Why Most Strategies Fail: Reason #1

BACKGROUND
This week, I saw a blog by the Cascade strategy software company entitled “The 5 Reasons Why 70% of Strategies Fail.” You can read it here.

The title lured me in. However, after reading the article, I was completely dissatisfied. I so fundamentally disagreed with almost everything said in the blog that I wanted to write back as to why I felt the blog totally missed the point.

However, because we approach strategy in such fundamentally different ways, I couldn’t find any common ground from which to start. It was as if we were from different planets speaking a different language.

Therefore, I will just write my own set of blogs on why I think most strategies fail. It boils down to three things. I will devote a separate blog to each reason.

PROBLEM #1: STRATEGIC FOCUS IS TOO INTERNAL
For a strategy to succeed, it must succeed in the external marketplace. It is out in the world, where the customers and the competition are, that you have to win acceptance. If the consumers vote for your competition, you lose—no matter what internal goals you have achieved. Too much internal strategic focus at the expense of external focus misses the point and often leads to failure.

The Most Important Question

Therefore, strategy needs to start in the external world by asking this question: Do you have a reason why customers should naturally prefer you over the competition? In prior blogs (here and here) and in a book, I referred to this as The Most Important Question.

There are three key concepts in this question. The first is the idea of “preference.” A good strategy provides a reason to be preferred by a meaningful segment of the population. This means that you perceived as providing a superior solution to an important problem faced by the customer—a solution worth choosing over other alternatives. Does the foundation of your strategy start with a compelling reason for being preferred by the external marketplace? Do you even know what problem your offering is even trying to solve and what others are doing to solve that same problem?

The second key concept in this question is “natural.” A natural preference is a preference rooted in the attributes of the value proposition. It is not artificially added on top. It is naturally embedded in who you are and what you offer. If you do not have a natural reason to be preferred, then you will be perceived as offering a commodity—no better than anyone else; no reason to be chosen over the others.

In the world of commodities, you cannot create preference naturally. Instead, you have to add incentives—or what I like to call bribes—in order to create artificial preference. These bribes can be lower prices, free add-ons, or other gimmicks to create the excitement that your commodity offering cannot do on its own. The problem with these bribes is that they suck the profitability out of your offering. And since competition can usually copy these external bribes, you end up in a downward spiral to bankruptcy.

So, if you have to resort to bribes to create preference, you strategy is a failure from the very beginning.

The cell phone networks in the US are a perfect example of this. The top firms (Sprint, AT&T, and Verizon) have not done a very good job of creating a natural preference for their network over the alternatives. To many, they are pretty much the same commodity, offering similar phones, similar coverage and similar services. The fact that there is so much switching between the firms indicates a lack of reason for preference.

Since there is little natural preference, these mobile network firms use a lot of bribery tactics to win customers, such as with price incentives and free features. These bribes often have only a temporary impact on preference, since the others copy the incentives. The only long-term impact is a reduction to profitability potential. Without the profits, long term success is threatened.

This is why AT&T is trying to buy up all the content companies. It is an attempt to create a natural preference rather than a preference via bribes.

One way to know if you have created naturel preference is to ask the market if your offering would be missed if removed from the marketplace. If alternatives work so well that you are not missed, then you have built a strategy that has no reason to succeed, no matter how well it is executed. I dare say that most companies fail because they never created a strategy that gave the market a reason to want you to succeed.

The third key concept in the most important question is “consumers.” It doesn’t matter whether or not I like my product. It doesn’t matter if independent testing says my product is superior. What matters is the consumer perception of my product. Theirs is the only opinion that matters. Strategies succeed or fail in the mind of the customer. How much of your strategic plan is focused on the mind of the consumer?

The Rise of the CMO

In my opinion, the beginning of the demise in the prominence of strategy was when businesses created the position of Chief Marketing Officer (CMO). The CMO was given responsibility for the external marketplace factors. It was snatched away from strategists. This created a number of disastrous outcomes.

1. It forced strategists to only work in the realm of internals—things like financial outcomes, project management and maintenance of the metrics of performance measurement. These are all a waste of time if your strategy is not rightly rooted in building natural preference in the marketplace. So the strategists could no longer control the key to strategic success.
2. CMOs really only have significant influence over bribes, like pricing and advertising and consumer gimmicks. They really don’t have much influence over how the company fundamentally functions in order to create a natural preference. Therefore, instead of focusing on natural preference, CMOs turned the company’s focus towards bribery. This ruins the essence of strategic success.
3. Although CMOs have lofty job descriptions with long-term goals, if you look at what most of them spend the majority of their time on, it is short-term advertising. Short-term advertising so consumes their schedule that they never get around to giving the long term marketplace the attention it needs. Because traditional strategists were almost exclusively long-term oriented, they were able to do a better job of making sure the long-term strategy could overcome short-term concerns (more on this when we get to the blog on reason #3 for why strategies fail).

Warning Signs that Your Strategy is on a Path to Failure

So, one of the first places I would check to see if your strategy is likely to fail is the balance in the strategy between internal and external orientation. If your strategy (and the process behind it) has too much of an internal focus, your strategy will probably fail. By contrast, winning strategies tend to be far more externally focused on the marketplace.

Here are some clues that your strategy is too internal:

First, are most of your strategic goals focused on “What’s in it for me?” or are they focused on “What’s in it for my targeted consumer group?” “What’s in it for me” goals are things like:

1.      Profitability Goals

2.      Growth Goals

3.      Shareholder Return Goals

These all may be nice things, but they are outcomes, not strategies. They do not tell you how to achieve them. There are lots of ways to increase profits or growth in the short term that will destroy a company in the long-term. In fact, often the fastest way to achieve internal goals in the near term is to screw your customers and give them no reason to prefer you over the long term.

As a general rule, if you get the external marketplace issues right, the internals tend to take care of themselves. However, if you only look at the internals, there is no guarantee that the externals will survive. A lack of external orientation in your goals often leads to failure.

A second warning sign is how you are measuring success: Are you mostly measuring what is going on inside your buildings or are you measuring what is going on in the minds of your customer?   Keep in mind that the perfect internal execution of a strategy which is seen as irrelevant in the mind of the customer is a waste of time and a certain path to failure. So measure what really matters.

Look at your KPIs (Key Performance Indicators). Are they mostly measuring internal achievements or external marketplace achievements?  Unless your strategy is making an impact on the marketplace, your strategy is worthless. Therefore, load up on KPIs that measure what’s happening out in the market where results really matter the most.

A third warning sign is to look at what your strategists focus on. Are they mostly focused on internal issues like financials or project management or KPI management? Again, these are nice things, but they are not the essence of what makes a strategy successful. Successful strategies put a company in a position where they can win in the marketplace.  If that is not job #1 for your strategists, then why should you expect to ever win in the marketplace?

I could say more on KPIs, but I will save that for the next blog, which will focus on the second reason why most strategies fail.

SUMMARY
Depending on which study you look at, somewhere between 60% and 90% of strategies fail. If we don’t address the deep-seated reasons why strategies fail, we will not be able to raise the percentage of strategic successes. I believe that there are three major reasons why strategies fail and my reasons do not always agree with conventional wisdom. The first reason I believe most strategies fail is because the strategic effort is too focused on internal issues. Real success occurs when a company is properly positioned to win in the external marketplace. This requires a strategy that is perceived by the customer as providing a superior solution to one of their problems in a natural way. If these external concerns are not met, then all the internal manipulations are a waste of time. So, if you want to have a successful strategy, put the emphasis on the issues which have the largest bearing on success. These start with getting the externals right.

FINAL THOUGHTS
I am not trying to imply that the internals do not matter at all. They do matter…just not as much as the externals. We will be addressing the internal issues more in failure reasons #2 and #3 (the next two blogs).

Strategic Planning Analogy #292: Parachuting Cats

THE STORY
Back in the 1950s, malaria broke out amongst the Dayak people of Borneo. It was serious enough to call in the World Health Organization (WHO) to find a solution. Their solution? Spray large amounts of the chemical DDT on the island.

The good news was that this effort was effective in killing most of the mosquitoes which carried the malaria. The bad news was that there were a series of negative side effects.

First, the thatch roofs on the houses started collapsing because the DDT also killed off the wasps which ate thatch-eating caterpillars. Second, many of these insects that were poisoned got eaten by gecko lizards, which ended up poisoning the lizards. Third, cats which ate the lizards got poisoned and started to die.

Without the cats to eat them, the rat population exploded. The rats carried diseases, such as sylvatic plague and typhus. With so many rats around, there was an outbreak of these diseases in the human population of Borneo.

Hence, the World Health Organization was called back in to solve this new health problem in Borneo (which, by the way, they had created). Their solution? Parachute live cats into Borneo.

THE ANALOGY
The World Health Organization was given a task—eliminate a serious outbreak of malaria in Borneo. They developed a solution which accomplished the task immediately in front of them. Unfortunately, WHO’s choice of action had negative unintended consequences.

It was not just one batch of unintended consequences, but a series of them. There were five layers in this series of unintended consequences:

Layer one: DDT killed more insects than just the ones carrying malaria.
Layer two: Lizards who ate the poisoned insects became poisoned.
Layer three: Cats who ate the poisoned lizards became poisoned.
Layer four: Without the cats, the population of rats skyrocketed
Layer five: The skyrocketing rat population infested the humans with new disease outbreaks.

Businesses have many problems to deal with, just like the WHO. In the rush to solve the immediate task at hand, businesses risk doing the same thing the WHO did—choose a path that solves the immediate problem, but has a series of negative unintentional consequences.

Just solving the problem of the moment is not enough. If we ignore the long term consequences in our decision-making, we can end up having our own version of parachuting cats.

THE PRINCIPLE
This story touches on two principles we have talked about often—the tyranny of the immediate and the law of unintended consequences. The tyranny of the immediate occurs when solving the crisis of the day is the only task you get time to work on, leaving no time for long-term thinking. You can read about the tyranny of the immediate here, here, here, and here.

The law of unintended consequences says that decisions you make often affect more than you realize, and usually in a negative manner. You can read about the law of unintended consequences here, here, here, and here.

The first point I want to make in this blog is that the more a company is held hostage to the tyranny of the immediate, the more likely it will create unintended consequences. If the WHO hadn’t been so focused on the immediate crisis of malaria, they might have taken the time to realize that heavy doses of DDT create more problems than they solved.

The second point is that unintended consequences often come in layers. If you only look out one or two layers, you can miss the serious negative side effects. Killing a few wasps and lizards doesn’t sound too bad. It wasn’t until you got to layer five (sylvatic plague and typhus outbreaks in humans) that the really bad negative consequence appears.

The same is true in business. Often, you cannot see the real disaster ahead until you look out a few layers. Look at all the layers of unintended consequences which came out of the simple decision to bundle high-risk mortgages. It didn’t just crush the housing market. Subsequent layer after layer of unintended consequences almost lead to a total global economic meltdown.

This leads into the third point. I believe that one of the most critical roles a strategist provides a company is the ability to look for all the layers of unintended consequences. While most of the rest of the organization copes with the tyranny of the immediate, the strategist can rise above the immediate and focus on the long-term implications—layer upon layer. This expertise will be an invaluable contribution to the discussion on how to handle the crisis of the moment. This contribution can help prevent a firm from going down a disastrous path ending in some version of parachuting cats.

In order to make this contribution, two factors must be kept in mind:

1. Avoid Setting Up the Strategist in a Position Where They Get Sucked Too Far Into the Tyranny of the Immediate.
If the strategist is given too much responsibility for near-term performance, then the risk is for the strategist to be doomed to just as much tyranny of the immediate as everyone else. When that happens, the strategist cannot provide that critical long-term perspective going out several layers, because they have no time to think about it.

I see this risk cropping up in two areas. The first is in the role of the Chief Marketing Officer (CMO). CMOs Officers are often given two roles. First, they are responsible for the long-term positioning/strategy of the brand. Second, they are responsible for the near-term sales and advertising promotions.

The first role is to rise above the tyranny of the immediate to protect the long-term brand strategy from unintended consequences. The second role dives deep into the middle of the tyranny of the immediate, trying to put out the fires that affect near-term sales.

From my observations, when someone has two roles like this, the tyranny of the immediate wins the battle for time. The long term suffers. It is no wonder that the average CMO tenure is less than one year. They are set up to fail because it is so hard to fulfill both of those requirements. For more on this, see CMOh, No!.

The second place where this problem can come about is if the strategist is in the Finance Department and also has responsibility for the annual budgeting process. There is a risk that so much attention will be placed on the one year budget and worrying about variances in current performance to this year’s budget, that the long-term concerns will be pushed aside.

The tyranny of trying to get this month’s/quarter’s/year’s numbers to turn out as budgeted can lead to hasty decision-making. You may find a way to get the numbers to work, just as the WHO found a way to get rid of malaria. However, the long term consequences could cause grave tragedy several layers into the future. You’ll be parachuting cats before you know it.

Therefore, I believe that strategists need to be protected from the tyranny of the immediate in their job responsibilities. You’ve got a whole company to deal with today. Let the strategist devote their time to examining all of those layers of consequences into the future.

2. Avoid Setting Up the Strategist in a Position Where they have No Influence on the Immediate.
Of course, if this isolation from the immediate is taken to an extreme, there can also be problems. The long-term perspective of the strategist needs to be applied to the decisions of today. Otherwise, what good is having that perspective?

Strategists shouldn’t be locked up in an ivory tower and only be allowed out in the spring for an annual planning off-site meeting. Not only does that make the strategist out-of-touch with what’s going on, it makes them irrelevant at the point in which operational decisions are made.

If the WHO had a strategist locked up somewhere, he could have come out in the spring and said, “I knew that DDT spraying would cause more harm than good. I knew those bad layers would occur.”

That does nobody any good. What was needed was to bring such a strategist into the room at the time the decision on DDT was being made and get the strategist’s perspective BEFORE making the move.

Don’t exclude the strategist from the core daily decision-making. Get that long-term multi-layered perspective. Use that perspective in your analysis before making the decision.

SUMMARY
To avoid negative unintended consequences, one needs to include a longer, multi-layered perspective into the discussion during the tyranny of the immediate. The best way to do that is to have the strategist participate in the discussion without being held accountable for the pressures of the immediate.

FINAL THOUGHTS
Everything is interconnected. Once you realize this, it is easier to find and prevent those unintended consequences. And the good news is that the more you eliminate those unintended consequences, the less you will be held hostage in the future to the tyranny of the immediate (which is often caused by unintended consequences).

CMOh, No!

THE STORY
Top secret agent James Bomb was about to go out on a very important mission to try to stop the evil schemes of dastardly Dr. Whoa. Before embarking on his mission, James Bomb went to the agency’s top secret lab to find out what kind of customized sports car he was getting.

“This automobile is state-of-the-art in fighting evil,” gushed with pride the scientist who customized the sports car. “It has everything you need…a machine gun, a rocket launcher, a grenade launcher, and even a torpedo launcher, in case you end up near the water.”

“I looks ingenious,” said James Bomb. “Now show me how they work.”

“Well, therein lies the problem,” sighed the scientist. “Because the sports car is so sleek, there was no room for the bullets, the grenades, the rockets or the torpedoes. I was able to squeeze in all the launchers, but none of the things they launch.”

“What, then, am I supposed to do?” asked Mr. Bomb.

The scientist replied, “In the glove compartment, there is a small pistol which shoots little BB pellets. I’m sorry, it was all I could find at the last moment.”

“Hrrummph,” murmured the disappointed Mr. Bomb. “Well at least I can hope to find some pretty women on the mission.”

THE ANALOGY
Just as in the spy world, there are important missions in the business world. It may not be the dastardly schemes of Dr. Whoa you are fighting, but there are forces out there that can seriously damage the future of your business unless you stop them.

They can give you a fancy mission and they can give you a fancy title (like top secret agent). They can even give you what looks like a powerful platform from which to do battle (like that sports car). However, if you have no bullets or rockets or grenades, you will lose that battle. All you have to look forward to is nabbing a little beauty on the way down.

I think a similar situation is occurring for many of those placed in the Chief Marketing Officer position, known as the CMO. They have been given a fancy mission: to protect the brand long-term and to help it grow over time. They have even been given the fancy title of CMO (they get to be part of the “C”-suite). And as part of the C-suite, they have what appears to be a powerful platform from which to operate.

Unfortunately CMO’s, as a whole, appear to be failing in their task. I think a lot of it is because they do not possess all the tools to get the job done (their version of grenades and bullets). They can make some beautiful ads on the way down, but that’s about it.

THE PRINCIPLE
In last week’s issue of Advertising Age magazine (dated July 9, 2007), one of the cover stories was about a study of the effectiveness of CMOs. The study, by marketing professors Pravin Nath at the LeBow College of Business and Vijay Mahajan of the University of Texas at Austin, looked at 167 companies over a five year period.

What they concluded was the following: CMOs on top management teams don’t have any effect on a company’s financial performance. Let me repeat that: CMOs on top management teams don’t have any effect on a company’s financial performance.

This study will be published in the January 2008 edition of the Journal of Marketing. To quote Advertising Age, “Pay attention CMOs: If you’ve been fighting for more influence with top management, hide this publication—now.”

I guess then it should be no surprise that in a different article which appeared last year in Advertising Age, it said that the average tenure for someone in the CMO position continues to drop and is now less than two years. It appears that boards and CEOs are not waiting for this study. They are already frustrated and have taken to canning the CMO.

What’s going on here? What is the problem? I think the problem has a lot to do with the principle of Expectations and Capabilities. In other words, if people’s expectations exceed your capabilities to meet them, you are bound to fail. It’s like super secret agent James Bomb. He is expected to defeat the evil Dr. Whoa, but his capabilities are limited to a little BB gun.

The typical expectations for a CMO are to:

1) Increase Sales Near-Term
2) Increase the Business Even More Dramatically Long-Term
3) Protect and Strengthen the Brand over Time

In many businesses, the CMO is pretty much the only one in the C-suite with a mandate to focus primarily on the long-term interest of the company. That is quite a tall order. And to top it off, if near-term sales take a dip, all the work on the long-term becomes somewhat for naught, as the pressure builds to forget long term and get the near term fixed. And if the average tenure is less than two years, how is anyone in the CMO position going to have enough time to see the fruit of their labors?

And for all of this responsibility and all of this stress, what are the tools this person has to work with? Typically, it is little more than advertising. In the fight for the future, advertising is like a BB pistol. It has some impact, but it is not enough. The fight for the future needs more.

In a prior blog, I talked about how if someone comes from a narrow professional background, they will see all problems as requiring their narrow background for the solution (see “Henry the Hammer”). In other words, if your background is advertising, you will see nearly every problem as requiring advertising to fix it. Most CMOs tend to come out of a narrow advertising background. Hence, they tend to rely on advertising as their primary tool to get their job done.

However, much of what it takes to protect and grow a firm long-term has little to do with advertising. It is far more complex, involving finance, strategy, asset alignment, personnel choices, and so on. All of the intricacies of positioning, pursuit and productivity which I briefly outlined in a prior blog (see “Same Title, Different Jobs”) come into play. Advertising is only a small part of the puzzle.

My conclusion is that the position of CMO is failing because the design of the position is such that it is almost impossible not to fail. The capabilities do not match up to the expectations.

My solution? Bring back the chief strategist. Strategic planning as a full time job in companies is becoming obsolete. Yet there is nobody more qualified to handle the expectations of preserving and building the future than the strategist. Strategic planners tend to have broader backgrounds than CMOs and are more capable of getting their arms around the big picture. Because they are pulled less in two directions (look out for the future AND get out next week’s ad), they can do a better job of focusing on and articulating the full scope of what must be done to grow the company.

Yes, outside strategic consultants have their value. However, would you ever consider outsourcing any of your other C-suite functions to an outside consultant who only shows up on an infrequent basis? By having someone on premise all of the time worrying just about your future, you get far more than just the advice of someone out for billable hours.

Advertising and marketing are very important, but they are not the whole job. Giving a VP of Marketing the title of CMO doesn’t really change anything but their title (and, I suppose, their compensation). Adding a Chief Strategy Officer to the team, however, can give a much needed fresh broad perspective to winning the future.

SUMMARY
Protecting and growing the future of your firm is an important task. It is important enough to require having someone on senior staff, full-time, just worrying about the future. The CMO is usually not capable of doing this, regardless of expectations, because they are distracted by the “tyranny of the now” on their advertising responsibility as well as not usually having a broad enough background to cover all the aspects related to the task. Instead, the best solution to the problem is to have a senior executive schooled in the art of strategic planning.

FINAL THOUGHTS
It is interesting to note that, while the study mentioned in Advertising Age saw no positive impact from CMOs on financial performance, it also concluded that “CMOs do not have a negative impact on financial performance.” Well, there you have it. Something to call home about and to put on your tombstone: “I did not have a negative impact on financial performance.”

If you have CMO in your title, I would suggest that you always be out there networking, because the nature of your position tends to cause short career stints.