Strategic Planning Analogy #435: We’re In This Together

THE STORY
Back between December 3, 2006 and March 6, 2007, Menu Foods was manufacturing dog and cat food using imported wheat gluten from China. This wheat gluten was a thickening agent used in the manufacturing of the gravy for the dog and cat food.

Unfortunately, this wheat gluten was not pure wheat gluten. It included melamine, a chemical to make the gluten appear to have more protein. It also included cyanuric acid, a disinfectant. This tainted gluten started causing dogs and cats to die from kidney failure.

As a result, Menu Foods needed to issue a recall on these cat and dog food products. Since Menu Foods was a contract manufacturer for other brands, they had to list all of those brands in their recall notice.

As it turns out, Menu Foods was manufacturing pet food products for nearly every private label (store) brand in North America, including Wal-Mart, Kroger and Safeway. In fact, 17 of the top 20 retailers were selling their store brand pet product using items made by Menu Foods.

Some of the premier name-brand manufactures also put their labels on products made by Menu Foods, including Iams, Eukanuba, and Nutro. In total, the recall encompassed dog food products under 51 brand names and cat food under 42 brand names.

Many consumers were shocked to discover that the majority of the brands of pet food they had to choose from were coming out of the same factory. People started asking themselves, “Why should I care about what brand of pet food I choose if most of the brands come from the same factory?” Many switched to the few brands which did not use Menu Foods and they never went back.

And what about the brand “Menu Foods”? If you go on the internet, you’ll find that its brand name is now “Simmons Foods.” Menu Foods is never mentioned. I guess that Menu Foods was a brand name that lost its value. Apparently, people still cared about that brand (and not favorably).

THE ANALOGY
We live in a world where outsourcing is a way of life. It seems like there is nothing immune from outsourcing. The story talks about outsourcing of manufacturing. But companies also outsource functions like distribution, sales, customer service, installation, human resources, payroll and just about anything else.

Outsourcing can look great on a computer spreadsheet full of numbers. However, the more of your business you outsource, the less control you have over all the inputs to that spreadsheet. If one of your partners fails to deliver as desired, your carefully created spreadsheet becomes worthless. All it took was a poor choice in outsourcing of wheat gluten at Menu Foods to create a public relations disaster for dozens of pet food brands who outsourced to Menu.

Outsourcing increases our dependence upon the decisions of others. Yet in most companies, strategic planning focuses almost exclusively on one’s own company’s actions. Unless our planning takes a broader perspective to include those in our outsourcing family, we will not be properly planning for our future. We will be increasing the likelihood of falling victim to a Menu Foods type of disaster.

THE PRINCIPLE
The question then becomes, “How do I properly conduct strategic planning in an outsourced world?” The principles basically come down to three words—control, communication, and contingencies.

1. Control
In an outsourced world, you no longer own very much of the process. However, just because you do not “own” the process does not mean you cannot “control” the process. The beauty is that as long as you have control, you do not need to own.

Look at Apple. Apple does not own the manufacturer of the ipod, but it tightly controls the design and the expectations around the output from the manufacturer. Apple does not own the rights to the music, but it tightly controls how the music is presented, how it is accessed, and what the prices will be. Apple made sure that each part of the entire music system worked exactly how it wanted to work, whether it owned it or not. As a result, the strategy worked brilliantly.

In developing a strategic plan in an outsourced world, one of the most important tasks is to determine the key elements of success. What is the position you are trying to own in the marketplace? What is your point of distinction/superiority which will cause people to prefer you over the alternatives? Which elements reinforce this position?

Once you make that determination, the next step is to build into your strategic plan a way to control those elements throughout your entire network, whether you own them or not. For example, if quality is important, then find ways to control the quality throughout the entire network.

Control can be achieved in a number of ways. You can place high expectations in the contracts with your partners on these critical elements with severe penalties if not met. You can demand the ability to inspect their premises for compliance. You can limit your choice of partners only to those with a shared vision (rather than just basing the decision on lowest price).

For example, Sears wanted its Kenmore appliances to be known for innovation. Therefore, Sears set up its contractual arrangement with Whirlpool (who makes a large percentage of Kenmore’s appliances) as follows: Any new innovation developed by Whirlpool must be exclusive to Kenmore for a period of time before it can appear on a Whirlpool appliance. This helped Sears to control its innovation reputation, even when it did not create the innovation.

2. Communication
If you want all of your outsourced partners to support your strategy, then it would help to let your partners in on what that strategy is. These are not just partners in your business, they are partners in your strategy. Therefore, they need to be a part of your strategy communication.

Who do you invite to your strategy sessions? How many of your outsourced partners are present? Are they part of the discussion? Do they get to participate on any of the implementation teams?

Once the strategy is formulated, do you communicate it with your partners? Do they know what is most critical to your success?

A lot of business decisions revolve around making trade-offs. You cannot do it all, so you have to decide what you will focus less on in order to be able to focus more on something else. Your partners make trade-off decisions all the time. If they do not know what is most critical to your strategy, then they might make the wrong trade-offs.

For example, Eukanuba and Iams base their reputation on high quality and health for their pet foods. They associate themselves with veterinarians in order to show how concerned they are with health. They are able to charge a premium price because of that reputation. Menu Foods made a trade-off away from quality and health in order to get the lowest price on wheat gluten. This was the wrong trade-off for Eukanuba and Iams.

The more you communicate with your partners, the more likely everyone will make decisions which support, rather than harm, your strategy.

3. Contingencies
If the automotive industry learned anything from 2011’s tsunami in Japan and flooding in Thailand, it was the need for contingencies. Too much of the outsourcing system rested in just a handful of suppliers. When the tsunami and the flooding wiped out those few suppliers, the whole automotive network came to a screeching halt.

For example, Xirallic is the additive in automotive paint which gives the paint a metallic shimmer. All the major automotive companies use this additive in some of their paints. However, there was only one factory in the world which made this additive. And that factory was wiped out by the Japanese tsunami. It was estimated that car production worldwide was reduced by 600,000 vehicles shortly after the tsunami just because of a lack of Xirallic.

To keep these network shutdowns from happening, one needs to incorporate contingencies into the strategic plan. For example, I worked with a retailer who built about 90% of its stores with fixturing from one company and 10% with fixturing from another company. Why? Just in case anything happened to that company who supplied the 90%, there was a relationship and a plan with an alternative—a built in contingency that was part of the plan.

And if you are the supplier, you may want to consider a plan to diversify some of your manufacturing to multiple locations in order have an alternative if major disasters strike.

Yes, just-in-time and lean manufacturing have benefits, but in the extreme this plan can hurt in times of emergency. Incorporate a little more flexibility into the plan to help avoid the disasters felt by the auto industry in 2011.

SUMMARY
Outsourcing can provide many benefits. It can give you access to better expertise, greater speed and lower costs than if you tried to do everything yourself. However, the more one outsources, the less direct control one has over the outcomes of the network. Therefore, if one wants to achieve strategic success in an outsourced world, one needs to proactively consider the entire network as part of its planning process. In particular, strategic plans should consider:

a) How to increase control over the critical elements throughout the network.
b) How to communicate with the partners so that everyone understands the plan and how they fit into the plan (and what is expected).
c) How to place contingencies into the plan to help avoid disaster when partners cannot live up to their expectations.

FINAL THOUGHTS
Many automakers (particularly those based in Japan) posted severe profit drops in 2011 because of the impact of the tsunami and the flood. If all you do in your negotiations with outsource partners is beat them up to get the absolute lowest price, you may save a tiny bit of money, but turn around and lose all of that (and more) when the network falls apart. Take a broader, more strategic approach with your network. It can save you from big losses (like in the automotive industry) or big embarrassments (like in the pet food industry).

Analogy #203: Collaborate Vs. Communicate

THE STORY
One of the most impressive feats of the second half of the 19th century was the completion of the US transcontinental railroad. This railroad line linked Omaha, Nebraska to Sacramento, California. Construction of the railway began in 1863 (during the US Civil War) and ended in 1869. During these 6 years, approximately 1,777 miles (2,859 km) of track were laid down, much of it across treacherous, snowy mountains. Not only did the workers have to battle the terrain, but they had to battle attacks by Indians.

This was an extremely important development, as it connected the entire United States—from coast to coast—with efficient travel. Prior to this rail line, a cross-country trip could take as long as six months. Now, the coast to coast trip could be completed in just one week.

The task to build the line was divided between two companies. The Central Pacific company was to start in Sacramento and build eastward. The Union Pacific company was to start in Omaha and build westward. Each worked independently and devised its own process for building its railway. The US government paid each company independently based on how many miles of track they laid down (at preset amounts based on the difficulty of the terrain).

Although the companies worked independently, the US government, however, needed to intervene in the decision of where the two tracks would connect. Both companies were trying to direct the connection point closer to where they controlled land (so as to maximize their profits). In doing so, the two firms could not come to an agreement. To settle the differences, the US government determined that the connection point would be Promontory Summit in Utah. On May 10, 1869, the golden spike which connected the railways was driven into the ground at Promontory Summit.

THE ANALOGY
The building of the transcontinental railway was a complex and extremely difficult feat. Many strategic business plans today call for their own version of a complex and extremely difficult feat.

In today’s world, when large complex projects are undertaken, there is usually a lot of talk about “collaboration.” The thinking is that complex projects in a “knowledge-based” economy are more efficient if there is continual collaboration and dialogue amongst those with various pieces of the relevant knowledge.

To foster collaboration, companies tend to add quite a bit of complexity to the business. Intricate matrix organizations are built, with multiple reporting relationships (and lots of dotted lines on the org chart). Expensive data/knowledge warehouses are built, with the capability for real-time sharing and interaction across the entire organization.

The transcontinental railroad didn’t worry much about collaboration. Other than collaborating on the initial design and the ending connection point, there was hardly any “working together” between the Union Pacific and the Central Pacific. To the contrary, rather than collaborating, they were encouraged to compete against each other to see who could lay the most track. Without collaboration, they very quickly completed a very difficult task.

This blog will try to show that modern businesses may be over-emphasizing the need to collaborate. As a result, they are building an unnecessarily complex infrastructure which may be choking efficiency rather than helping. It may be more productive to move to a structure more like that used to build the transcontinental railroad.

THE PRINCIPLE
The principle here is that there is a big difference between collaboration and communication. The dictionary defines collaboration as various parties working together on a project. By contrast, communication is just a sharing of information. Communication tends to move in one direction (from the person with the information to the person without). This is typically not a group of people who need to work together side by side to get the project done. It is just a data dump.

If we consider all communication to be “collaboration,” then we significantly overestimate how much true collaboration is going on. These inflated estimates then cause us to create elaborate collaboration solutions which may not be justified. Worse yet, all of that forced collaboration may create a bureaucratic nightmare that makes it harder for people to independently just go out and get the work done.

We can see this by looking at the typical life cycle for a major project.

Usually, a new strategic initiative starts with data gathering. Great strategies are not created in a vacuum, but within a context—an answer to a real need in the marketplace. One must understand the context in order to create the proper strategic solution. Therefore, data is needed to answer questions like:

1) What are My Capabilities?
2) What are the Key Issues/Concerns of my Customer?
3) What is the Competitive Landscape?

Getting the answers to these questions does not require collaboration. Instead, what is needed is a good data dumping process. In the fall 2008 issue of the MIT Sloan Management Review, there is an article about IBM’s attempt to create innovation through a massive collaborative process. Over 150,000 IBM employees were asked to participate in a multi-day on-line collaboration concerning ideas for innovation. IBM came up with a sophisticated process for such collaboration via computer software on the internet.

What was the result? Although lots of people wrote in and submitted ideas (available for all to see), there was virtually no dialogue which built upon any ideas. There was no real collaboration...no connections between submissions. It was just a data dump. All of those ideas could have just as easily have been mailed in on post cards. The ability to collaborate was not necessary.

Next comes the visioning—the choosing of the right course. My experience is that great visions come from great visionaries—not committees. Collaborating committees tend to compromise and dilute the vision into something bland and average. It doesn’t offend, but then again, it doesn’t inspire or excite the emotions. Radical, groundbreaking visions, typically result in love/hate reactions—something that would typically not escape a collaboration until watered down. In the case of the transcontinental railroad, Abraham Lincoln was the visionary who chose the path and made it happen, not a collaborative team.

Yes, visions need to be communicated and accepted around the organization. But this is more about persuasion than it is about collaboration. It is about disseminating information and inspiring folks. Sure, there is room to accept feedback and modify things a bit, but the overall vision, if properly chosen, should remain in tact.

Now comes the implementation phase. Collaboration is important here, particularly at those points where people’s work intersects with each other. Choosing the point at which the Union Pacific and the Central Pacific were to meet was one such intersection. To me, the key here is to:

1) Identify points of intersection early.
2) Come to a rough agreement of how you will mesh at the point of intersection (collaborate).
3) Go off and do your thing somewhat independently (not collaborate).
4) Check in periodically to see if you are still on a path to mesh, or if new information/knowledge requires readdressing the earlier decision (collaborate).

For example, if you are designing a new car, it is important that the people designing the chassis and the people designing the engine have a general agreement about engine dimensions, so that the engine fits into the spot where it is to be located in the chassis. That is collaboration. However, you do not need the chassis people to collaborate on building the engine. They are not trained in that skill. Nor do you need the engine people designing the chassis. As long as the intersection point (putting the engine in the chassis) is worked out well in advance, you have most of the collaboration you need.

The exception would be if the engine designers discover that they cannot design a proper engine to meet the earlier specs. They you may need to reconvene and collaborate on a new revised conclusion.

Having everyone fully collaborating together as one unit all the time can be counter-productive. Most great advances in business are driven by the forces of competition. If you eliminate internal competition, you can become as inefficient as the old communist regimes. Internal competition between Union Pacific and Central Pacific caused the train track to be built more quickly than if they had worked together. In my time at Best Buy, I saw how internal competition can bring out the best and drive great improvement.

A similar thing happens with best-in-class benchmarking. I have often seen people speak of moving best-in-class processes throughout a firm as “collaboration.” This is not collaboration—this is teaching and learning. And if you force everyone, all the time, to act in the same exact way, you have frozen productivity and innovation. You can never get better, because doing anything different from the current standard is not allowed. To make advances, you need renegades—people who do not collaborate and go off on their own to experiment and find the next improvement.

By the time you add internal competition and renegades into the mix, even the implementation stage is not as much about collaboration as one might at first think.

SUMMARY
Collaboration is not the same as communication. Communication seems to be more critical than collaboration. If we focus on building organizations that are unencumbered with bureaucracy, but communicate well, we are probably better off than if we had focused on building complex collaborative structures.

FINAL THOUGHTS
There’s an old saying that “too many cooks spoil the broth.” In other words, if you bring together a lot of chefs to collaborate on a cooking project, it will fail because the combination of all of their conflicting ideas will create a disaster. Better to find one great chef and let him or her create their masterpiece with a single, working recipe.