Strategic Planning Analogy #451: Too Much Cotton in the Bottle

THE STORY
The other day I bought a bottle of ibuprofen. I bought it to help with the occasional headache I get with my spring allergies.

When I opened the bottle, I couldn’t get the pills out. There was so much cotton stuffed in the bottle that I couldn’t get to the pills. It was quite a struggle to get that cotton out of the jar.

I understand why the cotton is put in the bottle. It is to protect the pills from bouncing around in the bottle and getting damaged during shipping.

But here is my question: What is the benefit of having perfectly undamaged pills if I am unable to get to them and use them for my headache? If they are locked up in a bottle behind too much cotton, they cannot help my headache. They are worthless to me.  I’d rather have easier access to a slightly damaged pill.

THE ANALOGY
That ibuprofen is only useful to me if I can get those pills into my bloodstream. Having them in a bottle does nothing for the pain.

A similar situation can occur in the business world. Businesses have all sorts of resources. They can be financial, technological, intellectual or a wide range of other resources. These resources are like those ibuprofen pills. If properly used, they can be productive and solve problems.

However, if the company tries too hard to protect those resources, it can be like over-stuffing the medicine bottle with cotton. The protection makes it nearly impossible to get access to those resources. And if you cannot use the resources, it is irrelevant that you kept them in top condition. They become worthless to you in your battle to increase your prosperity in the marketplace. THE

PRINCIPLE
The principle here has to do with risk. The problem is that if a company gets overly protective of its resources in order to eliminate downside risk, they will not only prevent undesirable activity—they will prevent all activity. Like over-stuffing the medicine bottle with cotton to prevent any damage, over-stuffing your business with policies to prevent any risk leads renders your resources worthless.

The only way to be 100% certain that activities with downside risks are eliminated is to eliminate all activity. And that leads to another 100% certainty—100% certainty that the company will cease to exist due to a lack of investment. And so, ironically, the policies intended to minimize downside risk actually increase the likelihood of the greatest downside risk—the risk of destroying the entire business through resource starvation.

As the old saying goes, you have to take some risks in order to receive any rewards. So, the goal should not be to stuff the medicine bottle with as much cotton as possible. The goal should be to find the best way to use the pills in the bottle. Or, to use business terms, the goal is not to avoid risk by preventing investments, but to find the most prudent ways to invest.

Now I understand the need to prevent wasteful and reckless use of resources. For example, if I had been reckless and swallowed all of those ibuprofen pills at once, I would have killed myself. But, if used properly, ibuprofen can do wonderful things. And similarly, wise use of company resources can do great things.

So the rest of this blog will look at ways to prevent over-stuffing the bottle with cotton and promote more prudent investing.

Problem #1: Personal Biases
Scientists and researchers tell us that most managers have built-in biases when it comes to making decisions. They say that the typical manager over-emphasizes the potential downside risk and under-emphasizes the upside potential. As a result, managers become too protective and miss out on making perfectly sensible investments.

I have a theory about why that occurs. I believe the problem is that the upside and downside risks for the company are not always in sync with the upside and downside risks for the individual making the decision.

For example, let’s assume that a manager has a tough decision to make. If you just look at the math from a probability analysis, you would see that although the downside risk is large, the upside risk is a little bit larger and a little bit more likely. Therefore, the “experts” would say that the manager should make the investment.

However, that is just considering the risk to the business. Now consider the risk to the manager making the decision. The manager may think that if the upside potential occurs, he/she may only get a minor recognition. After all, it is their job to make good decisions, so if the decision turns out well, they were just doing their job properly.

On the other hand, if the downside were to occur, the manager may rightly assume that he/she would lose their job. Just look at what is happening at J.P. Morgan. Some trading deals went bad and the downside scenario came to pass. And as a result, a number of people at J.P Morgan are losing their job.

So, from the manager’s perspective, there is very little personal upside potential from recommending the deal and if the downside potential occurs, he/she could lose their job. Therefore, it is no wonder that executives appear irrational (from the company’s perspective) in saying no to “reasonable” risk. After all, from a personal perspective, saying no seems highly rational.

Consequently, if you want management decisions to be in the best interests of the company, you need to make the personal risk profile more similar to the company risk profile. Otherwise, you can end up with managers overstuffing the medicine bottle, which hurts the company but protects their career.

Problem #2: Departmental Biases
Large business decisions often impact large sections of a business. Problems can occur if the risk profile varies between the sectors of a business impacted by a decision.

For example, one part of a business might bear the biggest brunt of the investment while another department may reap most of the benefits. In such a circumstance, the department needing to make the investment may resist the move, because the math may not make sense when just looking at that particular department in isolation.

To prevent this “irrational” cotton stuffing, one needs to get all of the affected parties to share in the entire company-wide risk profile. That way, decisions will be made for the good of the company rather than the good of the individual department.

Problem #3: Excessive Busyness
Just because a resource is kept busy does not mean it is being invested properly. There is an opportunity cost risk in missing out on potentially huge gains because resources are focused on surer, but much smaller gains.

Take, for example, your human resources. Since the start of the great recession, there has been a push to keep those human resources as busy as possible. Individuals are often doing a workload previously done by two or three people before the recession. At first, this may be admired as a wonderful productivity gain.

However, if someone is too busy with the mundane, they will not have the luxury of time to ponder larger issues which produce major breakthroughs. As we’ve seen in prior blogs (here and here), some down time is needed if you want the brain to discover that next huge breakthrough.

As a result, excessive busyness can act like that cotton, and prevent you from being able to use those resources for greater benefit. Therefore, one may need to program in some more “slack” time in order to get the most out of the resource.

Problem #4: All or Nothing
Often times, an investment can look scary because it is positioned to appear so massive. It is proposed as an all or nothing deal. You are told you are either in or you are out. And if you are in, you have to make the big bet all at once. And that can scare people away.

Well, this is often a false premise. Most big deals can be broken down into smaller deals. You may be able to test it in a small fashion before rolling it out. You may be able to borrow or rent resources before committing to purchase. You may be able to do a joint venture with a firm rather than have to acquire it.

Tactics such as risk-sharing, stage-gating or real options theory can help keep the risks manageable by placing them into smaller chunks. If a small chunk goes bad, you can stop before investing in the next stage.

Problem #5: A Portfolio of One
One of the best ways to overcome downside risk is to avoid putting all of one’s eggs in a single investment basket. That is just another scare tactic akin to the all or nothing approach mentioned above. Instead, invest in multiple investments. With a portfolio of investments in your pipeline, then the odds increase that the entire mix of investments will be positive (even if some of the individual investments are negative).

Therefore, to encourage better levels of investing, two actions should occur. First one needs to diversify the risk by building a portfolio of investments (at least in their initial stages). Second, one needs to move away from treating risk in isolation but look at the risk in terms of the whole portfolio. Accept some individual failures as a necessary part of the overall quest to create a positive portfolio.

Problem #6: Fear of Obsolescence
Often times, there can be a fear of investing in something new out of fear that it will hurt the core business. For example, Kodak did not aggressively invest in digital imaging for fear of hurting the core analog film business.

But here is what one needs to realize. If it is a good investment, somebody else will make it. Consequently, the core business is at risk whether you make the move or not. So in most cases you’d be better off making the move, since at least then you would be a part of that which destroys your core. Otherwise, you core is destroyed by someone else and you are left with nothing.

SUMMARY
There are many factors which can act to hold people back from making the investments which they should. We were only able to scratch the surface here. However, in the areas we looked at, it was seen that these factors can be minimized/reduced by becoming proactive in addressing them. By getting in front of these issues, we can establish approaches which keep people from stuffing the investment bottle with too much cotton.

FINAL THOUGHTS
By first investing in policies and approaches which help us to better handle risk, we will end up making more good investments in the business.

Strategic Planning Analogy #260: Are You Better Off?

THE STORY
Back in 1980, it was a close presidential contest between current president Jimmy Carter and former governor Ronald Reagan. Even just a few weeks before the election, there was not a clear leader.

It was hoped that some televised presidential debates would help people make a choice. Unfortunately, there was a split between how to handle third party candidate John Anderson. Reagan wanted Anderson in the debate; Carter did not. This argument caused them to miss deadlines for the debates.

Finally, with a little over a week before the election, Reagan wanted so badly to get in a debate that he caved in to all of Carter’s demands. So on October 28, 1980, Carter and Reagan debated in Cleveland, Ohio.

Ronald Reagan’s closing remarks at the debate were, "Are you better off now than you were four years ago? If so, I encourage you to vote for my opponent. If not, I urge you to vote for me."

Given the Iran hostage crisis, the weakening economy, and rising inflation, it appeared that most felt they were not better off than four years ago. As a result, immediately after the debate, public sentiment moved largely in favor of Ronald Reagan, and he won by a comfortable margin.

THE ANALOGY
Recently, there was a discussion on Linkedin about the sad state of strategic planning. During the current recession, it seems that strategic planners were often in the first wave of people let go. Not only that, recent unpredicted and unexpected events, like the housing slump, the debt crisis and the stock market slide had made people lose confidence that one can ever have much insight or influence over the future.

Finally, there was so much emphasis on near-term survival, that any talk of long-range planning seemed out of place in many companies. People were starting to believe that things change too fast and are too unstable to create any kind of meaningful long-range plan. The entire idea of strategic planning was starting to look out-of-date and useless.

Although I disagree with the conclusion, I can certainly understand the dilemma. To me, it goes back to the 1980 presidential debate. Business leaders were asking themselves a version of the question posed by Reagan: Is my company in 2009 better off now than it was several years ago?

The answer for most is “no.” Sales have plummeted. Profits have vaporized. Stock prices are down. Bankruptcies are up. By almost any measure, things are worse than before.

Now isn’t it the role of strategic planners to be the ones focused on improving the long-term prospects of the business? If the future is getting worse, then it would appear they are not doing their job.

Therefore, just like in the 1980 presidential election, companies are answering the question by throwing out the incumbents (the strategists) and are moving in a new direction.

THE PRINCIPLE
The principle here is that if strategists want any respect (and want to keep their jobs), they need a favorable response to that question: Is my company better off than before? Or to put it another way, is my company’s future any brighter because of the strategic planning efforts we have taken? If not, Reagan’s approach would say to kick out the strategists.

Granted, the current recession is so deep and so global that almost everyone is worse off, regardless of strategy. But has your strategy at least made you less worse off than your competition (are you gaining an edge on them)?

That has been the situation for the Ford Motor Company. Years earlier, it could see what was coming and built a strategy that acted early to get in front of the problem. They refinanced their debt when that was still relatively easy to do. They sold the weaker divisions when there was still a relatively healthy market for selling them. They got leaner and meaner in preparation for tougher times. As a result, Ford may not be having great times today, but they are gaining share and are better positioned than many of their competitors.

Now, it might seem obvious that strategists should measure themselves on how well they are helping to steer a company into a better future. Yet, when I look at what strategists get busy with, that does not always appear to be a priority. Here are some ways that strategists keep busy at tasks that are only tangentially related to creating better futures.

1) Scribe
Yes, it is important to get all the words and numbers written down. Things need to be quantified and clearly described. Accountability requires it. But if most of your time is spent just getting things written down and organized, you are not adding much value to the process. A stenographer or an administrative assistant can pretty much do that.

After a certain point, any improvement in the way words and numbers are written down will not improve the quality of a company’s future. And that point is fairly low on the quality spectrum. Instead, the place where quality time should be is on the ideas and activities behind what is written down. How much influence are you having on crafting the content of what is written? How much time is spent making sure business activities are bringing the content into reality? Don’t just blame the ops people for bad implementation of brilliant words. If you act as nothing more than a scribe, you should expect poor implementation.

2) Oracle
Yes, visionaries can be critical to success. And yes, one often needs to see into the future before one can optimize it. But if visioning is where you stop, then it is not very useful. Unimplemented ideas are like money hidden under a mattress. If it is never spent, then you live like a pauper, no matter how rich you are. You never benefit from it and may as well be poor for all the good the money did. Ebenezer Scrooge may have had money, but he did not have prosperity of life.

If you want a better future, then time must be spent in applying the insights of the oracle. Just being smart is not enough. In fact, studies have shown that B+ students make for better entrepreneurs than A students. B+ students tend to work harder in real life, while A+ students are too satisfied in just being smart and resting on idea-making that doesn’t go anywhere.

3) Activities Director
On the old Love Boat TV show, Julie was the activities director on the cruise ship. Her job was to make sure that there were lots of activities going on (on schedule with no problems) and that people were happy doing something. Sometimes we can get busy doing things like Julie. We spend so much time making sure the activities of the planning cycle go smoothly (the various discussion meetings, the filling out of paperwork, the approvals, the offsite planning meetings, the communication meetings, etc.) that we lose sight of why all that stuff is being done in the first place.

Perfect meetings do not always lead to perfect futures. I’d rather have a sloppy process that creates real substance than a flawless process that nobody treats seriously. True planning is not the process of managing the planning cycle. You can hire meeting coordinators for that. True planning is managing the quality of what comes out of the process.

Better Ways to Be Busy
If you want to have a meaningful part in creating a better future, focus your busyness on three things. First, help people get an accurate understanding of their true condition. Provide knowledge and insight that makes them smarter about what the situation is. Break down inaccurate biases. If your people have an unrealistic bias about what your condition is, then you will create a strategy that is inappropriate for true reality.

Second, control the debate. Make sure the tough questions are addressed and true out-of-the-box thinking is going on. Stretch the minds. Help people see the long-term consequences of near-term actions. Help people to see beyond the status quo. Help people envision alternatives.

Third, don’t hand off all responsibility once the ideas are on paper. Be active in making sure tasks get done. Monitor actions to make sure they stay on track. Keep people accountable. Make sure the long-term agenda does not get lost in the tyranny of the immediate fires which scream for attention. Scream back at them.

If you focus on these three tasks, you should get a better answer when people ask if the company’s future is better off because you were there.

SUMMARY
When strategists get a bad reputation, it is usually because leaders do not see significant value being added by strategists in the creation of a better future. Therefore, it is in your best interest to focus your limited time on the activities which are most critical to creating that better future. Don’t let the allure of “busyness” in lesser activities lure you into thinking your job is complete.

FINAL THOUGHTS
Ever notice any of those employees who have mastered the art of “looking busy” in order to avoid doing real work? You probably don’t have much respect for them. Remember that whenever you start feeling content in the busyness of being a scribe, oracle or activities director.