Anticipation and Creation

THE QUESTION
By almost any measure you can think of, free-market economies are superior to the highly planned economies of socialism/communism.  Free market economies create more total wealth and do a better job of raising the general standard of living for the whole society.

Yet, for many years, I have been advocating strategic planning for businesses.  This begs the question:

If the economy in total is better off with free markets versus planned markets, then why do I believe that individual companies are better off having strategic planning?

This question is becoming more relevant based on the most recent book by Nasssim Nicholas Taleb, called “Antifragile.”  You may recall Taleb’s earlier book, “The Black Swan,” which caused quite a stir.

In Antifragile, Taleb takes a dim view of strategic planners.  His claim is that strategic planners do more harm to businesses than good in their attempt to gain control by way of rooting out the risk of randomness.  Taleb believes that the unintended consequences of these acts are to add delay, complication and inflexibility to the very business they are trying to improve.  As a result, instead of saving the business, the planning increases the risk of failure. 

This is a valid concern.  I have seen examples where this type of result has occurred.  For example, in the name of reducing risk by sharing knowledge and expertise, large shared services organizations are built.  These shared services organizations, if structured improperly, can add delay, complication and inflexibility to a business.  In two instances I am personally aware of, these negative results were so severe that the shared service organizations were dismantled.

So we cannot just dismiss the argument posed in this book.  We need an answer to the question.

 

ANSWER #1:  SURVIVING CREATIVE DESTRUCTION
One of the main reasons why a free economy is superior to a planned economy is due to the concept Joseph Schumpeter referred to as creative destruction.  The general idea of creative destruction is that great improvements to the economy do not come from proactively tweaking the status quo.  Instead, they come from allowing the status quo to die and be replaced by something far superior.  Only by freely allowing marketplace churn—letting old business models be destroyed by new business models—does the market make great leaps forward.

And the beauty is that, when left free of excessive planning, the market will do this creative destruction all by itself.  It is when we try to interfere and protect the status quo that we hinder the ability of the marketplace to make great strides. 

In a macro sense, allowing creative destruction has much merit.  But business leaders live in a micro world.  Their primary role is not the health of the total economy, but the health of their business.  Freely allowing their business to be destroyed in the name of Creative Destruction will not win them any praise from their stakeholders (shareholders, lenders, employees, etc.).  No, these stakeholders want the business leaders to cause their businesses to survive and thrive regardless of what is happening in the macro economy.

I believe that the best way to do this is via planning (we’ll discuss how to do this further below).

 

ANSWER #2:  NOT ALL PLANNING IS GOOD PLANNING
In his excellent book “Good Strategy/Bad Strategy,” Richard Rumelt makes the case that most of what is practiced today in the name of strategy is truly awful.  Worse than just poor execution of good processes, Rumelt believes that much of what is called strategy today is not strategy at all.  It is just terrible actions which hurt businesses. 

I suppose Rumelt would agree with many of the points made by Taleb.  In the name of strategy, a lot of negative activity is taking place.  But that is no reason to abandon strategic planning.

That would be like saying that just because some doctors conduct malpractice, we should abandon the science of medicine.  Or, because some reporters distort the facts, we should ban all news organizations.    

No, the proper response would be to eliminate the bad practices and promote good, healthy planning which works in concert with creative destruction rather than against it.

 

 
ANSWER #3:  GOOD PLANNING IS NOT ABOUT PRESERVATION
My first rule of strategy is this:  “ALL strategic initiatives eventually fail.”  My second rule of strategy is this:  “You are not an exception to rule #1.  YOUR strategic initiative will eventually fail.”

The primary reason why strategic initiatives eventually fail has a lot to do with the forces of creative destruction.  The environment in which you conduct business keeps changing.  What was the best thing to do in one environment is usually not be the best thing to do in a different environment. As the environment changes, your original strategic initiative becomes less relevant.  If you do not change, eventually your strategic initiative becomes irrelevant and you die—destroyed by creative destruction.

But here is where my rule #3 comes in: “Just because strategic initiatives die does not mean that your company has to die.  As long as you continually abandon failed strategic initiatives and replace them with relevant initiatives, the company will outlast any individual strategic initiative.”

The idea here is that good strategic planning is not primarily about trying to preserve the status quo or reduce the risk within the status quo.  It is about preparing yourself to prosper in a world where the status quo changes.

Hence, two of the most important words in good strategic planning are ANTICIPATION and CREATION.

Yes, the environment is changing.  But the change is rarely random.  There is logic behind the change.  The impact of an aging population can be roughly predicted.  The impact of business life cycles can be roughly predicted.  Advances in technology can be roughly predicted (like Moore’s Law).  As a result, the future environment should not be a complete surprise.  It can be ANTICIPATED.  And if something can be anticipated, then it can be prepared for.  And that is a key role for good strategy—to help companies better anticipate the changing environment in which they must prosper (and find ways to best exploit what is anticipated).

Why I would even argue that unusual Black Swans (events which have never before occurred) can be anticipated.  Sure, we won’t know the exact nature of the next potential disaster, be it a tsunami, earthquake, nuclear meltdown, housing crisis or whatever.  But bad, unusual things cycle through on a fairly regular basis.  And the best strategic response to negative black swans often doesn’t vary much.  There are only so many ways a black swan can impact the environment, no matter what it is.  Through the anticipative act of scenario planning, one can have a set of pre-planned responses which will work for almost any black swan.

However, even stronger than anticipation is CREATION.  Creative destruction occurs when a company reinvents the rules in a way which renders the status quo obsolete.  Those who are early masters of the new status quo typically gain disproportionate benefits.  Creative destruction has to be created by someone.  It may as well be you.  After all, isn’t it better to destroy someone else’s status quo than to have someone else destroy your status quo?

As Peter Drucker put it, “The best way to predict the future is to create the future.”  Therefore, good strategic planning looks at ways to reinvent business models—to create the next cycle of creative destruction.  In essence, the planning process is not used to preserve the status quo, but to become a leader in controlling how the status quo will be destroyed.

This is somewhat similar to the Blue Ocean approach to strategy.  The idea is to use planning to look for new, uncontested spots in the marketplace.  In other words, instead of trying to win in the highly competitive red ocean of the status quo, create your own new status quo (the blue ocean).

Strategic planning as a source for anticipation and creation might even be an approach that both Rumelt and Taleb would find acceptable.

 

SUMMARY
Even though highly planned economies tend to be inferior to a more free-market economy, that doesn’t mean that planning is a worthless activity for individual companies.  Planning is worthwhile for individual companies, because it provides a means for them to survive the forces of creative destruction—either through anticipation or creation.   However, not all processes labeled “planning” focus on anticipation and creation.  Some focus on trying to preserve the status quo.   In a world where all strategic initiatives eventually fail, that second approach is not a recipe for long-term success.

 

FINAL THOUGHTS
The best planning looks forwards, not backwards.  As hockey great Wayne Gretzky put it, skate to where the puck is going to be, not to where it has been.  Anticipation drove his actions.  You should be driven by the same thing.

Strategic Planning Analogy #448: Tornado Chasers

THE STORY
Tornado chasers are an odd bunch of people. Some would say they are crazy.

First, they spend countless hours in research looking the next possibility of a tornado attack. Most people would say that there is enough trouble coming our way on its own, so don’t look for any extra trouble. But tornado chasers are driven to proactively look for the next opportunity for danger. (Yes, to them tornados are an “opportunity”).

Second, once they find the danger, tornado chasers don’t run away from it. No, they run towards it. They try to get as close to the tornado as they can. They chase after it as fast as they can as soon as they can.

Third, the tornado chasers don’t stop after doing it once. They continue to do it year after year after year, running towards danger.

Yes, that does sound a bit crazy.

THE ANALOGY
Tornados are not the only dangerous and destructive force out there. Just look at the business landscape. Large, formerly great, industry-leading companies disappear all the time. It is as if a tornado wiped them out. Nothing is left but debris. Enron; PanAm; Lehman Brothers; Kodak; Firestone; Worldcom; Montgomery Ward. and the list goes on.

Sometimes the destructive force starts from within the company. Sometimes the destructive force that destroys the company comes from the outside environment. But no matter where the force comes from, the ultimate blame for the destruction needs to fall on management. It’s their fault, because they did not come up with a strategy to deal with the destructive force.

Destruction is not inevitable. Other companies have been faced with similar destructive forces and survived. They reinvented themselves to stay on top. Like Judo, they used the dangerous force coming at them and redirected it to their advantage.

In many ways, these surviving firms are like the tornado chasers. Rather than ignore or avoid danger, they embrace it. They look for it. They run towards it to take it on before it has a chance to destroy them.

At first this approach may seem crazy, but as we will see in this blog, it is a lot safer for businesses to chase after the tornado than to just sit in their headquarters and have the tornado come and blow them away.

THE PRINCIPLE
The principle here is that often times the best way to deal with a destructive force is not by avoiding it or by building a bigger defense. That can be the path to ruin.

As Victor Hugo put it, “There is nothing more powerful than an idea whose time has come.” It is so powerful that no defense can overcome it. When it was time for the digital revolution, there was nothing the analog world could do to prevent it. The force was too powerful. The analog firms who tried to ignore or stop the revolution lost. The firms which embraced the transformation won.

No, the best approach is often to run towards the destructive force and embrace it. We need to become more like tornado chasers.

In particular, there are four things we can learn from tornado chasers which can help our business thrive in world of destructive forces.

1. Look for Danger Before It Exists
Tornado chasers don’t wait until a tornado has touched down before taking action. No, they look for meteorological conditions where tornados MIGHT appear. In other words, they prepare for tornados before the tornado exists by examining conditions which can lead to tornados. That way, they are fully prepared in advance—in the right place at the right time when the tornado comes.

This same principle applies to business. If you wait until a danger is in full force before starting action, it is usually too late. There is not enough time to respond. You will miss your window of opportunity. The rules will already be re-written by others. You will be left out. In addition, by acting early, you still have the strong cash flow of your core to help fund the battle. The more you wait, the more cash flow you will need in the fight, and the less you will be generating (as the force increasing eats away at your core).

Think about Google and its Android platform. Android was conceived at a time when smartphones were little more than a novelty and the thought of doing meaningful activity on them via the internet was little more than a dream. However, like a tornado chaser, Google could see that mobile could create the condition for a major competitor force in the future which could blow away Google’s computer-based search foundation.

Therefore, they went to mobile early and created a way to harness the eventual force to their advantage. Experts predict that by 2013, internet access via mobile will surpass internet access via mobile. It has indeed become a major force which could have destroyed Google’s base. However, because Google attacked the danger before it existed (via Android), they have used the force to their advantage and can move their search strength to the mobile platform.

Contrast this to the history of Microsoft. Historically, Microsoft has waited until the force of threat is already quite strong before making a move. It occurred with internet access, cloud computing and mobile. With mobile already larger than computers, Microsoft is still just trying to penetrate the market. They are very vulnerable to suffering significant damage from this force because they waited too long.

Do you have an eye out looking for where potential dangers can occur, or do you wait until the danger has built up a force of power before taking action.

2. Move to Where the Action Is
Tornado chasers don’t wait for the storm to come to them. They go to the storm. This is also true for businesses. In a prior blog, I explained why it is usually advantageous to fight your battles at the periphery before it gets to your core. If the new force is going to be the next new thing, then you need to embrace the force before it makes you obsolete.

When Google saw internet time moving to mobile, they went to mobile. When Sam Walton saw that supercenters, with groceries, had the potential to under-price his discount stores, he shifted to Wal-Mart Supercenters. When Amazon saw how digital books could ruin their business model, they agressively brought out the Kindle reader.

Now people could argue that Google had no right to get into creating a mobile platform. Their expertise was search algorithms and advertising. It looked crazy. People said the same thing when Wal-Mart added groceries—it was not a part of their expertise. It looked crazy. Amazon was a digital retailer, yet it reinvented itself as a device manufacturer with the Kindle. It looked crazy.

But here is the point. If the new force is drawing away your customers, you don’t have much of a choice. Either you find a way to become an expert in the new area, or the force will blow you away, like a trailer park in the path of a tornado.

3. Take the Threat Seriously
Most tornado chasers are not idiots. They realize that tornados are powerful, destructive forces. They respect that power and take precautions. They take their threat seriously. That’s how they stay alive. The same should be true for businesses. When a new threat arises, don’t be casual and half-hearted. Treat the threat for what it truly is—a force with the potential to destroy your brand’s very existence. Take it seriously and fight as if your life depended on it.

Google took the mobile threat very seriously. They did not wait for someone to build a platform to put their search engine on. They made sure there was a platform available for them by building it themselves (Android). In addition, they were concerned enough with the possibility that the Apple platform would try to lock them out that they gave away the Android for free. Now that shows how seriously Google respected the threat. As a result, Android now has close to half the market share and Google remains a powerful force in search and advertising.

Facebook could see a potentially forceful threat by Instagram, the photo-sharing site. They took the threat so seriously that they immediately purchased the company for $1 billion, even though the sight had no revenue. Now the potential threat is an ally.

Other companies often will put up a small fight in the new space, but do not treat the battle as seriously as they should. They do not fully respect the power of the new force to destroy them. Kodak did not fight the digital imaging war as seriously as it should have.  As a result, it did not land a new position in the digital space and had the digital competition blow away Kodak’s analog film business. It ended up with nothing.

Whereas Wal-Mart was willing to bet the company on an aggressive push into supercenters, Kmart only dabbled half-heartedly with the concept. As a result, Wal-Mart grew ever-stronger and Kmart grew ever weaker.

All strategies eventually fail. They become overtaken by a new force in the marketplace. Resisting the new force in an attempt to save the core usually leads to failure in both spaces. You end up with nothing. Take the threat seriously for its potential to wipe away your core and envision a way to win even if your core is severely damaged (or completely wiped out).

4. Never Rest
The thing about tornados is that they come back every year. You can never say that you’ve seen the last tornado. There will always be another one.

The same is true in business. Forces of change will continue to come. Today’s status quo will be replaced by the next big thing. And that next big thing will eventually be replaced as well. It doesn’t stop.

As a result, one cannot rest on the past. One has to always keep an eye out for the next storm.

That is what makes the half-hearted moves by Kmart into supercenters so interesting. Back in the 1960s, Kmart (then called Kresge) could see that the force of discounting was going to destroy their Kresge variety stores. Therefore they bet the company on the new trend by abandoning the variety stores and aggressively embracing the Kmart discount store format. As a result, Kmart was a powerful, dominant, and highly profitable force in retail for many, many years.

Yet, when the supercenter force came, they did not follow the pattern of destroying the old (Kresge) for the new (Kmart). They rested on the strength of Kmart and only pursued supercenters as an additional piece—not as a replacement. As a result, Wal-Mart supercenters are replacing Kmart in the marketplace.

And now we look at the force of e-commerce on the brick and mortar stores. Was Wal-Mart resting on its supercenter success too much and not taking the e-commerce threat seriously enough? Has Best Buy rested on its past too much and missed the next retail transformation? Only time will tell.

Yahoo and AOL may have lead the change on one wave of force. However, they may get wiped away by the current wave. You can never rest on the past.

SUMMARY
Economist Joseph Schumpeter coined the term “creative destruction” to describe how capitalism works. His point was that there are forces in the economy which destroy the status quo, much like a tornado. The status quo is then replaced by something more in tune with the marketplace. As a business person, you need to devise strategies to use creative destruction to your advantage. Otherwise, the natural forces will wipe you away.

FINAL THOUGHTS
Which is more dangerous—going out to attack the tornado or sitting inside a mobile home not knowing that a tornado is about to cross your path and destroy your existence? Get out of hiding and embrace the new force before it blows you away.