are not the only ones looking for success. Businesses want their strategies to succeed as well. So maybe companies should also hold pep rallies.

In a way, many companies do. Think about those annual strategy retreats. They’re a lot like pep rallies. People leave their offices to congregate together. There is lots of camaraderie and lots of inspiring speeches. People get more emotionally tied to the strategy. Enthusiasm to win is increased.

A lot of people complain about these types of strategy retreats. They think they are a waste of time because not a lot of serious strategic activity takes place. But consider this…you don’t see the football coaches doing serious planning activities at pep rallies. They aren’t sitting there at the pep rally developing their playbook. They are not designing their plan of attack against the next opponent.

I’m not even sure that such activities could even be possible with the band playing loudly and the students screaming in the background. Yet schools continue to hold pep rallies because they see value in the activity.

So maybe there is even value in a strategy retreat when strategy is not created at the event.

THE PRINCIPLE
The principle here is that strategic success requires more than just a well thought out mission and viable plan of attack. At the end of the day, strategies have to be properly implemented by people in order to succeed. Ignore the people element, and even well thought out plans are usually doomed.

People are both rational and emotional beings. And for most of them, strategy work is layered on top of a full burden of day-to-day activities (with lots of pressure to get them accomplished). If you do not break through the clutter of the day-to-day and create enthusiasm for the plan at both a rational and emotional level, the strategy will lose the battle for attention against the day-to-day. Implementation will suffer.

Studies show that strategies typically fail due to weak implementation. Strategy retreats can help “rally the troops” around the strategy in a manner which increases the enthusiasm for the plan. This improves the level of commitment in the people and increases the likelihood of successful implementation.

Here are some suggestions about how to make the best use of a strategic retreat.

1) Don’t Try to Use Strategy Retreats to Create Strategy
As it turns out, strategy creation is a complex, time consuming process. Great strategies cannot be created over a weekend once a year. Besides, not everyone is great at strategy creation. It takes a different kind of thinking to be great at strategy creation. Therefore, trying to create strategy at a strategic retreat is a waste of time. Don’t even try.

Instead of trying to get people to “create” strategy, try to get them to “react” to strategy. As I’ve mentioned in a prior blog, most people are better at reacting to ideas than creating them. Therefore, use the retreat to deal with reactions. Find out:

a) Where the rational and emotional resistance lies among those required to implement it.
b) How the strategy can be improved.

By incorporating this feedback into the plan, you give the people a sense of having participated in creating the plan without actually having a creation session. This minimizes implementation resistance and increases emotional commitment in a very efficient manner. And efficiency is important if all you have is a weekend at your disposal.

Pep rallies don’t create strategies. Follow their lead.

2) Use Strategy Retreats to Break Through the Daily Clutter
It is difficult to get enthusiastic implementation from people who do not fully understand or comprehend what it is they are being asked to implement. Lack of comprehension can be one of the biggest enemies of implementation. Therefore, use the retreat to maximize comprehension and understanding of the strategy.

It often takes time for all the rationale and all of the nuances of a strategy to sink in. It cannot be done in little “sound bites.” Back at the office, where all the daily pressures take place (the “tyranny of the immediate”), about all the time the strategy can get is little sound bites—spoken when the audience is only half-listening. The real benefit of the retreat is that it pushes away the tyranny of the immediate, so that the ears have the time and the attention levels necessary to fully comprehend and embrace the strategy.

Use that time to fully explain why the strategy is so critical to future viability and success. Explain how the environment is forcing a need to change and why this is the best change to take. Explain the dire consequences of the status quo. Show how its importance truly eclipses the day to day. Show why this strategy is worth becoming a priority in their life. Make them BELIEVE in the rightness of the strategy, both rationally and emotionally.

This is more than just lecturing. Make it come alive through demonstrations and role playing. If you let them play the part of the competition who seeks to destroy the company, they will quickly see the vulnerability of not embracing the right strategy. Show them interviews with disgruntled customers. Let them experience the competitor’s products first-hand. Appeal to all the senses—seeing, hearing, touching, experiencing.

Keep the daily pressures as far away as possible. Ban electronic devices. Prevent digressions into daily problems. Don’t let them communicate with the office. That way you have the full attention of all the senses. Then you can make the strategy truly come alive and become something more than just a clever slogan. It is then something real which can be understood, believed and embraced.

3) Use Strategy Retreats to Break Down Silos
Not only does strategy implementation require people, it requires people to cooperate. Cooperation relies on three elements:

a) A willingness for people to set aside personal agendas for the greater good.
b) A willingness to trust others and work together.
c) An understanding of how your role fits within the larger picture—what you are responsible for and how that interacts with what others are responsible for.

Strategy is not a “corporate” thing. It is an “everybody” thing. If people don’t understand how they fit into the implementation plan (and make it a priority), they cannot fulfill their part of making the implementation a success. It has to get very personal at all levels.

Strategic retreats are a good time to break down those individual silos and improve cross-departmental cooperation. After all, this may be one of the rare times when these executives get to interact with each other in a neutral environment where daily pressures don’t get in the way. It is a time to build bonds of trust.

It is a time to show how all the pieces fit together…a time to for people to see how they fit into the plan and what they need to do. Never let a strategy retreat end without people seeing how their role fits into the strategy implementation. You may never get a better opportunity.

Pep rallies break down own individual concerns and get us thinking about the entire school and the entire football team. It makes us want to do whatever we can to help the TEAM win. That sounds pretty good for businesses, too.

SUMMARY
Although strategy retreats are not great places for strategy development, that doesn’t mean they are a waste of time. Strategy retreats are a great place for improving the rational and emotional commitment of people to the strategy. And that goes a long way towards improving strategy implementation. Use them to increase understanding, get feedback and increase cooperation.

FINAL THOUGHTS
Pep rallies are not the only time students think about football. They also go to where the games are played each week. The support follows where the action goes.

The same principle should apply to businesses. The strategy cannot be isolated to a remote location once a year. It needs to come along to where the game is being played every week. Regular interaction is needed so that people are reminded of the strategic implications of their daily decisions. I think that strategists should have an audience with senior management at least once a month in order to keep the commitment to strategic implementation strong all year long.

The retreat should just be one small piece in the larger context of influence.

Is DCF Becoming DOA?

2011-09-05T22:35:00.002-05:00

THE HYPOTHESIS
One of the key financial tools available to strategic planning is Discounted Cash Flow (DCF). It is one of the accepted standards for evaluating a business. The basic idea is to take future cash flow expectations for the business and discount them back to today’s value based upon an assumed cost of capital. There are slight variations in how the cash flow is defined (such as the difference between accounting cash flow and the cash flow definition of EVA [Economic Value Added]), but the general principle is rather basic.

It is such an accepted tool in strategy that if you look at the requirements listed when a company is hiring a strategist, expertise in DCF is often demanded. After all, how can one evaluate alternatives if one has no way to put a value on them? And DCF is the standard accepted way to compute those values. Right?

Well, lately I have found that the DCF methodology is becoming less dependable as a valuation tool. In an increasing number of cases, it appears to me that standard DCF calculations are becoming less reliable—perhaps even deceptive—such that they may lead to the wrong conclusions.

In the rest of this blog, I will explain why I feel this way.

THE ASSUMPTIONS BEHIND DCF
For DCF to be a reliable way to evaluate businesses, one has to accept certain assumptions. The three most important are

1) Future cash flows are the primary determinant of business value.
2) Cost of Capital is relatively easy to determine.
3) Cash Flows are relatively easy to determine.

If any of these assumptions are not true, than DCF becomes a less reliable tool. The greater the number of assumptions that are untrue, the less sense it makes to rely on DCF as the primary valuation technique. And in my opinion, all of these assumptions are currently under attack.

ARE CASH FLOWS STILL THE PRIMARY DETERMINANT OF VALUE?
Let’s look at the first assumption: Cash flows are the primary determinant of value. This assumption makes the most sense if you plan on holding a business for a long time and manage it for profits. Since, in this case, profits are the manner in which the return on investment is achieved, then linking value to the cash flow thrown off through operations makes sense.

But what if the primary form of return on investment comes from something else? It seems that to an increasing level, most of the value created in a business comes at the point when a business changes hands.

It reminds me of professional sports teams. People pay a large fortune to own one of these sports teams. Yet, on an annual cash flow basis, most of these sports teams lose money. Based on DCF, these sports teams destroy value. The analysis would say that you should not pay much of anything for a sports team and maybe you should even be paid by the current owners to take it over.

Yet people still pay a fortune for these teams. Why? Well, there are a number of reasons, but one of them is the fact that, over time, the resale value for these teams increases. If, after a few years, you want to re-sell the team, one usually can get back far more than what one originally paid for the team.

In this example, all the value comes from the point when the team changes ownership. None of it comes from annual cash flows. Therefore, DCF is not a very reliable to for determining the value of a sports team. At one time, sports teams were a bit of an anomaly in this regard. Now, this is becoming more of the norm in the business space. We talked about this in an earlier blog.

Just look at all the valuations being created for all the digital businesses in the social networking space. Each level of valuation seems based on what happens at the next shift in ownership. Angel investors and early round funds are looking at how the value may rise when late round funders jump in. Late round funders are looking at how the value may rise when the firm goes public. Early IPO investors are looking for that early bump in stock prices which soon follow an IPO. The original entrepreneurs are at looking at what they can make when they can cash out.

The same thing applies to the rise in the investment funds and activist investors. They seem focused almost exclusively on getting value from ownership churn. Sometimes, they take businesses private in order to take them public again soon after, hoping that this churn will put extra money in their pocket. Or they want to break up a company because they think the ownership change in a break-up unlocks the “true” value. Or they want to put a company up for sale because they think a new owner will value the business more than current owners.

In both the start-up and the active investor cases, there is little desire to own the business and actually get the return out of the annual cash flow. Instead, the desire is to get the money out of the next ownership shift. If that is the case, then the business is no longer run to optimize cash flow, but to optimize resale value.

It’s like all the people who were flipping houses during the housing boom. They didn’t buy the house to live in it. They bought it specifically to resell quickly at a profit. They would make investments in the house based on what would best increase resale potential rather than what would make the most sense if you planned on living there. We spoke of this in an earlier blog.

This same thing is happening more and more in the business world. Cash flow is not the prime source of value. Pleasing the customer seems to be less important than pleasing the next owner. If you listen to startup firms discuss their strategy, it often sounds like the only “customer” they care about is the one they hope will provide the next round of funding.

In at a lot of these “profits from churn” strategies, it often looks like the investors, their lawyers and the investment advisors may get rich, but the company’s ability to create long-term cash flow actually shrinks. Lots of costs related to creating future value are stripped out (like R&D and maintenance). Instead, money is put into superficial things which may dazzle the next owner, but don’t lead to a better business (sort of like “curb appeal” in selling houses has little to do with living in them).

Based on all of this, I think that cash flows are losing some of their linkage to how value is created
(and how businesses are run). This makes DCF a less effective tool.

IS THE COST OF CAPITAL EASY TO DETERMINE?
There is a simple formula in DCF to determine cost of capital. It looks at risk-free rates of return and adds a factor for industry/business/stock market risk. The risk free rates usually are based on government debt rates. However, since the great recession, it seems that governments are setting their debt rates at levels which have nothing to do with the “true” cost of debt for a business. There are other political and social factors at work. Sovereign debt in many parts of Europe is so messed up that it makes its usefulness as a tool in calculating DCF for businesses much more problematic. Even US Treasuries, which were supposed to be the perfect risk free measure, are complicated by the ratings reduction of US debt by S&P.

Japan has been distorting its debt situation for a long time. There is also little trust in how debt and equity work in China (and that’s where a lot of new business valuations are taking place). These policies distort how businesses invest, in ways that have nothing to do with cash flow prospects.

Between all the volatility and uncertainty in the debt and equity space, I think it is getting increasingly more difficult to determine what a true cost of debt and a true cost of equity should be. And with all the pre-planned churn for taking businesses in and out of equity, I’m not as certain as to how to even factor cost of equity and debt into the calculation.

I was thinking about this recently, while listening to some “business experts” on TV discussing some of the implications were of some of the wild valuations of deals recently taking place. Using the rules associated with DCF, the commentators did the math backwards and concluded that, based on the valuations, companies must have an irrational expectation for cost of capital. No, I think it meant that DCF no longer set the rules as much as in the past. The math didn’t apply.

ARE FUTURE CASH FLOWS RELATIVELY EASY TO DETERMINE?
With a lot of the new social businesses going public, like Groupon, Linked In, Facebook, etc., there are wild speculations about what the future may hold. Heck, some of the businesses being looked at have never made a profit, yet are being valued very highly. And for those making a profit, the valuations assume that profits will grow at astronomically high rates for a long time in order to justify the price. There is almost no scientific, rational way to “prove” the validity of these abnormal assumptions, where history seems to have no bearing on the future.

In times like these, people place their investment bets not based on DCF math, but on what they think mob psychology might lead to, even if they don’t think the mob is correct. Supply and demand math takes precedence over DCF math.

SUMMARY
Although DCF calculations still have merit, recent circumstances are making DCF less reliable as the sole source for value calculation. One needs to also consider how other factors influence value, like frequent changes in ownership, laws of supply and demand, non-typical government stances on monetary policy, etc. Otherwise, one may miscalculate value and make poor strategic decisions. So, although it’s too soon to say that DCF is DOA (Dead on Arrival), I think one can say that the health of DCF is not as strong as it used to be.

FINAL THOUGHTS
We merely scratched the surface on this topic. For the sake of length, I cut the discussion short. If you would like to continue the discussion, feel free to leave a comment.

Strategic Planning Analogy #410: Self Awareness

2011-08-30T15:57:00.004-05:00

THE STORY
Imagine, if you will, a man who is trying to find the ideal woman to marry. We’ll call him Bob.

Bob does a great deal of research into determining the characteristics of a great wife. Then he does research into where to find women with these characteristics. Finally, Bob applies “proven” tools for approaching these women.

Unfortunately, Bob has absolutely no luck in convincing any of these women to become his wife. In frustration, Bob complains to one of his friends, “I don’t understand why I am not having success finding the ideal wife. I’ve done all the research and used all the accepted techniques. I found the great women, but none want to be my wife. What am I doing wrong?”

Bob’s friend answers, “Take a look at yourself. You are obesely overweight. You are unemployed. Your personality is rude and obnoxious. You are sloppy and ugly. Until you fix up your own act, no woman will be interested in you.”

“Hmmmm,” says Bob. “I’ve spent so much time looking for the right woman that I never spent any time looking at myself.”

THE ANALOGY
Looking for great business opportunities can be a lot like looking for that perfect spouse. You can do all the research (like Bob did) to determine what the characteristics of a great opportunity are (like high growth, large demand, good margins, low competition, etc.). Then you can do the research to find out where those types of opportunities exist (like emerging economies, or social networking businesses, or green technology). And then you can apply proven techniques to try to get into those great business opportunities (acquisitions, alliances, etc).

And you can still fail miserably, just like Bob.

And the failure may have nothing to do with all that research you did. The problem may be that instead of focusing entirely on looking for opportunities, one needs to occasionally focus on one’s self. Look in the mirror at your own business. Do you have the proper qualities to make the deal work? What are you bringing to the opportunity which adds value? Does your company look to others like Bob—totally undesirable?

It takes two to make a great marriage. Don’t forget your part in the deal.

THE PRINCIPLE
The principle here has to do with strategic fit. A supposedly great deal may actually be a terrible deal if there is no strategic fit. Even if the opportunity has all the characteristics typically associated with success, it can still be a miserable failure in the wrong hands (no strategic fit). Therefore, when making strategic assessments of potential opportunities, do not look at them in isolation, but in the context of their fit with your organization.

This point was driven home to me in a recent study issued by the Corporate Executive Board. Their report said:

“Despite strategists and senior managers having spent decades on emerging markets strategy, they still spend too much time trying to understand the market and not enough on understanding whether their firm is ready for that market. Our research on over 1,000 market entry examples shows that this mistake is made over 70% of the time.”

In other words, right now emerging markets are the pretty girls that the guys want to marry. But just because the woman looks attractive to you doesn’t mean that you look attractive to the woman. This may seem obvious. However, since businesses are making this mistake of going in ill-prepared over 70% of the time, the idea must not be as obvious as I think.

I’m not saying that these companies are failing because they are bad companies. They just aren’t ready for the opportunity because of a poor fit.

Jigsaw puzzle pieces aren’t inherently good or bad by themselves. What makes them good or bad is whether or not they properly connect with your puzzle piece. If the pieces fit together, everything is good. If not, then the piece is not useful to you—even if it is very useful to someone else.

So what can we learn from this?

1) First, Look In The Mirror
Before going on a strategic quest for the ideal new opportunity, take time to first look into a mirror. Research yourself before researching others. Until you know what you look like, you won’t know what opportunities will fit. Ask yourself questions like these:

a) How can I add value to an opportunity?

b) What is causing me to be successful in some of my current businesses? Is it a particular skill I bring to the marketplace or is it a particular type of characteristic of the marketplace itself?

c) What is causing me to have problems in some of my businesses? Is it the lack of a skill or is it the wrong type of marketplace?

d) Where can I succeed better than others? (Differentiated Skills, Competitive Advantage)

e) Where does my expertise lie? Am I better at a particular stage of a lifecycle (start-up vs. growth vs. maturity)? Am I better with particular value positions (low price vs. high service)?

f) What is the best cultural fit for me?

Based on the answers to these questions, you can now know what are the right criteria to look for in new business opportunities.

2) Don’t Get Seduced By the Hot Fad
At any point in time, there are hot fads in business investments. “Common Knowledge” tells everyone that these are the places to be, so businesses flock to them. As the Corporate Executive Board points out, a current hot fad is getting into emerging markets (like China or Brazil).

Yes, a lot of money will be made in these hot markets. It is also true that many companies will lose a lot of money going after these hot markets. In fact, most companies will fail. Only a few companies (like Amazon) succeeded in the first dotcom bubble. Most died a horrible death.

So just because a market is “hot” does not mean that success is a given. Hot markets can also burn the company that is not prepared or not a good fit.

Therefore, do not get seduced into thinking that you have to pursue particular opportunities just because they are the hot place to be. Don’t think that just because all of your peers are pursuing a particular strategic path that you have to do the same thing.

Instead, look for the opportunities which fit well with what you do. Perhaps your best opportunities lie far away from the current fad.

3) Make Yourself Presentable Before Diving In
Sometimes, an opportunity might have great potential for you, but you are not ready yet for that opportunity. If Bob was going to lure a great wife, he was first going to have to lose some weight, get a job and improve his personality. Your company may need to do something similar.

When McDonalds was beginning to grow internationally, they ran into a problem. They wanted their hamburgers and french fries to have the same quality and taste as in the USA. However, these other nations did not have access to the proper types of cattle and potatoes to make that happen. Therefore, before they could build their restaurants, McDonalds had to spend a great deal of time working with the local agricultural infrastructure. They had to convince the local farmers and ranchers to use McDonalds-style cows and potatoes and raise them in the proper manner.

Until McDonalds got the infrastructure in place, they were ill-prepared to build their restaurants globally. If they had just rushed in with the restaurants (before fixing the infrastructure), they may have failed.

If you find a great opportunity, determine what you need to be successful with it. Then look at what you have to offer. If you are missing something (as McDonalds was with infrastructure), then work on filling that gap before diving into the opportunity. Don’t be like the 70% in the study who fail to spend the time to become appropriately prepared.

SUMMARY
A key aspect of strategic planning is to find future growth opportunities. As important as this is, don’t become so focused on looking outward for opportunities that you fail to look inward at yourself. The best opportunities are the ones that fit with who you are (or who you can be). Preparing yourself to win can be more important than finding a so-called “winning” opportunity.

FINAL THOUGHTS
The more you strengthen your core competencies and skill sets, the more places there will be where you can find additional opportunities to succeed.

Another New Book: Strategic Choices

2011-08-24T18:25:00.003-05:00

I've just finished putting together another new book, with chapters based on this blog. The book is entitled "Strategic Choices." You can download a free copy of the book here.

The idea behind the book is that great strategies depend on making the right choices over a wide range of topics. Each chapter tries to shed light on some of those choices which need to be made.

I hope you enjoy it.

Strategic Planning Analogy #409: Turbulence!

2011-08-23T18:15:00.004-05:00

THE STORY
Earlier this week I flew to Kansas City. We started to fly into some turbulence and the plane began to bounce around. The pilot’s voice came on the intercom to say that there was a major storm ahead in Kansas City. He hoped to change the flight path in order to get us into Kansas City and avoid most of the storm.

A little while later, the pilot’s voice came on the intercom again. This time he said that the plane did not have enough fuel to circle Kansas City until it would be safe to land. Therefore, the plane would be diverted to Omaha for refueling.

This was a little disconcerting to me, because I was doing a one-day trip to Kansas City (in and out in the same day without spending the night). If I missed my meeting in Kansas City, then the whole day would be a waste of time.

Fortunately, with a little bit of rescheduling, everything worked out just fine.

THE ANALOGY
Turbulence doesn’t just cause problems for the paths of airplanes. Turbulence can also cause problems for businesses traveling along strategic paths.

Whereas airplane turbulence comes primarily from storms, strategic turbulence can come from significant changes to any of Porter’s five forces—changes in the competitive mix, changes to suppliers or customers, new technology, or a change in the environment. If any of these changes are large enough, they can make your strategic journey a bumpy ride.

When the strategic turbulence appears, there may be a clamoring among your executives to immediately abandon the current strategy and start all over again with a new one. “THINGS HAVE CHANGED!” they may shout. “WE NEED TO CHANGE THE STRATEGY!”

This would be like airplanes changing their destination every time they hit a little turbulence. Anyone who has flown a lot knows that in the vast majority of cases, planes find a way to safely deal with the turbulence and still reach their intended destination. Most of the time, there is no need to change the destination.

And that’s a good thing. Do you have any idea what kind of chaos would incur if every plane kept changing its destination for every instance of turbulence? The negative ripple effects would be huge. People and planes would end up in the wrong places. Connections would be missed. Costs would skyrocket. It’s not a good approach for airline turbulence or for strategic turbulence.

Another reaction of executives to strategic turbulence might be to say, “Look! Things never go exactly as planned. Situations keep changing. Therefore, planning is worthless. We should stop doing it.”

Of course, that would be like airlines saying that because turbulence occasionally occurs, the airlines should abandon the idea of scheduled flights and stop filing flight plans. They should just leave the airports when convenient and decide on where they are going once they are in the air. Again, another bad idea for both airlines and businesses.

Yes, sometimes turbulence gets so bad that airlines need to change the destination (as they did for me this week). But that is the rare exception. And it should be the same for strategic turbulence.

THE PRINCIPLE
The point here is that there are a lot of ways to deal with strategic turbulence. Immediately changing the entire strategy or abandoning strategic planning altogether are usually among your worst options.

Don’t Rush to Abandon Strategies at the First Sign of a Storm
Just as most weather-related turbulence is not sufficiently strong enough to justify an airplane abandoning its destination, most changes to Porter’s Five Forces are not sufficient to cause one to completely abandon a strategy (provided you had a great strategy to begin with). We will illustrate this by assuming we are a company with a successful luxury strategy who has entered some strategic turbulence in the form of an economic recession.

A recession will cause some near-term rocky times for a luxury strategy. Spending will go down. Profits may take a big dip. But does that mean one should abandon the luxury strategy position? A lot of time and effort and money has gone into building that luxury position. To walk away from that position would be to abandon all that effort and start over. The old customer segment would be confused and the new segment would be suspicious. During the transition from the established position to the new position, the position in the marketplace would be weakened.

And then, when the recession is over, and you want to go back to the old luxury position, you may not be able to do so because of your repositioning during the recession. It’s hard to regain a luxury image once it is lost.

Frequent strategic upheavals and change have about the same impact as having no strategy at all. All that change confuses the marketplace as to what you stand for. As a result, you end up standing for nothing.

Unless you believe that the recession will be so long and so severe that the luxury segment will utterly disappear for many, many years and never return with any significance, then one must conclude that over the long run a luxury position is viable. And if you already are successful in that segment, it is unlikely you will find a better position which justifies all the costs involved in switching.

This is not to say that you should do nothing when turbulence comes about. Turbulence probably requires a modification of tactics. But those modifications should not be random. They need to stay within the context of the greater strategy.

Yes, the airlines make some changes to get through a storm. But those tactical changes are designed to find a better way to reach the old destination (given the new near-term situation). The same idea applies to business. Rather than immediately changing the strategic destination, look for ways to adapt your tactics so that the old destination works best while in the turbulence.

Changing Altitude
One thing planes tend to do when they confront turbulence is to change their altitude. In other words, instead of flying directly into the heart of the storm, they try to go above or below the worst of it.

A similar tactical change for business would be to basically stay the course but adjust the magnitude of activity in a given area—going either higher or lower in intensity. For example, the luxury company in the recession can change the magnitude of a number of factors to help avoid the worst of the impact of the recession.

The levels of production might be lowered. Payroll might be cut. Marketing expenses might rise to try to gain a larger share of the temporarily smaller pie. The idea is to essentially do similar things, but at a different level more appropriate for the times.

Changing Path
If changing altitude is not enough, planes will alter the path. They still are trying to reach the same destination, but taking a slightly different flight path to get there. The equivalent approach for businesses would be to make more substantial tactical changes than merely changing the magnitude.

For example, the luxury company may conclude that lower end of their customer mix (those aspiring to become wealthy) is most severely impacted by the recession. Therefore, the mix is modified to shrink the aspirational products and focus more on the upper end (where the recession has less of an impact).

Or maybe the luxury products are temporarily redesigned so that they require less expensive inputs of labor or material. Maybe the luxury clothing uses slightly fewer embellishments or emphasizes a less costly fabric (while still maintaining a luxury look and quality level). Or maybe the latest designs in luxury art-glass use a little bit less of the expensive glass. The idea is to adapt to the recession by doing different things that make it easier to get through the recession without destroying the essence of the core strategy.

Take the Bumps
Sometimes the best alternative for the plane is to just go through the storm and accept the fact that it will be very bumpy for awhile. That can also be true for businesses. If there is a multi-year aging process involved (as with some luxury liquors), there may be little you can do to production levels in the short run. If quality labor is in short supply, you may not want to alienate them through temporary layoffs. If you have important contractual arrangements with key, irreplaceable players, you may not have much flexibility to make short–term adjustments. Hence, to support the overall strategy there might not be much you can change in the short-term. You just have to ride out the storm.

SUMMARY
Turbulence should not be used as an excuse to abandon strategic planning or to hastily make random radical changes to strategic direction. Most turbulence is temporary or not sufficient enough to make a strong position obsolete. Usually the best course is to maintain the same strategic destination, but merely make tactical adjustments. This could be by changing the levels of magnitude in your current tactics, or in doing different tactics altogether. The key is ensuring that these changes reinforce one’s overall strategy rather than weaken it.

FINAL THOUGHTS
Of course, as I learned when my flight was diverted from Kansas City to Omaha, some turbulence is large enough to require a total reset of strategy. For example, if you are the leader in analog photography when the world is switching to digital imaging, there is little you can do to keep your business model relevant. The change is too great. A new destination is needed. Therefore, it is important to accurately assess the magnitude of the turbulence before making any decisions about what to do. And it is better if you start that work early, before you enter the storm.

Strategic Planning Analogy #408: Poisoning the Well

2011-08-17T10:29:00.004-05:00

THE STORY
There are lots of stories written and movies made about feuding families in rural areas. A common tactic used to attack the enemy in these stories family was “poisoning the well.” What would happen was that one family would sneak onto the other family’s property. They would then do something to the well water or reservoir of their enemy with the intent of either drying up the source of the water or making it unfit to drink. This was called poisoning the well.

This was a particularly nasty tactic, because if a farmer or rancher doesn’t have access to good water, their livelihoods are ruined. Not only is there nothing for the family to drink, but nothing to feed the cattle or water the crops. The family who was attacked in this way had few options. Often they just had to give up and move somewhere else.

What makes this tactic even scarier today is the fact that it is not that difficult for a terrorist to “poison the well” of major cities. Using modern chemistry, it wouldn’t take much for a terrorist to cause the major sources of water for huge cities to become unfit to drink. Suddenly, that old tactic takes on new significance.

THE ANALOGY
A similar situation occurs in the business world. However, instead of the well or reservoir being filled with water, it is filled with cash. Just as water is needed to keep the cattle healthy and the crops growing, cash is needed to keep the company healthy and growing. Cutting off the flow of water can ruin a farm or ranch. Similarly, cutting off the cash flow to a business can ruin it.

And just as the families in these movies and books had enemies, so do businesses. And if a company makes a strategic error, they can create a situation in which competitive forces “poison the well” of cash for a business. This can be so ruinous to a firm that the company can no longer exist.

Therefore, a key component of strategy needs to be protecting the well of cash so that it does not get poisoned.

THE PRINCIPLE
Today’s principle has to do with where the emphasis should be placed when looking at the strategic aspects of a potential acquisition. I believe that, in general, too much focus is placed on potential synergies from the acquisition (ways to boost cash) and not enough time is spent looking for the potential of the acquisition to poison the well of cash (ways to destroy cash).

As we will soon see, acquisitions can trigger competitive events which may cause a poisoning of the well. Since the purchase price in an acquisition is typically linked to the value of future cash flows, any poisoning of the well seriously diminishes the value of that acquisition (because there will be far less cash after the poisoning). It can cause you to grossly overpay for the acquisition if you do not take this into account during due diligence.

Ways in Which Acquisitions Can Poison the Well
There are many ways in which an acquisition can poison the well. For example, let’s assume you want to acquire one of your suppliers. That supplier may also be supplying your competitors (your enemies). The enemies will not want to do anything to help you, so if you buy that supplier, they may take their business with that supplier elsewhere. In other words, your ownership of that supplier can trigger competitors to take away their business and reduce the supplier’s cash flow. You have poisoned the well.

Let’s say you want to acquire your distributor. Suddenly, many of your enemies who also use that same distributor may no longer want to use them because they do not want to help a distributor owned by their enemy. Again, the cash goes down due to ownership change. You’ve poisoned your well.

Let’s say that you want to acquire a direct competitor. It may be that a lot of the customers using that competitor were doing so specifically because they did not want to give their business to you. Once you buy that competitor, it becomes a part of you. Therefore, the customers who were trying to avoid you will take their business away from the company you want to acquire. The well is poisoned.

I spoke about this concept in more detail in a prior blogs (here and here). You may want to go back and review them.

Synergies Aren’t As Great As One Thinks
Given the high potential for ruinous poisoning, you’d think that more attention would be given to it. Instead, my experience has been that the bulk of the strategic focus in acquisitions is around synergies.

Synergies are good and they should be looked for, but if we focus too long in this area, we may delude ourselves into seeing more synergies than really exist. Lots of studies have looked into why most acquisitions fail. One of the key conclusions which keeps coming up is that acquisitions rarely achieve as many synergies as one thinks prior to the deal. Apparently, much of that time focusing on synergies was focusing on illusions which will not occur. They deceive us into seeing more value than there really is.

Worse yet, all that time spent on the optimism over synergies may keep us from spending enough time on the pessimism of potential well poisoning. Too much optimism combined with not enough pessimism leads to grossly overvalued estimations of cash flow. The result is that companies pay too much for an acquisition and destroy company value.

The Google – Motorola Mobility Deal
The principle of poisoning the well can be seen in the potential acquisition of Motorola Mobility by Google. Does Google have enemies? Yes, indeed. There’s a reason why Microsoft filed a complaint with the European Commission back in April 2011, alleging that Google was engaged in illegal anti-competitive activity. There is a reason why several companies which don’t usually work well together (Apple, Microsoft, Research in Motion and Sony) combined to outbid Google for Nortel’s intellectual property back in July. They don’t like the power of Google and they want to keep Google from getting stronger.

Then comes the announcement that Google wants to acquire Motorola Mobility. As it turns out, not only does this action give Google’s enemies a chance to poison the well, it also gives Google’s “friends” an opportunity to poison the well.

For example, Microsoft is expected to use this event to tell people in the industry that they cannot trust Google and should put more of their priorities into the Microsoft/Nokia system. This can poison two wells. First, it can take sales that would have once gone to Motorola Mobility and shift them to Nokia. Second, it can make a higher percentage of phones carry the Microsoft software instead of Google’s Android system. The Microsoft system will shift more mobile advertising revenue to Microsoft (through Bing and other sources) which could really hurt Google’s cash flow.

Worse yet, this just might be enough of a boost to Microsoft to give them critical mass in the mobile marketplace, something they can build on and grow. Perhaps if Google had not announced this deal, Microsoft would have eventually given up on the mobile software due to insufficient demand. A similar situation could occur with Research in Motion, who might have eventually gone away, but now may have a chance to revive itself through the poisoning of Google’s well.

Even Google’s device partners (“friends”) in the mobile space (Samsung, LG and HTC) may now become less enamored with their partnership with Google. They may begin to think that Motorola Mobility will get preferential treatment over their own devices. As a result, they might hedge their bets by getting closer to Microsoft, shifting share away from Google’s Android.

If less of the really cool devices (from Samsung, LG, and HTC) carry Android, and if Motorola Mobility puts Android on inferior devices, then consumers may revolt and switch away from Android. Again, more poisoning of the well.

And if Android starts losing significant market share from all these poisonings, it may have less influence in getting priority for cool apps from the development community. This could start a downward spiral, as even more customers see a reason to switch to others who have cooler apps sooner.

The point here is that this type of deal can cause all sorts of negative poisoning of the well. I hope Google fully considered these ramifications when contemplating the deal.

SUMMARY
Acquisitions do more than create positive synergies. They can also trigger negative impacts on cash flow (poison the well). Since the true amount of synergies in a deal tend to be less than expected, and the poisoning of the well can be larger than expected, strategic emphasis during acquisition may need to shift from synergy to poisonings.

FINAL THOUGHTS
In the old stories, it was the enemy who poisoned the well. In business, we tend to poison our own well through poor strategic decisions. Shame on us! This is a preventable problem, because it is under our control. Make sure you consider the potential for poisoning the well whenever you contemplate a move which upsets the status quo.

Strategic Planning Analogy #407: Standing at the Road

2011-08-15T16:57:00.004-05:00

THE STORY
Back when I was in college, I sometimes got around by hitchhiking. One time while hitchhiking, a driver got me started on my long trip by taking me as far as an exit on an interstate highway.

It was great to get to the interstate highway. I had planned on taking that highway for quite a distance. Unfortunately, I was left at an exit which received virtually no traffic. I stood there quite awhile with absolutely no cars driving by.

After a very long wait, I eventually found someone willing to pick me up. That was quite a relief, because after a couple of hours, I had only seen three cars on that entrance ramp.

THE ANALOGY
The good news was that the first ride on that hitchhiking trip got me to the road I wanted to take. The bad news was that it took hours before I could get moving on that road. I could see that road in front of me, but I had no way to take advantage of it.

Sometimes, a similar thing happens in strategic planning. The strategy process will determine the right strategic path to take and then consider the strategy job to be finished. It was now up to someone else to implement the process to get down the path.

It’s as if the strategists see their job as being like the first ride I had on that trip. That first ride got me to the road and just left me there. I quickly learned on that trip that being at the road was not the same thing as being able to take advantage of that road. I knew it was the right path, and I could see it in front of me, but I was making no progress, because my first ride abandoned me as soon as I got to the highway.

If all your strategic process does is get the company to see the path, and does not help it move down the path, then your company may get stuck for a long time, just as I was stuck at that entrance ramp.

THE PRINCIPLE
The principle here has to do with how one defines success. Since we tend to work in such a manner as to achieve success, then the nature of how we define success has a great determination on what one actually does.

For example, if a company defines success for the strategist as merely coming up with a fully-designed strategy, then “success” is achieved the moment the strategy design is concluded. By this definition, strategy implementation is not necessary to achieve “success.” Just having a plan is reason enough to celebrate a successful conclusion, even if it is poorly (or never) implemented.

It’s easy to see why such a narrow definition of success comes about. After all, it seems reasonable and fair to reward people based upon outcomes which are under their control. And the strategists have meaningful control over the strategy design process.

Similarly, it seems a bit unfair to hold people accountable for outcomes which are out of their control. And strategists are rarely the primary driving force in charge of strategy implementation. So why hold a strategist accountable for an outcome they do not manage?

The problem though, as we will soon see, is that this narrow definition of success may not be in the best interest of the company. It also may not be in the best interest of the strategists.

Bad For the Company
They are many ways in which defining success for strategists as merely creating a plan is bad for a company. First, it tends to focus the strategist on the quality of the process rather than the quality of the output. After all, if success is achieved at the moment a plan is approved, then success is achieved faster (and more efficiently) with an efficient planning approval process. The focus shifts to creating a slick, standardized process. Just fill in the forms, hold the meetings, make the presentation, and then you are done! Success!!

It’s easy to put together a process to create an impressive-looking planning document if you don’t have to worry about how good the plan is, or how difficult it will be to implement, or if the strategy will work after implementation. Unfortunately, these latter issues are very important to the company’s ultimate success.

A company succeeds only if the plan succeeds. And a plan only succeeds if it is both a) worth implementing; and b) is actually implemented. Otherwise, the plan is worthless.

If you broaden the definition of success to include these other issues, then strategists will spend more time on them. I would suspect that the type of plan you get would be different. The process might get messier, but the plan will be better. Even if the strategists have only a minor role in the actual execution, if they are held more accountable for execution, they will create a plan which is easier to execute. Similarly, if they are held more accountable for the effectiveness of the plan when executed, they will create a plan which is more effective if implemented.

A second problem with the narrow definition of success is that it tends to isolate strategic planning from the rest of the business. Creating a strategic plan just becomes another thing which needs to get done (and not the primary responsibility of the operators of the business). Once the plan is designed, you can check it off the “to do” list as a successful completion. Then the focus of the company moves on to the next item on the list. It is just sort of done and forgotten, because no connection is made between making the plan and running the business.

If the day-to-day decisions are totally divorced from planning decisions, then the contents of the plan become irrelevant. After all, a company’s long-term execution is merely the sum of all the decisions it makes on a daily basis. If the daily decisions ignore the strategic implications, then the strategy never becomes a part of how things get done. As a result, the company never benefits from the plan, because it merely sits on a shelf, rather than being a major influence on how the company acts on a daily basis.

The strategist needs to be present not only at the place where the plan is designed (getting to the road), but at the place where key operational decisions are made (driving down the road). Otherwise, the company may end up like a hitchhiker stuck in place because it can’t find the right way to get down the road.

Bad for the Strategists
It’s not just the company which suffers under the narrow definition. The strategists suffer as well. First, if the rest of the company sees strategists as primarily responsible for the strategy process, then that is how the strategists will be measured. Bonuses will be based on things like making sure all the parts of the process get done and get done under budget. This can be a horrible way to make strategy and it wastes a strategist’s resources.

Good strategic positions and broad strategic objectives shouldn’t change all that often. For example, the basic plan for Wal-Mart is low cost/low price. That hasn’t changed in decades. The basic plan for Apple is cool devices doing cool things in cool ways. That hasn’t changed in years, either.

Going back to square one every year to complete the entire planning cycle in these cases is a waste of time and effort, because the core strategy will not change. You are better off rotating through key strategic issues related to the enduring plan already in place. But if the strategist is judged on revisiting the plan every year (and concluding it is still good), then the time for getting at the key strategic issues is lost. The strategist’s talents are wasted.

Worse yet, if companies see the plan in place as rather enduring, and they believe that putting the plan in place is all a strategist is good for, then they will see no need to keep strategists around. The idea would be that as long as “low cost/low price” is working for Wal-Mart and “coolness” is working for Apple, there really is no need to even have any strategists around. In this case, the strategist is fired.

It is like that hitchhiker story. Once the driver (the strategist) gets you to the road, they are cast off as unnecessary. The company (as the hitchhiker) will find another way to get down the path without you. And as long as they keep traveling down that same road, they will see no reason to get another strategist.

The strategist then loses his/her ability to influence the actions because they are not around. So, not only is the strategist unemployed, he/she is unable to keep the plan relevant. That makes the actual plan seem even less valuable, making it harder to get rehired to do it again.

Solution
As a result, it is in the best interest of both the company and the strategist to keep planning work and daily operational work more intertwined. That way, the company gets a better implementation of a better (more relevant) strategy. In addition, the strategist gets a more fulfilling (and longer-lasting) job. And the best way to keep the work intertwined is to use a broader definition of success for the strategist which includes aspects of implementation.

SUMMARY
The value of a strategy is not in having a plan on a piece of paper. No, the true value of a strategy is in its ability to improve the outcome of the business. Therefore, strategic success should be defined based on how well a plan improved a business instead of on how efficiently it was designed.

FINAL THOUGHTS
If the company sees no need to take the strategist along on the journey, then the company will not get timely information about problems up ahead on the road. By the time they realize that the road they are on is no longer any good, it may be too late to get back on track.

Strategic Planning Analogy #406: Reference Points

2011-08-08T17:48:00.001-05:00

THE STORY
Recently, I was watching an old movie from 1992 on DVD, called “The Player.” The movie is about a guy who works at a movie studio. His job is to listen to writers pitch ideas for new movies. He hears thousands of pitches each year.

Because he has to listen to so many movie ideas in such a short time, he keeps telling the writers to limit their pitch to 25 or fewer words. Well, it’s hard to describe an entire movie in only 25 words, so the writers use short-cuts. Since everybody in the movie industry knows about all the prior movie hits, the writers explain their plots by referring to the other movies it is similar to.

A common approach used in the movie (and in real life) is for the writer to pick a couple of movies the new movie is like (we’ll call them “Movie X” and “Movie Y”) and then pitch their new idea as “Movie X meets Movie Y.”

Of course, the movie exaggerated the absurdity if you try to combine too many concepts.

In the move, a studio executive is trying to summarize a crazy, convoluted movie idea he’s hearing by saying, “So it's a psychic, political, thriller comedy with a heart.”

The writer agrees, saying, “With a heart, not unlike Ghost meets Manchurian Candidate.”

Not all possible movie combinations should be combined.

THE ANALOGY
Just as movies don’t get made unless they are successfully pitched to studio executives, strategies don’t come to life unless they are successfully pitched to management. And just like the movie studios, the business executives you are trying to pitch to are very busy. If you cannot crystallize the essence of the strategy in 25 words or less, the executives may never take the time to grasp what you are talking about.

Therefore, if you want to get your strategy implemented, you need to think and act like those writers trying to get a movie made. You need to use short-cuts—reference points with which your audience is familiar. For example, you could describe your strategy as being like “Competitor X meets Competitor Y,” implying that you want an assortment strategy like company X but add to it the service levels of competitor Y. This short-cut helps management quickly understand what you’re trying to do—in a way that they can easily visualize. And if they like what they see, it is easier for them to implement the plan, because they have those reference points to fall back on.

THE PRINCIPLE
The principle here has to do with reference points. The idea is that reference points can be a strategist’s best friend AND their worst enemy. Therefore, they must be used carefully.

The Benefits of Reference Points
We’ve already talked about many of the benefits of using reference points when pitching a strategy. It speeds the process, it makes it easier for the audience to understand, and it makes it easier for the audience to implement. These benefits occur because reference point help take an abstract concept more tangible.

For example, Zapmeals had an idea to try to get quality food quickly into the hands of people who didn’t want to waste time sitting in a fancy restaurant. Their idea was to use the internet to connect local chefs (who can provide the great meals) with local people (who want the great meals). To pitch the idea, they used a reference point of a success people were aware of: “eBay for takeout orders.”

The Dangers of Reference Points
Although there are many benefits to the use of reference points, there are also many dangers. Reference points refer to what the audience knows. And what the audience knows is what already exists. It is impossible to become an innovative leader if all you are doing is copying what already exists in the industry.

As a result, reference points can keep one locked into minor variations of the status quo, if used improperly. This is particularly true if all of your reference points come from within the industry.

In the worst case scenario, competitors start clustering around the current winning strategies in the industry, because that is the common reference point for success. With all that competition fighting for the same spot, a brutal war for market share will develop. There will be a race for the bottom as everyone cuts prices to gain share. In the end, all will fail.

For example, I knew of a retailer who described his company’s strategy as being like Company X, a direct competitor. I asked him how he planned to differentiate himself that retailer. He really didn’t have an answer. He just saw a successful competitor and wanted to emulate it. The problem was that this competitor already strongly owned that position and there was no way he was going to be able to take the position away from them. Therefore, his reference point was going to make him an inferior imitation—not a formula for success.

Great strategies tend to create business in a space that in currently unoccupied. You won’t find unoccupied spaces if you look for reference points among companies that already occupy a space.

There’s a reason why one finds very few original movies. They all tend to look like other movies you’ve seen before, because the reference points when they were pitched were movies you have already seen before.

Solution: Borrow from Other Industries
To get around this problem, one needs to use reference points which come from outside the industry. That way, you get the benefits of a reference point without all the problems which come from copying what is already in the industry.

As Clayton Christensen has pointed out in the Innovator’s Dilemma, most great new innovations tend to come from people who are outsiders to the industry. They are not trapped by conventional industry reference points, so they can come up with something entirely original.

You can do the same, by searching for reference points outside your industry. For example, I was speaking to someone in the banking industry who was using retailers like convenience stores as a reference point. He liked the way mass oriented retail stores created impulse sales through effective signing and display endcaps. He liked the way they could sell a lot through minimal service by creating self-service. He liked the way customers felt comfortable in a convenience store instead of the uncomfortableness people felt in a bank. He wanted to replace those scary desks in a bank with friendly aisles full of financial packages. In other words, he wanted to be “the 7-Eleven of banking.”

So, spend some time looking beyond the walls of your industry. Think about how others do their business. Look for principles you can transfer to your industry.

The idea here is to look for successes in areas totally unrelated to your industry and envision what would happen if you applied their success formula to your industry. It may turn out that a full space in one industry is actually an open space in your industry.

It is so difficult to get management to embrace a strategy in a space that is empty (they say “if it is so good, why is the space empty?”). Therefore, if you can point to tangible examples of other industries where that position is very successful, you have a better shot of selling the idea.

SUMMARY
Great strategies need to be sold before they can be implemented. And it is easier to sell the idea if you can relate it to a concept the audience already understands (a reference point). The trick is to look for comparison insight outside your core industry. Otherwise, you will end up just copying one of your competitors and become a weak imitation.

FINAL THOUGHTS
With over 400 of these blogs, I have shown how easy it is to understand complex strategic principles by finding analogies in unrelated fields. This same approach can be used to sell your strategy. Find a great analogy and then your selling process will be a lot easier.

Strategic Planning Analogy #405: Three Steps to Success

2011-08-01T15:41:00.003-05:00

THE STORY
Awhile back, I wrote a book on strategic planning and sent it off to the publishers. Below is a very rough and condensed paraphrase of the type of ongoing dialog I had with the publisher.

Publisher: Your book is very comprehensive and integrated. In one place, it provides a complete approach as to how to do strategic planning.

Me: Thank you for the compliment.

Publisher: No, that was a criticism. Business leaders do not want to buy an all-inclusive, integrated, comprehensive approach to planning.

Me: Why not? Isn’t a comprehensive, all-inclusive, integrated approach the best way to do planning?

Publisher: Maybe so, but for a business person to buy into YOUR comprehensive approach, it requires the reader to abandon THEIR current approach. Business leaders have big egos. They’ve been successful in the past…which is why they are currently a business leader. Therefore, they think they already have a pretty good idea as to how to do things well. All they are looking for is a handful of useful tips they can add to their knowledge base to make them a little better at what they already do. Your book does not do that.

Me: So lists of simple tid-bits about planning sell, but writing about comprehensive planning approaches fail?

Publisher: That’s right.

It was not too long after that conversation that I got the idea to write about planning as a series of short, stand-alone articles. Each would be based on a little story with an analogy. It lead to my book “Strategy is Like Barbeque Sauce,” which in turn lead to my starting this blog.

THE ANALOGY
This same idea for books on planning applies to any other communication about planning. Just as a great integrated book on planning is of little value if the audience doesn’t want to buy it, a great integrated plan is of little value if those who have to implement it don’t want to buy into it.

In writing my first book on planning, I made the mistake of confusing the principles of good planning design with the principles of good planning communication. Well designed plans tend to be complex and integrated—a holistic approach. The idea is to design something where the power of the outcome exceeds the sum of the individual parts. Tradeoffs are made throughout the organization in order to get everything aligned in the direction of competitive advantage. This creates a synergistic strength which is stronger than any individual action and difficult for others imitate.

A great example is Apple. Their success is due to taking a complex and integrated approach to their strategy. They didn’t just introduce another mobile phone. They introduced an entirely new integrated business model—phones, apps, app store, and Apple stores, with cool design and easy integration holding it all together.

My mistake was to think that just because plans should be complex, integrated and holistic, so should be the communication of the planning process. But this fails to take into account the stakeholders of the strategy. Stakeholders like things to be simple and easy. For example, the approach used to introduce the iPhone was very simple and focused on ease of use.

And, as the publisher said, you don’t want to insult the implementation stakeholders or bruise their egos, either. They just want simple lists to add to what they already know.

THE PRINCIPLE
The principle here is that two separate skill-sets are needed to ultimately succeed in planning. One is the skill-set for plan design and the other is the skill-set for communicating the plan execution. The characteristics of these skill-sets are different, and you will have significant difficulties if you confuse the two.

The Two Skill-Sets
The skill set for plan design is all about a holistic, integrated approach. It is about finding a unique way to put all the pieces together in order to win.

On the other hand, the skill set for plan execution is all about simple check lists. It is about dicing up the work into easily managed (and measured) chunks which can be assigned to people (and easily added to their daily work load).

If you don’t believe me about the power of lists, just look at the business web sites which provide lists of their most popular articles. There always seems to be a disproportionately higher number of articles with a number in the title—a number referring to a small checklist. For example, current articles in the American Express Open Forum include:

• The Leader's Checklist For The Startup Manager

• The Best Advice I Ever Received: 3 Top Executives On Tips That Count

• Top 10 Excuses For Not Going Global

• 4 Marketing Ideas That Are Sure To Make A Splash

The problems arise when the checklist approach is applied to design or the integrated approach is used for execution.

Problem #1: Checklists Used During Design
If check lists are so popular why not use them during the design stage? I’ll tell you why. It doesn’t lead to a good plan design. You can put all sorts of steps on a planning checklist—looking at strengths, looking at weaknesses, looking at the environment, writing mission statements, and so on. If you do each one separately and just check it off when it is done, then the work is not building to a creative solution. At best, you will get some small incremental improvement.

No, if you want truly innovative and revolutionary strategies, you need to change your world view and your thinking on complete business models. You need to rethink the entire process, as Apple did with the iPhone. It is a messy and creative process, requiring one to hold a lot of concepts in one’s head simultaneously. It is not a series of discrete tasks that can be done one at a time. There is a back and forth tug on various trade-off options and scenarios. The secret is in the gestalt—how the parts play together—not any individual piece or pieces.

Just remember the Edsel. Each part of the design of that automobile was individually optimized, like a checklist. The grill was designed separately from the headlights or the hood, or the tailfins, and so on. Although each part was designed well on its own, when all of it was put together on the car, it was a disaster. There was no gestalt. As a result, there was no success.

Problem #2: Integrated Approach Used During Execution
However, just because a holistic approach is necessary for design, it does not mean that the approach needs to continue to dominate through execution (as I discovered with my book). Although the integrated approach may allow people to envision what the whole picture should look like, they may not have a clue as to what their particular role is to make it a reality. The end result can be anarchy. Although a little anarchy is good in the design stage, it is poison during execution.

Unlike the Edsel example, if you instead start by first designing the whole (the gestalt), you can then later begin chopping up the tasks into each part which needs to get done (the opposite of the approach used for the Edsel). The constraints of the gestalt are already known, so the individual work on execution of each part will still work towards creating the greater whole.

By chopping up the tasks into lists, one gets several advantages. First, you can assign responsibility for each task. That way, everyone knows what they are to accomplish. Confusion is eliminated. Second, with responsibility comes accountability. Management knows who to deal with when the execution falls short of intended results. Third, it is easier to develop metrics for each task. That way, you can better measure performance. Fourth, by chopping up the tasks into modules, you can create a more sophisticated time-line for execution. Finally, it is easier to develop a motivational incentive plan when the tasks are more narrowly defined and more specifically assigned.

SUMMARY
The skills needed to design strategy are different from the skills needed to implement the strategy. Strategy design requires a holistic gestalt approach—simultaneously building the design of the entire business model. Strategy execution requires cutting the gestalt into its component pieces (and put on a checklist), so that responsibilities and accountabilities can be assigned and measured. Therefore, strategy design and execution should each be approached differently—using the approach consistent with its unique characteristics. Problems ensue when the approaches are flipped. For example, the individualized checklist will never lead to revolutionary, innovative strategy design. At best you will get incremental advances. At worst, you will design the next Edsel. Similarly, if the implementation is left at only the gestalt level, you will end up with confusion and anarchy, not efficient execution.

FINAL THOUGHTS
Did you notice I titled this blog “Three Steps To Success”? If that’s the kind of title that appeals to people, then I’ll use it. Think about that when giving a title to your strategic execution. I know that a lot of successful firms select about three key strategic items they want to accomplish that year and then give them a fancy title like Key Result Areas or Key Strategic Initiatives. If you give a great title to the checklist, it will get more attention during discussions.

Strategic Planning Analogy #404: A Word About Sponsors

2011-07-27T15:32:00.001-05:00

THE STORY
Paris Hilton has tried a number of things in her career—singer, actress, and author, just to name a few. But she has also been very busy lending her name to all sorts of products.

Some of the products she has lent her name to make sense—items like apparel, shoes, fragrances, and accessories. Although with all the hundreds and hundreds of styles and versions, one wonders how much input she actually had on many of these products.

Other products with her name are a little bit further afield—items like a collection of fashion and accessories for dogs, press-on nails and eyelashes, hair extensions and the like.

Yet others are even more far afield, like Paris Hilton motorcycle helmets, video games (Paris Hilton’s Diamond Quest), champagne and wine in a can, a chain of nightclubs (Club Paris), and decorative accessories for scrapbooking. She even promoted a brand of beer in Brazil whose name roughly translates into “Very Blonde Bitch.”

Needless to say, a lot of these far afield products were major flops. I guess the name Paris Hilton has only so much power.

THE ANALOGY
Paris Hilton has made a lot of money by lending her name to a wide range of products. Many of the people who paid her that sponsorship money, however, did not succeed as well from the deals. A large number of these products were failures.

Once on the David Letterman show, David was giving Paris a hard time about all of the sillier products she had lent her name to. It soon became apparent that Paris really wasn’t all that interested in many of the odd items sold under her name. You could see that she was much more interested in the promotional money she was making than the desirability of the products her name was on. I’m not even sure she had ever used many of these products. For example, Paris rarely ever made her scheduled appearances at Club Paris. She was too busy. If Paris wasn’t interested enough to visit her clubs, why should I make the time to visit them?

In the end, this made Paris Hilton a relatively poor sponsor.

In the world of strategic planning, it is also common to have a need for sponsors. Unless some high level executive lends their name as an endorsement of the strategic program, the program goes nowhere. However, if your executive sponsor just lends his/her name and really doesn’t get personally invested in the project, that sponsorship may be about as useful as Paris Hilton’s name was on some of the far afield products.

Sponsorship by itself will not ensure strategic success. You need the right sponsor who will lend the right kind of support.

THE PRINCIPLE
The principle here has to do with executive sponsorship for strategic initiatives. You not only need a strategy for the initiative, but also a strategy for managing the sponsorship of that initiative.

There are three elements to a sponsorship strategy—choice of sponsor, choice of relationship, and incentives. Each aspect is discussed below.

Choice of Sponsor
In general, there are two rules of thumb in choosing a sponsor:

1) The higher the sponsor’s rank in the corporation, the better. In fact many feel that without the endorsement of the CEO (the highest ranking officer), the initiative will never fully get off the ground.

2) The more involved (time, emotion, action) the sponsor is in the initiative the better. You don’t just want use of the person when the initiative is introduced, like was often the case with Paris Hilton. You want their help all the way through to the end.

The problem is that, often times, the higher one reaches in the organization for a sponsor, the less time that person has to get involved in the strategic initiative. Therefore, you need to make trade-offs. The goal is to find the highest ranking person who still has enough space in their schedule (and enough desire and expertise) to devote meaningful energy to the initiative.

Getting the right sponsor is critical. And the sooner you work on getting the right one, the better. Don’t wait until the project is approved to look for a sponsor. The sponsor may be essential to getting approval in the first place.

My experience is that it is best to start seeking out sponsors before the initiative is even fully fleshed out. That way, the sponsor can help design the initiative. By participating in the early design, he or she is more emotionally vested in getting the initiative accomplished, since it is partly their idea. I’m pretty sure that Paris Hilton was brought in relatively late on many of the products she endorsed, which is why she had no emotional ties to them. Even if the desired sponsor is not part of the strategic development team, get them emotionally involved early by seeking their input.

Choice of Relationship
There are three types of relationships a sponsor can have with a strategic initiative. The least involved relationship is that of an “endorser.” An endorser essentially lends their name to the project early on and does little else.

At the other extreme is the “complete handoff.” This is where the sponsor takes over full responsibility for the project. In fact, they may even be asked to abandon their regular job in order to manage the project full-time. At the time of the handoff, the strategists are no longer involved in the project.

The third option is in the middle, which I call “co-production.” This is where the strategists and the sponsor work together manage the process.

There are many problems with the two extremes. For example, if all you get is the endorser’s name early on (the first option), then you can end up with many of the same problems that manufacturers had using Paris Hilton’s endorsement. The sponsorship is too weak to withstand all the resistance the initiative will encounter along the way. About the only time endorsement alone is desirable is when trying to get the support of the CEO (because that may be all you can get at that level). In that case, you probably need multiple sponsors—endorsement at the very top, and something stronger further down the organization.

The complete handoff is nice, because you are getting the greatest commitment of the sponsor. However, there can be a problem if the strategists are cut away from the project too early. The strategists and their team put a lot of effort into researching and thinking about the initiative. They have some unique skills in helping to see how all the pieces fit together. If they are cut out of the process too soon, a lot of their insight is also cut out.

The key concern here is that new strategic initiatives are often contrary to the status quo, yet most sponsors come out of the status quo. Therefore, if the strategists are cut out too soon, the initiative may end up becoming less radical than desired, and end up more like the status quo. After all, that is what the sponsor knows and is more comfortable with. That is why you need to keep the strategists around longer, to help pass on the insights learned and make sure that the radical essence of success is not lost over time.

This is why I prefer the middle-ground of co-production. That way, everyone has a vested interest in success and the key success factors are not lost along the way. But even if you cannot get formal co-production, informally try to help after the handoff so as to minimize problems.

Incentives
To keep the initiate on a successful path, it is helpful to make sure that interests of the sponsor are in sync with the interests of the initiative. One way to do this is by creating incentives which cause initiative success to be in the sponsor’s best interest. If all of a sponsor’s incentives are tied to their regular job, then don’t expect a lot of time taken away from their regular job to work on the initiative.

Figure out what motivates these people (power, money, accomplishment, etc.) and then make sure that the initiative helps them get what motivates them.

SUMMARY
Strategic initiatives often need sponsors in order to get approved and to get implemented. Therefore, having a good sponsorship strategy is important. Start looking for the right sponsors very early in the process. Get them emotionally vested in the project. If at all possible, keep the strategists actively involved with the sponsor long enough to ensure that the radical nature of the change is not lost over time. Finally, provide incentives to the sponsor, so that active sponsorship of the initiative is in their best interest.

FINAL THOUGHTS
Of course, if the idea is bad, even great sponsorship isn’t worth much. I’m not sure if there is a sponsorship strong enough to make a major success out of champagne in a can.

Strategic Planning Analogy #403: We’re All Number One

2011-07-19T23:01:00.002-05:00

THE STORY
One of my first jobs after getting my MBA was to help a small retailer determine where to put its advertising dollars. All the local radio stations thought that I should be spending my advertising dollars with them. As a result, I was constantly being shown presentations by the radio stations about why I should be using them for my advertising.

What amazed me was that nearly every radio station in that market could use the ratings book to “prove” that their station was ranked number one. How could they all be #1? It was done by slicing up the market into sub-segments. As it turns out, for some time during the day for some sub-set of the demographics, each station could find a place where they were number one.

For example, one relatively weak station showed me that they were #1 with teenage girls at 2AM. I’m not sure how many teenage girls are listening to the radio at 2AM, and I’m not sure why I would want to talk to them at 2AM, but it was the rare opportunity when this one station could claim to be #1, so they bragged about it.

It didn’t take me long to figure out why the boss had given me the task of working with these radio stations. He knew from experience that these presentations were a waste of time. So to avoid them, he gave that job to me—the new guy.

THE ANALOGY
These radio stations all saw an advantage to being able to claim that they were the market leader. Therefore, they sliced up the data until they found any obscure data point that would allow them to claim some form of leadership, no matter how meaningless.

A lot of business strategies and mission statements also put a high priority on leadership. You’ll find goals to be “a market leader” or “industry leader” (or something similar) in many of them. And there is a lot of evidence showing that there are strategic benefits to being a leader.

The problem is that not all types of leadership are created equal. As we saw with the radio stations, it is possible to find leadership within minutiae that is so obscure as to be practically meaningless.

This same problem can occur with all businesses. Like the radio stations, they can find a way to claim leadership. If you look hard enough, almost all businesses can find someplace where they are a leader. But is the leadership meaningful? Is the leadership claim strategically significant, or just some trivial point of data with no power?

THE PRINCIPLE
The principle here has to do with smugness. Having a business which is a leader can be very satisfying. It can be a source of pride. It can make you feel like your strategic mission has been accomplished. It can make you feel smug…nothing left to do but put your feet up on the desk and watch the profits roll in.

In reality, however, there is no room for smugness in strategic planning. Just because you have found a way to define yourself as a leader today does not mean that you will remain a leader tomorrow. Worse yet, the type of leadership you have defined for yourself may not have any strategic power or significance.

While it may be true that all successful businesses are leaders, not all leaders are successful. You need leadership in a place worth leading.

Problem #1: Leaders Without Followers
The definition of a good leader is someone with lots of followers. Similarly, being #1 is only valuable if you are number one in a place with high demand. Being #1 in a place that everyone is abandoning is not much to brag about.

The largest threat to the power of leadership is obsolescence. It leaves the leader of the obsolete with nothing but memories, because their future is typically ruined. And pretty much everything eventually becomes obsolete. Therefore, if you smugly rest on your #1 position, refuse to abandoned your strategy, and hold on too long, you will eventually be a leader in a worthless position—abandoned by customers because it is obsolete.

This applies to leadership positions in specific products. Just think of all the analog products and business models made obsolete by the digital age. Being #1 in video tape players is worthless in a world of streaming movies off the internet.

Technology leadership is also vulnerable to obsolescence. Being the leader in the manufacturing of cathode ray TV picture tubes is worthless in a world of flat screen TVs. And as Clayton Christensen points out in his book on The Innovator’s Dilemma, data storage devices have gone through numerous technological transitions, and the leader in the former technology is rarely the leader in the next technology. Often, they cease to exist because they smugly clung too long to the obsolete technology.

Even entire industries can become obsolete. Think about the payphone industry. Being #1 in any aspect of the payphone industry is pretty worthless in a world of cell phones. Similarly, being #1 in the video rental store industry is fairly worthless, because the entire industry is obsolete. Just look at what happened to Blockbuster. Their leadership in the end could not save them.

Even leadership with a customer segment can be worthless if that segment goes away. I worked with a wholesale company whose core customer segment was small independent retailers. The small independents were disappearing due to the growth of Wal-Mart and other large chains. This wholesale company’s #1 position with independents was becoming worthless because independents (its customers) were becoming obsolete.

I know a story of a brewer who was looking at buying a beer brand. They did research and found out that although this brand had a leading regional position with a certain customer segment, that segment was starting to get old. They were starting to die off. No new customers were being added. In the not too distant future, so many members of the customer segment would be dying off that the leadership with this segment would be worthless. Dead customers are obsolete customers.

Problem #2: Leading in a Meaningless Place
Even in young, growing sectors, leadership can be worthless if the leadership is in a bad place. For example, some segments are just too small (like being #1 with teenage girls at 2AM). Even if you are the leader with 100% market share, it is not enough to provide an adequate return.

Think about satellite-based cell phones. About the only customers who desire them are people in places without access to cell phone towers. Unless you are out in the middle of the ocean (and few of us are) or in a very remote area (and by definition almost nobody can be in an area labeled “remote”), then you have virtually no reason to pay the extra expense for satellite-based phone service. Therefore, being #1 in satellite phones is fairly worthless. The returns will never justify the costs.

Another worthless place is being the leader in a broken business model. Even in young, rapidly growing businesses, if you cannot eventually find a path to profits, then that leadership is worthless. I can think of a lot of dotcom business which are leaders with a large number of followers. However, they have not discovered a way to adequately monetize that leadership. The business model is broken. In these situations, leadership will only allow you to burn through cash more quickly on your way to failure. The reason why dotcom bubbles and housing bubbles burst is because the industries are based on flawed models. Eventually, the flaw brings the market down, and even the leaders struggle to survive.

Avoiding the Problems
So how do you avoid these problems? First, don’t get smug and stop adjusting to the marketplace. Always be watching the marketplace for early signs that your position is in a place that is becoming obsolete. That will give you time to prepare to jump to the area that is making you obsolete. Better yet, consider initiating the act that will cause obsolescence. That way, you have a better shot at keeping leadership through the transition.

Second, don’t get smug and relax just because you were able to manipulate the data in such a way as to find some place where you are #1. It may be a worthless place of leadership. Do the math to make sure that all that effort to lead will end up in a place worth leading.

Third, once you have found the right place (a place where you can win and a place worth winning), work hard to be a leader there. This is when leadership really makes a difference, so work hard to get it.

SUMMARY
Doing nothing is rarely a good strategy. Marketplace conditions are too fluid. Even a market leader can lose out if their point of leadership becomes obsolete or is threatened by others with a superior business model. There is never an excuse for becoming smug and stopping the attempt to get closer to where the market is going. Rather than looking for ways to redefine the status quo as some obscure version of leadership, look for areas where leadership is really valuable and move from the status quo to get there.

FINAL THOUGHTS
As Clayton Christensen likes to point out, leaders at one point in time rarely survive the transition to the new when the old becomes obsolete. They are replaced by new companies created just for the new. And a major reason, I believe, for that inability for the leader to survive the transition is because they become too smug.

Strategic Planning Analogy #402: Strategy is Like a Resume

2011-07-10T17:41:00.003-05:00

THE STORY
Since I am currently looking for a job, I have been spending some time talking with resume-writing experts. One of those experts said something which caught my attention.

He said that when recruiters see a job title in a resume, they usually have a pretty good idea of the duties and responsibilities associated with that title. Therefore, if the only explanation on your resume is the duties and responsibilities associated with that job, you haven’t really told them much of anything they didn’t already know.

Worse yet, the expert said you are not telling the recruiters what they want to know. What they really want to know is how successful you would be if they hired you for the job they are trying to fill. By only telling them the duties and responsibilities, you are not explaining how you approached those duties and responsibilities and why you were successful.

The expert referred to these as “transferrable skills.” In other words, what skills do you have which could be transferred to the recruiter’s company to create success there? After hearing this, I modified my resume.

THE ANALOGY
There’s an old acronym called WIIFM (pronounced “wiffum”). It stands for “What’s in it for me?” In other words, I have no interest in what you’re saying unless you first tell me how it affects me.

My original resume did not pass the WIIFM test. I hadn’t explained how any of it was relevant to the recruiter. Therefore, they had no reason to be interested.

The same principle applies to business missions. They need to pass the WIIFM test. Business Missions need to explicitly explain why the marketplace should care that you exist. In other words, they need to explain what’s in it for the customer.

THE PRINCIPLE
The principle here has to do with having an orientation towards others. When writing a business mission, it should be like a good resume—oriented towards why the customer should be interested in me.

Unfortunately, many mission statements and plans are like bad resumes—nothing more than bragging about how great I am. Recruiters don’t care about how “great” YOU are. They want to know how great you will make their COMPANY. Similarly, a good mission statement shouldn’t just say how great YOU are, but explain how your business model is great for your CUSTOMERS.

You can see the difference when looking at Ends and Means.

1. Ends (What is my goal?)
One way to tell a good mission/plan from a bad one is to look at the goal of the company. A bad mission plan has a self-centered, bragging goal, something like:

1) A huge sales goal
2) A huge profit goal
3) A huge growth goal
4) A goal to be the biggest or best in the industry (a leader)

It’s not that any of these things are necessarily bad. It’s okay to be successful. The problem is that these goals are not very useful from a strategic point of view. They do not provide any strategic insight.

It would be like a coach in sports saying his goal is to win games. That’s a great thing to do, but saying it provides no direction as to how those games are to be won. If the coach just told the players “Our goal is to win” he has not given them any strategy as to how to win. Everyone on the team may interpret the goal differently. As a result, there is no teamwork, no coherent game plan to follow that would lead to a win.

The key weakness of a self-centered goal is that the linkage to success is weak. There are lots of things one can do in the name of becoming great, but it doesn’t always lead to greatness.

For example, let’s say I wanted to have great sales. Tactics which might come out of that could include things like:

1) Selling everything below cost (which in the long run destroys success)

2) Getting people to purchase sooner than they normally would (which only reduces sales later)

3) Reducing the quality so that you can afford to sell cheaper (which will hurt future sales when people figure out that it wasn’t such a good deal at that lower level of quality)

4) Diversifying into all sorts of added businesses which divert the company focus, put you in places where you have no competitive advantage, and/or confuse the customer about what you stand for. All of this will hurt the company long-term

5) Expanding the appeal beyond an exclusive niche to reach the masses. This can destroy a fashion brand, because the core customers want exclusivity. They will abandon it once the masses have it. And once the core customers abandon it, the masses won’t want it much longer, either.

In other words, the pursuit of near-term sales-building tactics can lead to long-term disaster. Ultimate, sustainable success is often not achieved. Long-term failure is very likely.

Now, let’s compare this to the opposite approach—having an “other-centered” goal. Instead of saying “What’s in it for me” you say “What’s in it for my customer”. The new goal would be about providing a benefit for the customer. It could be something like:

1) I will save the customer time;

2) I will make the customer’s life easier;

3) I will improve the customer’s standard of living;

4) I will reduce the customer’s down time;

The idea is to form a goal around improving a particular part of your customer’s life. If you truly have a way to improve the customer’s life, they will give you their business. The sales will come naturally, without having to resort to the tricks like I mentioned above. This creates a sustainable business where customers come back because they want to, not because you bribed them or tricked them into coming.

With my resume, I was told to take out phrases that implied “hire me because I’m wonderful” and replace them with phrases which implied “hire me because this is how I can make your company better.” Similarly, instead of saying “my goal is to be great” in your mission statement, say “my goal is to benefit from focusing on making my customers’ lives better.”

2. Means (How Does My Business Model Allow Me to Please the Customer?)
Bad resumes just say how great the person is and list the duties the person had at previous jobs. The experts say that instead of focusing on duties, focus on “transferrable skills.” These are the things I am able to do that would work well at the new company. These skills are the means by which I achieved success at the old firms and can also bring success at the new firms.

This also applies to mission statements. It’s one thing to say you are oriented towards helping your customers solve problems. It’s quite another to have a business plans which provides the means to accomplish this goal (profitably). It is the skills you use to satisfy the customers.

Therefore, a business mission should also outline the means by which your company will win at serving its customers. These are the company’s skills which allow it to do a better job than the competition.

For example, one could say that their business mission is to “save their customers time by bundling all their entertainment needs into one convenient package.” So the end is saving customers time and the means is though the ease of providing it all in one bundle.

There are many ways to save a customer time. If you don’t pick one, the company will lack focus and waste its effort by moving in too many directions. Pick the means where you have the best chance of winning.

SUMMARY
A good mission statement is like a good resume. It communicates two things: the ends (what I can do for my customers) and the means (the unique skill-set and business model which makes it possible to profitably deliver the ends better than the competition). The final statement would generically look something like this:

My mission is to provide “X” solution to my customers by doing “Y” better than anyone else.

That provides a lot more strategic direction than saying “my goal is to be great.”

FINAL THOUGHTS
Resumes are short. Business missions should be short at well.

Strategic Planning Analogy #401: Adrift at Sea

2011-07-04T11:30:00.003-05:00

THE STORY
Suppose, for a moment, that you took your company out for an ocean cruise. While on the cruise, there was a terrible storm and your ship sank. Now, you and your senior team are all on a tiny lifeboat out in the middle of the ocean, adrift at sea.

You realize that this is a serious problem, so you decide to hold a strategy meeting on that tiny lifeboat.

“Ladies and Gentlemen,” you begin. “We have a serious problem here. We need a strategy to get out of this mess. The first order of business will be to come up with a strategic goal. My suggestion is that our goal should be to reach land. Any objections?”

Everyone agrees that reaching land is a good goal.

“To get to land,” you continue, “we need to move the boat. Therefore, I want all of you to work on tasks to move the boat. That will be our strategic tactics”

So everyone started to do whatever they could to move the boat. People took whatever they could find to act like an oar. Then they leaned over the side of the lifeboat to use their makeshift oar.

However, since nobody knew where the closest land was, everyone just started rowing in random directions. Worse yet, everyone was rowing in a different direction. As a result, the boat just went around in circles.

Looking at the mess, you finally conclude, “You see? This is proof again of why I don’t think strategic planning works. We’re working hard but not getting anywhere.”

THE ANALOGY
It seems that this experience on the lifeboat is not all that uncommon. According to a recent survey by Booz & Company, a lot of executives have come to a similar conclusion about the planning activities at their companies. The survey found that most of the executives (53%) don't feel their company's strategy will lead to success.

What does that say about the power of strategic planning if most executives do not have confidence in their company’s strategy? It’s a black eye to all strategists that the confidence in the industry has sunk so low. We’re sinking like that cruise ship.

Now it’s easy to see why the strategy on the lifeboat was so awful. The goal and the tactical directions did not provide any useful guidance. All it led to was random, useless activity. As we will soon see, a lot of business strategies are almost equally as useless.

THE PRINCIPLE
The principle here is that when strategic planning doesn’t get you where you want to be, it is not because strategic planning doesn’t work. Instead, the problem is that you have a lousy strategic plan. A bad strategic plan is like an inaccurately drawn map. It may look like the real thing, but it is useless.

We need to raise the standard of strategic planning and no longer accept lousy plans. They’re hurting the image of the profession in the eyes of top executives. Listed below are some clues that your strategic plan is leading to a disaster like the one made in the lifeboat.

1) You May Be Adrift At Sea
One of the most important outcomes of a strategic planning process should be an understanding of a company’s reason for existence. If you do not have a reason for why customers should prefer you, then you should not be surprised when customers choose not to patronize you. This is why I said recently that this is the most important question you need to ask in a planning process.

You cannot fulfill a purpose if you have no purpose. And if you have no purpose, then expect your strategy to fail. Without a purpose, you are like that lifeboat—adrift at sea, bouncing around wherever the waves take you. You will never make it to shore.

So the first thing to do is check if your strategy is built on a foundation of purpose—a reason for existing in the marketplace. Companies adrift never win. In the Booz survey, only one in five (21%) executives think their company has a "right to win" in all the markets it competes in. You cannot solve this problem until you give your customers a reason to want you to win—a purpose linked to their desires.

2) Your Goal is Too Vague
Now you may be saying, “Wait! I have a purpose. My goal is to provide great returns to my shareholders…or my goal is to grow sales at 20% per year…or my goal is to be a leader.”

These goals are no better than the goal in the story of wanting to “reach land.” It is too vague. Where is the land? Which direction do we need to go? What does it take to get there? What do we need to get there?

Vague goals like sales targets or return on investment are focused on the outcomes which benefit one’s self. They do not address how or why those results should occur (ignore the cause for those outcomes). The only way to get sustainable sales or profits or leadership is by pleasing the customer. Unless your goal addresses how you are specifically benefiting the customer, then there is no guidance in how to get those sales or profits or leadership. You are still adrift at sea.

Check your goals to see if they are specific enough around how you are going to please the customer. If the goal is too vague, then you probably have a lousy plan.

3) Your Tactics Are Poorly Aligned
In the story, everyone was paddling in a different direction. As we all know, if you want a boat to move efficiently in a singular direction, you need to have everyone paddling in that one direction. The same is true for tactics. If they are not aligned towards the purpose, it will never be reached.

According to the Booz study:

- Two thirds of the executives (67%) say their company's capabilities do not fully support the company's strategy and the way it creates value in the market.

- Almost two-thirds say their biggest frustration is "having too many conflicting priorities."

- 82% say that their growth initiatives lead to waste at least some of the time.

These survey answers would seem to indicate that there isn’t a lot of tactical alignment going on out there. Too many companies have too many paddles moving in too many directions.

No wonder these people don’t trust their strategy. It is having no meaningful impact on what people do. There are too many so-called “strategic initiatives” out there which aren’t properly linked to the big-picture purpose.

For a strategy to be effective, it needs to provide a focus to what people do. It needs to show what to do as well as what not to do. It needs to be a beacon light showing the way, so that everyone knows the direction in which to push their efforts.

And even more important, it needs to help prioritize what is to get done. It is impossible to be effective at simultaneously working on 20 different key strategic initiatives. That is too many. It will cause too many conflicting priorities. Most companies can only handle four or fewer key strategic initiatives at any given time.

Is your strategic planning process:

a) Getting everyone to move in the same direction (towards your purpose)?
b) Getting everyone focused on the same few top priorities?

If not, you may have a lousy plan.

SUMMARY
If you are upset with your strategic planning, don’t blame the concept of doing planning. Instead, blame the lousy quality of the plan. Instead of rejecting the idea of doing planning, change your approach, so that you are producing quality plans. Signs that you may be producing lousy plans are a) lack of a clearly defined, customer-oriented purpose, b) too much vagueness, c) little connection between the purpose and the activities, and d) trying to do too many strategic initiatives at the same time.

FINAL THOUGHTS
If the plans are lousy, eventually the blame will shift from “what a lousy plan” to “what a lousy planner,” and the planner will find him or herself unemployed. Fix this before it is too late.

Strategic Planning Analogy #400: Don’t Eat The Whole Fish

2011-06-30T17:47:00.002-05:00

THE STORY
There is a Japanese seafood delicacy called fugu. We call it the blowfish. Although many rave about the taste and texture of the fugu, the fish has a serious drawback—eating it can kill you.

Fugu contains tetrodotoxin, an extremely potent neurotoxin that paralyzes its victims while they are still conscious. In other words, you are fully aware as your throat closes, your lungs deflate and you drift slowly into death. Even extremely small doses of tetrodotoxin can kill. There is no known antidote.

This toxin permeates large portions of the fish. Therefore, if you want to eat the fish and survive, you must only eat the particular portions not containing the toxin. That is why only chefs who are properly trained and certified in fugu preparation are allowed to sell fugu in Japan.

Even though the chefs are certified, I think I’ll pass on fugu.

THE ANALOGY
Just because the gourmet crowd loves fugu, that doesn’t mean they devour the whole fish. These people are smart enough to know that only a portion of the fish is edible. They are careful to avoid the poison within the fish.

Unfortunately, this is often not the way businesses operate. Leaders may become enamored with a particular company or a strategy, just like the gourmet love the fugu. For example, a leader may say they admire the success of a particular company like GE or Google or Apple or Berkshire Hathaway. Then, wanting to make their company more like the company they admire, these leaders start to imitate EVERYTHING which the company they admire does. In other words, these leaders do not discriminate and decide to “eat the whole fish” of the company they admire.

And just like the poison in the bad parts of the fugu can kill, the bad parts in the admired company can kill your company.

THE PRINCIPLE
The principle here is that just because a company enjoys success, that does not mean that everything they do contributed to that success. In addition, many of the things which “work” in their company could be toxic if applied in another company. Therefore, we need to be discriminating and only borrow concepts from others which are appropriate to our situation. Instead of eating the whole fish, we need to first cut away the dangerous and inappropriate.

There are three reasons why borrowing something indiscriminately from an admired company can become poison to our own company.

1. It Wasn’t A Part of Their Success
Even great companies can do stupid things. At one time, many people thought Enron was a great company. In February 2001, Fortune magazine's ranking of America's most admired companies listed Enron as No. 1 for "innovativeness" and No. 2 for "quality of management."

And, yes, Enron did do some remarkably creative things. Unfortunately, they also did some stupid things. The stupid things eventually destroyed Enron. By the fall of 2001, Enron fell apart.

What ultimately killed Enron was its highly leveraged reward structure on a quarterly basis. It caused employees to do bad things in order to reap the outlandish quarterly rewards. This was their poison in the fish.

Had someone in early 2001 decided that Enron was a great company, they might have indiscriminately done anything that Enron did. They might have copied the compensation structure which was the poison in the fish. After all, it was a “great” company, so isn’t everything they do great?

No, great companies can do lots of things that have nothing to do with their greatness. In fact, great companies can be so successful that the success overcomes a lot of poison. A weak company cannot afford to do too many stupid things and stay alive. Strong companies can. So there can actually be more poison in a strong company than a weak company.

Therefore, when admiring a company, first try to figure out which parts of the company are most highly correlated to their success. Then focus your attention on how you may incorporate that particular concept into your own business. Don’t just try to copy anything they do. You may end up copying their poison.

2. It Won’t Work in All Environments
Another company which used to be on most admired lists (for many decades) was GE. When companies got into trouble, they often wanted to replace their leaders with executives from GE. The idea was that GE leaders were a part of what made GE great, so if I get one of their leaders, it will make my company great.

Unfortunately, when many of those GE leaders went to other companies, they were not as successful as they had been at GE. Does this mean that the leaders suddenly become less competent? Of course not.

The problem was that the leaders often found themselves in a different environment than they had at GE. The corporate culture may have been different, the competitive situation different, the place in the lifecycle different, and so on. This could make the success formula at GE inappropriate or irrelevant in the new environment.

Of all the things GE did right in their glory years, one of the most important ones was their knack of knowing how to manage portfolios. They knew when to get out of old businesses and when to get into new businesses. They knew what to fund and what not to fund. If you move that portfolio knowledge to a one-business company operating in an area GE would have exited, then that knowledge isn’t very useful.

Remember, in the environment of the fubu fish, the tetrodotoxin is not poisonous. It is only poisonous when moved into the environment of the one eating it. The same is true in business. When the environment is different, the success factors can be very different. What works in one place can be poisonous somewhere else.

Right now, companies like Apple and Google tend to be highly admired. These companies are in a particular environment where there is high obsolescence and an extreme dependence upon gifted engineers and programmers, for which there is a severe shortage. That is why these companies tend to have some unusual perks to keep their engineers and programmers happy, like free gourmet meals.

If you try to apply the lessons of Apple and Google to a mature business with low obsolescence and little dependency on scarce talent, these tactics may not provide nearly as much benefit. They may just be money pits that decrease your profits—perhaps to the point of poisoning your ability to compete.

Therefore, consider the impact of the environment (yours and theirs) before adopting ideas and strategies from other companies.

3. It Won’t Work Alone
Often times success is not due to a single factor, but to a highly integrated system. By just copying one portion of the system, you may not reap its benefits, because the benefits require the entire interrelated system.

Take Wal-Mart, for example. One of the keys to its success is its low prices. Therefore, one could try to emulate the success of Wal-Mart by also offering extremely low prices. The problem is that if all you do is try to underprice Wal-Mart, you make quickly go bankrupt. It will become your poison.

Wal-Mart can afford to offer low prices because of its integrated system to lower costs. It has world-class logistics, global sourcing, a culture of frugality and a lot of other factors in place to allow it to profitably have low prices. If you copy the prices without copying the rest of the system, you will not have success.

Usually the connection is not as obvious as in the Wal-Mart example. Therefore, it may take more effort to determine how the complete system works. Then, you can determine if you want to copy the entire interrelated system.

SUMMARY
Just because you may admire a particular company does not mean that you should indiscriminately copy anything which that company does. If you do, you may be adding poison to your company rather than success.

FINAL THOUGHTS
This principle also works in reverse. Just because you have a low regard for a company doesn’t mean that everything they do is wrong. I know of a leader who would refuse to hire anyone who came from a company with a smaller market share than his own. His reasoning was that if a company had lower market share, then everything and everyone associated with that company must be inferior. But just as there can be poison in a “great” company, there can be nuggets of gold in a “bad” company.

Strategic Planning Analogy #399: The Most Important Question

2011-06-24T16:37:00.004-05:00

THE STORY
I was talking one time with the president of a retail company. This company had just chosen a new strategic direction. In essence, they had decided to imitate a strategy which had been very successful for another retailer with whom they competed. Puzzled by the choice of strategy, I asked this president a few questions.

“Will you have lower prices than this competitor?” “Not really,” he replied. “Our prices will be about the same.”

“Will you offer a better assortment than this competitor?” “No,” he replied. “The assortment will be similar.”

“Well I know the competitor has superior store locations. So, I’m wondering…what is it about your strategy that will cause customers to prefer you over this competitor?” He didn’t have an answer.

It wasn’t too long after this conversation that this individual was no longer president of that retail company.

THE ANALOGY
In the story, the president chose a strategy which had been very successful for a competitor. My guess is that the president concluded that since the strategy made his competitor successful, then it must be a good strategy. And if it is a good strategy, then it will work for his company as well.

Unfortunately, that’s not the way strategies work. In general, a strategy is not intrinsically good or bad on its own. It’s value is based on the context of the particular company using the strategy and the competitive landscape. In other words, a strategy is only good if it is good for you.

For example, a low price strategy may be excellent for the lowest cost operator, but a disaster for a high cost operator. So is the “Low Priced Strategy” a good strategy? It depends. And if you don’t have a good understanding of yourself and your marketplace, you may come to the wrong conclusion.

To help figure out if a strategic option is the best strategy for you, it is often a good idea to develop a process where you ask a lot of questions, as I was doing with this president. And one of the best questions you can ask yourself is this: What is it about your strategy which will cause customers to prefer you over the alternatives? In the story, the president did not have an answer to this question. And as a result, his strategy failed and he lost his job

THE PRINCIPLE
The principle here has to do with the concept of superiority. Great strategies enable a particular company to achieve a position of superiority in the marketplace. And this superiority is only relevant if a meaningful percentage of the marketplace desires it. And one of the best ways to determine if you have achieved this relevant point of superiority is to ask the question: What is it about your strategy which will cause customers to prefer you over the alternatives?

No Reason To Prefer = No Reason To Exist
This is a critical area to spend time on, because preference is directly related to relevance. In other words, if consumers have no reason to prefer you, then you have no reason for existing.

A lot of businesses struggle to survive. I believe that most of these firms struggle because they never established a reason for why customers would need them to survive. They have never established a rationale for why someone should clearly prefer them over the alternatives. There is no clear superiority.

These struggling companies may say that they have good products/services at competitive prices. But so do nearly all the alternatives. Just look in the phone book or do a search on the web. There are lots and lots of alternatives. And most of them are pretty good. Just being as good as everyone else is not enough. That does not provide a reason for people to choose you. Mediocrity is not a viable strategy.

In an earlier blog, we asked about what would happen if your company ceased to exist. Would anyone care? Could they easily find a substitute and move on with their lives as if nothing happened? If that is the case, then you do not have a worthwhile strategy.

If you want to exist, then you need give people a reason for wanting you to exist—a point of superiority.

If You Know Why Consumers Should Prefer You, Then You Pretty Much Know Your Strategy
The real beauty to this question is that, once you know why consumers should prefer you, then the rest of the strategic process becomes relatively straightforward. It boils down to four words: Strengthen, Protect, Declare, and Leverage.

Strengthen: Keep strengthening your point of preference so that your level of superiority becomes even greater. This is where a disproportionate amount of your resources need to be applied. This is the “offense” part of the strategy.

Protect: This is the “defense” part of the strategy. This is where you monitor the competition and do what you can to keep them from catching up or surpassing you in superiority.

Declare: It does no good to have superiority if the customers are unaware of it. Have a plan in place to make sure your customer segment is fully aware and fully appreciates your point of superiority.

Leverage: A point of superiority opens up numerous profitable opportunities. The point of superiority needs to be exploited by leveraging it into as many profit opportunities as you (and your customers) can handle. This could mean adding new products/services, expanding into new countries, etc. As long as these actions take advantage of your point of superiority, they can successfully grow your business exponentially.

So, if you were Apple, you know that your superiority centers around having the coolest technology. So what is the strategy? Strengthen the coolness by continually improving the products. Don’t let anyone come up with anything cooler. Leverage your coolness into an expanding array of products: iMac, iPod, iPhone, iPad, etc. Surround them with cool stores and cool apps that exclude the competition. And tell the world about your coolness through cool media campaigns.

If you are Wal-Mart, your superiority centers around low prices. So what is the strategy? Do what you can on the cost side so as to strengthen your ability to afford to sell at even lower prices. Protect yourself from others who could get a price advantage. For example, when Wal-Mart discovered that supercenters could get a price advantage over discount stores, they pretty much abandoned the discount store strategy and started building supercenters. Leverage your strength by going international (which has the secondary benefit of increasing economies of scale and enabling even lover prices).

Even Knowing You Have No Point Of Leveage Makes Strategy Easier
Let’s say you find that there is no reason why customers should prefer you. Just knowing that makes the rest of the strategic process easy. You have four options: Create, Bribe, Intercept, or Exit.

Option #1 - Create: Choose a point of superiority (which you don’t own today) and make it a reality.

Option #2 – Bribe: Add something tangential to your mediocre offering which will create temporary excitement and preference. This usually takes the form of either a big price reduction or some sort of “gift”/“bonus” with purchase. It’s like a legal bribe. Since your offering alone isn’t good enough to stand out, you need to sweeten the deal with something extra.

Option #3 – Intercept: If you can’t get the customer to go out of their way to prefer you, then you need to go out of your way so that they cannot avoid you. Intercept them before they have the chance to find someone else. For example, if you are no better than anyone else, then the best way to increase your chance of being chosen may be to use an SEO strategy to make sure you show up on the top of the first page of a Google search. If you are a retailer, put your store in the busiest location or closest to the customer, so that it is a bigger struggle for them to go elsewhere. Have more aggressive salespeople than the competition.

Option #4 – Exit: If you have no reason to exist, then perhaps the best thing to do is to find a strategy to stop existing—as profitably as possible. Selling or shutting down is often the most prudent thing to do.

SUMMARY
The most important question one can ask one’s self when doing strategy is this: What is it about your strategy which will cause customers to prefer you over the alternatives? Once you answer this question, the rest of the process becomes rather obvious and straightforward. The next steps become much clearer. If you have a point of superiority, the next steps are to Strengthen, Protect, Declare, and Leverage that point of superiority. If you do not have a point of superiority, then you need to either create one, “bribe” the customer, intercept the customer, or exit the business.

FINAL THOUGHTS
Following the leader will never get you in the front for the race to the customer. Instead of chasing behind the competition, find a race where you have the superiority to win.

Strategic Planning Analogy #398: Strategy Trees

2011-06-22T11:49:00.002-05:00

THE STORY
Back in the 1960s, the Smothers Brothers had a comedy show on TV. On one episode, they were talking about the problems of a population explosion. Dick Smothers was lamenting the fact that the global population was growing too quickly and was causing all sorts of problems.

Tom Smothers said he didn’t even think there was as population explosion. When Dick asked why he believed this, Tom replied with the following logic:

I am one person. I have two parents, four grandparents, eight great-grandparents, and so on. As you go back in time, my family tree keeps expanding. So, as you can see, my family population is actually shrinking from what it used to be. Therefore, the population isn’t exploding. If anything, it is shrinking.

THE ANALOGY
Tom Smothers had faulty logic when looking at his family tree. Because he did not understand the complete picture, he came to an inaccurate conclusion.

Family trees are a lot like corporate organization charts. We need to make sure that we understand the complete picture of how the organization chart works. Otherwise, we may be like Tom Smothers and reach the wrong conclusion.

In particular, as strategists, we need to understand how strategy filters through an organization. Just as Tom Smothers mistakenly thought that population was shrinking as one moved down the family tree, we can mistakenly believe that a strategy’s relevance shrinks as we move down the organization chart.

Just keep in mind that the people further down in the organization chart are often closer to where the customers are and where the production is and where transactions take place. And if a strategy isn’t relevant where the customers are and where the production/transactions take place, then is it really relevant at all?

THE PRINCIPLE
The principle here is that strategy needs to be seen as a key role for everyone in the organization, from top to bottom. It is not just a play thing for leaders at the top.

Linked In Discussion
I was reminded of this when looking at a discussion thread on Linked In. The discussion topic was about why it is so difficult to convert strategy ideas into execution. I posted a comment which referred to an earlier blog. In this blog, I compared strategy to a basketball game.

In basketball, you win by scoring more points than the opposition. This becomes the over-arching strategy. However, if all you do as a basketball coach is yell at the players to “go get more points than the opposition” you really haven’t done much.

No, basketball games are won based on the types of plays executed by the players. Although the scoreboard may tell you whether or not you won, it is the game plan—those Xs and Os drawn on the clipboard—which create the ability to win. So, if you want great execution of your strategy, quit focusing so much on the scoreboard and spend more time focusing on the clipboard.

The response I got on the Linked In discussion surprised me. I was told that the clipboard is mere tactics. This response implied that strategists should be concerned with strategy execution, not tactical execution. Therefore my comment was useless.

At this point, the thought going through my head was this: If tactics are not relevant to strategy execution, then why are you doing those tactics? No wonder these people were having trouble executing a strategy—they are disconnecting them from tactics. Just as yelling at a scoreboard does not change the score, yelling about the overarching strategy does not tell people how to make the strategy real.

Actions Have Many Roles
In a family tree, an individual may have many roles, depending on who is looking at them. For example, an individual can be seen as a Father, a Son, a Brother, an Uncle, a Nephew, and so on, depending upon who is looking at them. The same thing can happen for business activities within an organization chart. At the top of the organization, a particular action may appear to be a tactic. However, further down in the organization, that same action appears to them to be a strategy.

I learned this lesson a long time ago. I asked people about strategy & tactics and this was the typical response: “Strategy is what I do. Tactics are what the people below me do. And I’m not always sure what the people above me do.” And it didn’t seem to matter where the individual was in the organization chart. Those near the top and those in the middle had the same comment. (And in great companies, this translates all the way to the bottom.)

I’ll illustrate this with an example. At the top of a corporation, the senior executives may voice their strategy as shifting the business portfolio from declining business sectors to growing business sectors. The tactic would be to take the cash flow from declining “Division X” and give it to growing “Division Y”.

Now if you are in charge of declining Division X, you now see your strategy as maximizing near-term cash flow (in this way, the tactic from the corporation is translated into the strategy of the division). At the Division X level, key tactics to increase cash flow might be to reduce headcount and capital investments.

The head of operations in Division X would now see his strategy as finding a way to reducing labor expenses without spending a lot of money to do so (meaning the tactic at the top of the division is now the strategy in the middle of the division). The head of division operations creates a tactic of eliminating the third shift and giving more overtime to the second shift.

Now, to the head of production scheduling, that tactic becomes his/her strategy. And so goes the process all the way down the organization. One person’s tactic becomes the next person’s strategy.

Solution
Therefore, if a strategist wants to ensure that an overarching strategy gets executed, here’s what needs to get done.

1) Make sure that the overarching strategy from the top gets broken down into 1st level tactics.

2) Make sure the second level in the organization knows their role in those 1st level tactics, so they can craft their strategy appropriately.

3) Help the 2nd level of the organization develop their tactics (the 2nd level tactics).

4) Help the third level of the organization translate the 2nd level tactics into their strategy.

And so on…

Strategy is not just for the folks at the top. Everyone should be operating under a strategy. The scope of the strategy may contract as you go down the organization chart. But for each level, they need to think strategically about that which is within their scope. And that strategy needs to be linked to the tactics one level above them.

By doing this you gain two benefits—everyone is thinking strategically about their job and all the actions are linked together towards achieving the over-arching strategy.

SUMMARY
If you want to make sure that a company’s over-arching strategy is executed properly, then you need to make sure that strategies in the lower levels of the organization are linked to the tactics of the level above them.

FINAL THOUGHTS
At first, the idea of loading up an organization chart with “good soldiers” (who are good at following orders) sounds great. You’ll get things done, because “good soldiers” obey without question. However, you might get better things done if your people take personal responsibility for developing the strategy at their level (instead of just blindly following orders). Help your people to take responsibility for the strategy at their level in a manner which supports the tactics one level up. This should make them “better soldiers.”