Strategic Planning Analogy #474: Weighing Money

THE STORY
Back in the 19^th century, the US was primarily a rural nation.  In those days, if you wanted to purchase something, you didn’t have all the malls with all the stores nearby like we have today.  Instead, if you needed something, you got out your Sears or Montgomery Ward paper catalog and ordered what you needed by mail.  Then, a few weeks later, the mailman would deliver to you what you ordered.

Not only weren’t there many stores back then, there weren’t many ways to pay for the things you bought.  No credit cards or PayPal existed.  Only the very rich had checking accounts.  As a result, almost everything was paid for in advance with cash—usually with coins.

This caused a problem for Sears and Montgomery Ward.  Thousands upon thousands of orders would come to them by mail—each of them in envelopes filled with coins.  Trying to figure out if the right amount of coins were in the envelope to match the cost of the order was a logistical and financial nightmare.

Sears eventually came up with a way to simplify the process.  In fact, they eliminated the process.  Instead of counting the money, they weighed the money.  As it turns out, Sears discovered three things:

1)      The vast majority of people are honest about putting in the right amount of coins;

2)      You can get a reasonable (but not exact) estimate of the value of a pile of coins by weighing them; and

3)      Weighing coins is a lot faster, easier and cheaper than counting them.

By switching from counting to weighing, Sears could process the orders faster with a lot fewer employees.   The big shortages of money would still be caught.  And whatever little shortages that slipped through were small and infrequent.  The money saved from not counting more than made up for any losses from shortages in payment.

So everybody won.  The consumers got their orders processed faster and Sears made the process more profitable.

 

THE ANALOGY
Sears could have spent a lot of time and money to perfect the system of counting all those coins.  And I’m sure they could have made significant improvements to the money counting process.  But I’m also sure that those improvements would never have been as cost efficient as abandoning the process altogether to switch to weighing money.

At first, it seems counter-intuitive to say that profitability goes up when you stop accurately checking to see if you were properly paid.  How could a company like Sears stop counting its payments?

Well, as it turns out, the top line on the income statement is not the most important line.  The long-term prospects for the bottom line are far more important.  If a little less accuracy on the top line can create far more money on the bottom line, then we should be happy with that. (and, by the way, Sears eventually knew the exact total of all coinage coming in—even if they couldn’t tell which order the coins came from).

I bring this up because a lot of businesses are focused on increasing accuracy all over the place.  Using a host of processes like Six Sigma or Lean, a great deal of time and effort is used to gather tons of data to figure out how to do things better or faster or cheaper or with fewer defects all over the company. 

These practices may improve the individual areas being studied.  But, like Sears, perhaps even more improvement to the consolidated bottom line would have occurred if the study had not occurred and the process was entirely eliminated.

Precision and improved performance is not always the right answer for every process. Sometimes, the bigger picture is better served when some processes stay a little looser or are eliminated altogether.  The secret is in knowing when to apply these tools and when not to.

  

THE PRINCIPLE
The principle here has to do with the difference between efficiency and effectiveness.  Efficiency is about focusing on making a process operate as well as possible (speed, cost, accuracy, etc.).  Effectiveness is about focusing on doing those things most critical to long-term success (pleasing customers, gaining competitive advantage, improving long-term cash flow, etc.).

The Folly of Putting Efficiency Ahead of Effectiveness

The difference between a focus on efficiency or accuracy can be great.  For example, I could create the most efficient process for sending messages in Morse Code, but that would never be a more effective way of communication when compared to smartphones and the internet.  If the end goal is communication, I should abandon the Mosrse Code and adopt smartphones and the internet.

Focusing on perfecting Morse Code while ignoring smartphones may seem silly, but companies do things almost as silly all the time. 

Most companies never really have an adequate answer to what I call “The Most Important Question,” which is:  What is it about your business strategy which would cause customers to naturally prefer you over the alternatives?  In other words, they have never figured out what will make the company uniquely effective in the marketplace. 

Instead, they do pretty much what everyone else in the field is doing.  They offer essentially the same solution in the same way.  Then the hope is that they can eke out a small advantage by doing the whole thing just a little bit better. So, they use tools like six sigma and lean in an attempt to make everything they do a little more efficient than the competition.

The problem with this approach is that:

1)      Perfecting the status quo does you no good when the status quo becomes obsolete (like when smartphones and other communication tools made Morse Code obsolete).  Being the best obsolete alternative is not much to brag about.

2)      The competition rarely stands still.  They are also trying to become more efficient.  As a result, it is difficult to get a meaningful long term advantage in doing what everyone else does just a little better.  Think of the battle between Fuji and Kodak to become the best at producing photographic film.  They alternated having small temporary advantages until digital technology made both of them obsolete (see more here).

3)      If you don’t start first with understanding what is most critical for effectiveness, you have no way to prioritize what efficiencies to work on.  In addition, you don’t know which approach is best to improve them (is it by reducing costs, reducing defects, saving time or something else?).  As a result, you can end up working on the wrong projects (like improving money counting instead of moving to a less accurate process of money weighing).

The irony is that putting efficiency first is not the most efficient way to improve your long-term prospects.  It wastes a lot of effort on doing things that do not meaningfully improve the really important things, such as winning in the marketplace.

The Benefits of Putting Effectiveness First  

True, lasting efficiency only comes when effectiveness is given top priority.  Effectiveness focuses on finding a way to win.  That “way to win” involves understanding the underlying problem you are trying to solve (your solution) and differentiating attributes where you will excel in order to be the best at that solution.

For example, Wal-Mart’s solution is to improve the lives of lower income people by making the things of life more affordable.  The differentiating attributes they focus on are lowest cost and lowest price.  Wal-Mart doesn’t waste a lot of effort perfecting service or luxury, because that focus won’t improve their ability to win with their strategy.  Instead, they place all of that efficiency and perfection emphasis in areas which lower costs and lower prices.  And Wal-Mart didn’t stop at just trying to perfect the status quo discount store.  When they discovered that supercenters were a more effective way to solve their problem, they quickly made the switch.

The key to strategy execution is knowing which trade-offs to make.  It is virtually impossible to be the best at everything.  If you try to simultaneously be best at low prices, high quality, speed, service and innovation, you will probably end up being inferior to someone on all of these attributes.   No, if you want to be meaningfully superior, you have to focus on only a couple of attributes.  You trade off (do less) in the areas less important to your effectiveness so that you can afford to trade on (do more) in the areas critical to your effectiveness.  

Starting with effectiveness lets you know where to prioritize you efficiency efforts.  And it lets you know which aspect of efficiency (speed, price, etc.) to focus on.  And, most importantly, it lets you know where not to direct your efficiency efforts.  And, finally, it keeps an eye open for non-status quo approaches which are more effective at solving the underlying problem.  This provides an effective way to win year after year after year.

 

SUMMARY
If you focus too hard on trying to be perfectly efficient at everything you do:

1)      You can end up never winning superiority at any attribute relative to competition (because your efforts are dissipated over too many conflicting areas); and/or

2)      You end up perfecting the obsolete.

However, if the primary focus is first on being effective at owning a solution, you will know how to make the right trade-offs, so that you can become perfectly efficient in the places necessary for you to win in the marketplace.

 

FINAL THOUGHTS
Tools like Six Sigma and Lean should not be looked at as substitutes for strategy (or as being your strategy).  No, they are merely tools.  Tools in the wrong hands can be dangerous.  Tools in the right hands can produce great things.  If you want those tools to do great things, you need to first understand your effectiveness strategy.  This provides the context for knowing where and how to apply those tools.

Strategic Planning Analogy #459: Strategic Toss-Outs

THE STORY
When its time to clean out the junk which accumulates at my house, my wife and I have different opinions.  She seems very willing to toss out my stuff, but more reluctant to toss out her own stuff.  I, on the other hand am very willing to toss out her stuff while hanging on to my own.  As a result, we often disagree about what should be tossed out.

Sometimes, I’ll come home from a business trip and find out that my wife used the time I was away to get rid of the junk in the house.  Apparently, she finds it a lot easier to make those decisions about what to toss when I’m not around.   The disagreements go away (along with a lot of stuff I would have wanted to keep).

THE ANALOGY
Houses aren’t the only things which collect junk over time.  So do businesses.  Business junk that accumulates over time includes:

   1) Old Products and Services which are no longer relevant.

   2) Formalized Processes and Procedures which are out of date.
   3) Informal ways that things get done which are out of date.
   4) People and positions which no longer accurately reflect best practices.
   5) Ways of thinking about the business.
   6) Unprofitable customers.
   7) Old capital investments.

Although nobody would argue with the abstract concept of eliminating the obsolete and irrelevant, the problem arises in that not everyone agrees about what is obsolete and irrelevant.  This is particularly true if someone else believes that what you yourself do for the business is obsolete and irrelevant.  Like the situation with my wife, someone else’s area in the business may appear less relevant than one’s own, so you fight to toss their junk while keeping your own.

Worse yet, sometimes businesses are in a position like a couple who is downsizing from a large house to a small apartment.  In order to fit into the smaller dwelling, they not only have to get rid of junk, but also get rid of some stuff that has reasonable value.  Similarly, businesses often find a need to downsize and are faced with the tough task of getting rid of seemingly good things in order to fit the budgeted shrinkage.

The problem, of course, is in deciding what seemingly valuable aspects of the business to toss out.  This can be difficult, because it may require getting rid of long-time employees or heritage products associated with the founding of the company.  And, as in the story, there can be differences of opinion as to what is or is not valuable. 

And, if some people are left out of the decision (as I was during a business trip), some highly valuable things could get tossed out because the one doing the tossing did not appreciate the value.

THE PRINCIPLE
The principle here is that strategic planning is about more than just how to grow a business.  Yes, it may be more fun to talk about growth strategies.  However, often times a lot more value can be unlocked from a business by tossing out a lot of the accumulated junk already choking the business.

There can be all sorts of processes, people, products, and factories embedded in the business which are gigantic cash drains.  Getting rid of this junk can create a far greater return on investment than investing in completely new stuff.  (Remember all those statistics about how most acquisitions and new product introductions fail?—it is not a given that every growth move is a winner.) 

Unfortunately, if you get rid of the wrong stuff, like core competencies, key aspects of your competitive advantage, and investments in the future, you can end up destroying the future of the business. (Wrong cutting moves can be as dangerous as wrong growth moves).

Therefore, decisions about what to toss out can be just as strategic as decisions about what to add.  Yet, I’ve seen many examples where cost cutting programs totally bypass any strategic scrutiny.  Perhaps every department is told to cut out 10% of their expenses and they can use their own judgment about what they can toss.  This could end up being a strategic nightmare, because it may not cut out enough junk in some areas while choking off the best potential in other areas.

Without a coordinated, strategic approach to tossing out, you can end up tossing away your best chance at success.  Here are some strategic issues to consider when embarking on a cutting/fixing program.

1) Know what is the Foundation of Success

Nobody would intentionally sabotage the underpinnings of their success.  Yet it happens all the time.  There are two causes.  First a company may not know what is the basis of their success, or they may have a mistaken understanding of what strategic elements created their success.  Unless you first know what is critical to your business model, you will not know how cuts or fixes are going to affect those critical elements.  So before embarking on a cutting/fixing program, make sure everyone is in agreement as to what is important for future success.  Know what your key points of differentiation are and what parts of the business model cause them.

Second, all cutting/fixing suggestions need to be viewed in the context of their impact on the core business model.  If the cuts or fixes critically hurt the core elements of success, then don’t do them.  Remember, these are not isolated decisions.  They impact the overall business model.  Keep that in mind when making each decision.

2) Consider Cross-Linkages

Actions in one part of the business can impact many other parts of the business.  For example, the operations department might cut back on labor to make their department’s costs lower.  They might even get a big bonus for this action.  However, the resulting drop in quality could ruin the budget for the service/repair department and make the selling force much less productive due to the problems in trying to sell lower quality goods.

Therefore, one needs to look at the big picture and all the cross-departmental implications.  Reward people on the total impact of their decision, not just on their individual area.  Otherwise, you can end up with a single individual maximizing their area while destroying everyone else (sort of like when my wife cleans out when I’m not around).

3) Flexibility and Backup is Important

Getting rid of excess fat in your supply chain is usually a good idea.  However, like most good ideas, it can turn into a bad idea if taken to an extreme.  If the 2011 tsunami in Japan taught us anything, it was that an extreme approach to lean supply chains is a disaster if a link in the chain gets broken. 

A lot of automotive manufacturing parts had only a single source of supply and that source was wiped out by the tsunami.  And because of a just-in-time system, there were no excess parts on hand. As a result, the entire global automobile supply chain ground to a halt waiting for the single source for one product to be replaced.  This created great financial losses for many months.

You can prevent these great losses by building a little bit more flexibility and backup into the system. Have backup sources or alternative manufacturing options.

Also keep in mind that needs and desires can change over time.  This can require you to make frequent tweaks to your offering.  If you get so specialized in your process (to save money) that you cannot quickly adapt to minor tweaks, you have really made yourself less efficient. 

4) Consider Fewer, But Larger Cuts

A lot of strategy has to do with making trade-offs (see prior blogs here and here).  The idea is that if your strategy requires you to excel in a certain area, it may require you to put more money in the area to excel in and less in areas which do not add (or even take away from) from your competitive edge.

In other words, instead of cutting back a little bit everywhere, perhaps you need to invest more in some places and completely eliminate other areas.  For example, Wal-Mart invests more in areas where cost savings can be realized (like IT systems) and completely eliminates services which only serve to raise costs (and prices).  When you consider fixed and variable costs, the only way to get big improvements in some non-essential activities is to eliminate the whole thing (to cut out the fixed cost).   

So, before making your decisions on what to toss out or fix, first understand the trade-offs which underpin your strategy.  Then consider becoming more extreme in your approach to those trade-offs.

5) Think Longer-Term

To prosper long term, you need a full product development pipeline.  You need something to sell today, something to sell in the near term and something to sell in the long term.  If you cut off R&D and product development to help near-term profits, you may be destroying long term profits because you let the pipeline get empty.

This is like saving a little money today by not changing the oil in your car and ending up eventually having to replace the entire engine because of the damage caused by improper lubrication.  Those near-term savings pale when compared to the long-term consequences.  So make sure our near-term cuts aren’t crippling your long-term strategy.

SUMMARY
Strategy isn’t just about plans for how to grow and expand.  It should also include plans for how to fix/improve/eliminate the messes in the current business.  If you do not take a strategic approach to these cuts and fixes, you can end up destroying the key elements of distinction which created your basis for existence.  In other words, strategists can’t just dream about a blue sky future; they need to get their hands dirty helping keep the current businesses on a balanced path between cost efficiency and strategic effectiveness.

FINAL THOUGHTS
A lot of companies focus on “best practices” in order to increase efficiency.  But if all you do is focus on industry best practices, then you are not doing anything to distinguish yourself in the marketplace.  To win, you have to do things differently, and you don’t get different by following industry norms.  Strategies help you understand how to be different, and this can open up greater efficiencies through trade-offs than you can find in best practices. So power your cuts and fixes with strategic insight.

Strategic Planning Analogy #433: Constructive Energy

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 #392: Sunday Best, Part 2

REVIEW
In our last blog, we talked about some of the problems which occur when companies label a function as either an “everyday task” or a “strategic task.” By labeling a particular task as either one or the other we end up sub-optimizing because there tends to be both a strategic and everyday aspect to everything we do. If strategic thinking doesn’t impact the everyday activities of what a company does (and how it does it), then the strategy is rather irrelevant. Conversely, if we cannot translate great strategic, transformational thinking into a future everyday activity, then the great ideas provide no financial benefit.

By labeling an area as only being one or the other (strategic or everyday), we make the everyday less strategic and the strategic less relevant to the everyday. This is the opposite of what is needed. It is only when we see tasks as requiring both a strategic as well as an everyday approach that we get the best of both worlds.

In the last blog, we focused on the problems which occur when a task is labeled as “strategic,” where we used the example of growth. In this blog, we will look at the problems which occur when we label a task as “everyday.” We will use the example of cost reduction.

COST REDUCTIONS
Controlling costs is a key part of nearly every business. When annual budgets and compensation measures are put into place, it is very common to see some emphasis placed on lowering costs versus the prior year. It is so common, in fact, that cost control is seen as being a part of “everyday” business. It no longer feels like a separate strategic activity. It is just a part of the daily grind.

However, by labeling cost reduction as an “everyday” task, we are severely limiting how much we can really reduce.

Efficiency vs. Effectiveness
The big problem with placing cost reductions in the “everyday” category is that the process becomes siloed. Every department acts independently on their own span of control. As part of a particular department’s everyday work, the task of cutting department costs becomes nobody else’s work but that particular department’s.

For example, the annual goal may be to cut 10% of your controllable costs. With this goal, you are not responsible for cutting the costs outside your control, since that is not a part of your everyday work.

At first, this seems logical…only hold people responsible for that which they can control. And because they can control it, and because action in this area can directly impact their bonus, they are both motivated and capable (empowered) to make the cost reductions a reality. What more could you ask for?

Actually, you could ask for a lot more. The problem with this approach is that the task of cost reduction becomes little more than doing basically what you have always done, only a little more efficiently. In other words, the idea is to keep doing your same old everyday work, but with a little less waste and a little more productivity. This approach may make you a little more efficient. However, it may not make your company any more effective. And you may be missing out on the really big, game-changing cost reduction opportunities.

Radical improvements in costs typically require radical changes in the ways things are done. These radical changes usually transcend any particular department. Total reengineering may be necessary—requiring significant cross-departmental reorganization. In the end, entire departments and entire tasks might no longer exist. The product mix may be altered. What becomes the new “everyday” may look nothing at all like the former “everyday.”

These types of changes will never occur in an environment where each department separately works on their own cost problems as part of their everyday activities. Instead, these solutions only occur when cost control is approached from a more global, strategic basis.

I recently witnessed this situation first hand. This company changed its approach to cost-cutting, to take a broader, more strategic approach. A cross-functional team was put in place that was not bounded by the way things used to be done. Nothing was sacred—any everyday task could be radically reinvented. As a result, departments were eliminated, tasks changed, and big reductions in costs were produced—more than what would have otherwise occurred.

Selfish vs. Selfless
And then there is the problem of the multiple hats. Sometimes we need to wear our “department hat” and look out for the best interests of our department. Other times, we need to wear our “corporate hat” and look out for the best interests of the entire company. If cost cutting is labeled as being just an “everyday” activity, then we will only be wearing our department hat when approaching cost reductions.

This can lead to less than optimal results. For example, one way to lower a department’s costs is by pushing those costs onto another department. This may make your department look better, but it doesn’t help the overall company. Another way to lower costs is by reducing the service you provide. But if your lowered service hurts the effectiveness of other departments, then you really haven’t improved the company.

And of course, it is difficult in such an environment for someone to volunteer that his or her area gets eliminated or outsourced for the sake of the whole. Who wants to volunteer to lose their job? Who wants to volunteer to weaken their base of power? Unless there are shared risks across the entire company, nobody will want to take any risk which jeopardizes their individual area.

As a result, an everyday-only approach to problems tends to only nibble at the situation. If you want to make more monumental change, you need to add a strategic component. This is something which needs to transcend what any individual department can accomplish on its own.

SUMMARY
When we label particular activities as being solely either “everyday” or “strategic,” we are short-changing our ability to succeed. All activities have both a strategic and an everyday aspect to them. To ignore one of these aspects is to miss many of the benefits available to us. For example, when the strategic aspect is ignored, we miss all of the benefits which lie outside the complete control of particular department. The cross-functional, non-traditional options are missed. One ends up with small, incremental improvements instead of large, transformational change.

FINAL THOUGHTS
Just because all tasks require both an everyday and a strategic approach, this does not mean that the approaches should be intermingled and done together. Each approach is very different and requires a different type of mindset. Therefore, it is usually more productive to rotate one’s focus—to take a strategic approach for awhile and then switch to an everyday approach for awhile.

Strategic Planning Analogy #390: Hide the Scores

THE STORY
Imagine you are an athlete and they changed the rules of the game you play. The first change is that the place where points are scored cannot be seen by the players. It is obscured from their view. For example, if you play hockey or soccer, you cannot see anything that happens near the goal area. Once the ball or puck enters the goal area, you cannot see where it went. Similarly, if you play basketball, you cannot see anything that happens near the hoop. Once you shoot the ball, you cannot see if it went into the hoop or not. Scoring becomes a mystery.

The second rule change would be that the referees, who are the only ones who can see the scoring, have up to five years to determine if any scoring occurred.

As a result of these changes, the athletes would have no immediate feedback. They would have no idea if their actions were successful. Player statistics would be virtually non-existent. Worse yet, the players might have to wait up to five years to find out if they even won the game. With the way players switch teams today, they more than likely would have switched to a new team before they even know if they were successful on the prior team. And, of course, without up-to-date statistics, it would be difficult for the players to negotiate salaries. No, I don’t think the athletes would like these rule changes.

The fans wouldn’t like the situation, either. It’s hard to get excited about going to watch a game where you don’t know the score and won’t know the results until five years after watching it.

These rules would be hated so much that I can assure you that they would never be enacted.

THE ANALOGY
Unfortunately, as bad as these rules are, they are very similar to the rules executives face every day in the game of business. For many of the tough decisions that CEOs and strategists make, there is no immediate feedback. They cannot see if it was successful right away. It can take up to five years before one knows whether that tough decision was made correctly or not.

For example, Cisco’s decision to use the Flip camera as part of a push to diversify into consumer electronics initially looked very promising. The Flip camera was loved by the market when introduced and when purchased by Cisco in March 2009. Initial sales were very promising. It wasn’t until years later that the ultimate results of that diversification decision were in. The decision to diversify into consumer electronics was a complete failure for Cisco. They couldn’t even find a buyer for the Flip camera business and just shut it down two years after purchasing the business. And, of course, the decision to diversify was made well before making the purchase of Flip, making this around a three year feedback cycle.

And this three years was a relatively quick feedback (best case scenario). Consumer electronics tends to reward winners and losers much faster than most other industries. And most companies probably would have waited a couple of years longer than Cisco for even more feedback before pulling the plug.

Given that the average tenure for a CEO or strategist is less than 5 years, executives can move to a new company before knowing whether they were ultimately successful at the prior company. Trying to put together any kind of up-to-date statistics on CEO performance can be fairly meaningless, because it can take many years before the full impact of the really big decisions can be seen. That is why it is so difficult to determine what fair compensation for top executives should be.

Like the athletes in the story, CEOs tend to hate this condition of uncertainty. And like the fans, stock analysts and stock traders also hate this uncertainty. It’s hard to recommend or buy stocks when you won’t know the complete score for past actions for up to five years.

Yet, even though it may be hated, this is reality.

THE PRINCIPLE
The principle here is that successful CEOs and strategists need to resist the temptation to act based solely on immediate feedback. Instead, they need to focus a significant part of their time pursuing long-term visions, even when it is difficult at the time to know how those decisions will turn out.

There is a tendency to try to avoid these uncertainty issues and try to make business rules more like sports rules. Compensation packages look for ways to immediately score a leader’s performance. Stock analysts find all sorts of near-term scoring to look at in order to rate a company. As a result, you get companies so focused on the next quarter’s performance that critical long-term decisions get pushed aside.

Decisions are made to increase near-term statistics rather than to win the long-term game.

HBS Study
I was reminded of this situation by a recent study reported by the Harvard Business School. The study was trying to correlate the day to day activities of a CEO with company performance. The scoring mechanism used by the study was productivity. What they found out was that:

1. The more hours a CEO was at work, the higher the productivity

2. If most of that CEO working time was focused internally on employees, productivity went up.

3. If most of that CEO working time was focused externally on customers or the marketplace, there was no impact on productivity.

Hence, one might conclude from this study that CEOs should spend a lot of time in the office dealing with employees.

Wrong Focus
However, I see a major problem with this conclusion. In particular, the scoring methodology is all wrong. We’re measuring productivity in this study, not long-term success.

Isn’t productivity more the responsibility of the COO (Chief Operations Officer), not the CEO? Naturally, if all you want is greater productivity, spend a lot of time pushing your employees. But there’s a big problem with this approach. You can end up having the most productive process for an obsolete solution.

Kodak spent a lot of time perfecting productivity on analog film and totally missed the transition to digital imaging. Blockbuster perfected productivity on moving DVDs through stores and missed out on winning the transition to receiving movies via direct mail and digital streaming.

Focusing on getting better and better at doing an old task gets you nowhere when that task is no longer needed. And trust me, all business models eventually become obsolete. That is why efficiency (doing things well) is not enough. You also need effectiveness (doing the right things).

That’s why CEOs and strategists should spend considerable time looking beyond the tasks of today. They need to look for where the company needs to be tomorrow. Time should be spent addressing issues like:

1) What needs to be added to the portfolio?
2) What needs to be deleted from the portfolio?
3) What will make our current business model obsolete?
4) What will be the next big thing to threaten our core?
5) Where are the gaps in our competencies when transitioning to the business model of the future?

These questions won’t get answered by spending all day in the office putting pressure on your employees. To answer these questions requires getting away from the daily grind and spending time alone in thought. It requires getting out into the field to talk to customers and see what is going on. It requires broadening your horizons. It requires putting up blinders around those near-term measures, so that you are not fixated on them all the time. It requires making bold moves, even though you may not know the outcome of those moves for a long time. It requires ignoring the results of that HBS research.

In other words, it requires resisting the temptation to focus only on an instant score like an athlete. Instead, it requires taking responsibility for those actions which only CEOs and strategists can answer—what do we need to transition to and how to we make that transition.

SUMMARY
Successful CEOs and strategists need to break away from the temptation to fixate on near-term measurements and instead spend a considerable amount of their time making decisions about key factors where the results of those decisions may not be known for another five years. Otherwise, they may find themselves perfecting the obsolete.

FINAL THOUGHTS
Yes, CEOs cannot completely ignore the tyranny of the immediate—the fires which need to be put out right away. But one cannot ignore the long-term either. Most experts seem to feel that CEOs should spend about a third of their time on long-term issues. Yet most studies show that CEOs spend far, far less time than that on long-term issues. The only way to increase the time is to back away from such a strong focus on near-term scoring.

Strategic Planning Analogy #320: Efficient Nothingness

THE STORY
Once upon a time, there was a man named Joe. Joe was the CFO of a large retail company. Joe wanted to make his retail company the most cost efficient retailer that ever existed. He made it his life mission.

Joe discovered that two of his company’s biggest costs were buying/managing inventory (having stuff to sell) and servicing customers (helping people buy the stuff). Therefore Joe eliminated these costs. First, he stopped buying inventory. That saved a ton of money on inventory. No more costs to acquire it, distribute it, or stock it. He didn’t need to invest in shelves or displays, either. Eventually, the stores became completely empty.

Then Joe eliminated the door to the store. “I never saw a positive return on investment directly related to doors, so why have them,” said Joe. Without doors, customers could not enter the empty stores. Joe loved it, because now he did not have to spend any money serving those customers.

About the only cost left at the store was rent. Therefore, Joe negotiated with the landlord to have rent set as a percent of sales. Now that sales were $0, his rent would also be $0. At last, Joe had achieved his dream—the most efficient store.

THE ANALOGY
A couple of big priorities in business these days are efficiency and innovation. Therefore, it is not surprising that there are many looking for efficiency in innovation.

Joe found a way to create efficiency in retailing. He got rid of all the management headaches and eliminated all the costs at the store. There was only one problem…he also eliminated every opportunity for that retailer to make a profit.

Efficiency is not the same thing as effectiveness. An efficient path to nowhere is not valuable. Getting to nothing faster and cheaper still leaves you with nothing. Joe had no costs, but also no profits.

The same is true when looking for efficiency in innovation. The ultimate goal is not efficiency…it is effectiveness. An efficient process for innovation that does not create great innovation is not very valuable.

THE PRINCIPLE
The principle here is to not confuse process with outcome. Yes, a process is essential, but it is only useful to the extent it creates the proper outcome. If greater efficiency does not improve the output, it hasn’t helped much, if at all. Sometimes greater efficiency can even destroy output, as we saw in the story.

Profitable retailing requires two things: stuff to sell and a way to sell it. Eliminate those two (for the sake of efficiency) and retailing has no longer has reason for existing. Similarly, innovation requires two things: a great idea and a way to bring it to market. Destroying these, in the name of efficiency, makes the innovation process worthless.

On April 19, 2010, CFO.com published an article about CFOs and efficiency. The article was reporting on a study conducted by The Boston Consulting Group regarding innovation. Not surprisingly, the study found that 85% of finance executives say innovation is an important part of their company’s strategy.

One of the most interesting parts of the study is that while 22% of finance executives say they are the biggest driving force for innovation at their company, only 3% of non-CFO’s see them that way.

Why the disconnect between CFOs and the rest of the executives? I believe it is due to confusion between process and outcome. CFOs are rarely responsible for the two key outcomes of innovation: Innovative Ideas and Bringing the Idea to Market. I doubt that most executives see the CFO as the “go-to” guy for a great innovative product idea or as the key player to bring a new, innovative product to market. How can you be the “diving force” of innovation if you do not do at least one of those two things?

Driving an empty semi-trailer does not make one a driving force (even if empty trailers get better fuel efficiency). The trailer needs to be full of innovation in order to make the trip worthwhile.

The CFO in the story was very proud of his efficiency actions, even though they destroyed the retailer’s profitability. In real life, CFOs need to make sure they do not fall into the same trap with regards to innovation.

Typical CFO innovation activity, like measuring the innovation process (from beginning to end) or helping control how much money flows to an innovation project, have their place—but this is not innovation! This is like the scorekeeper at an athletic event. Just because the person is keeping score accurately does not make them an athlete who is the driving force behind winning games.

I’ve read about executives taking pride in cutting lots of cost out of their innovation system. Well, nobody likes wasting money, but don’t get too proud of that fact if it is choking off future innovation.

True innovation, almost by definition, is going to be disruptive to the status quo. This applies not only to the status quo in the marketplace, but to the status quo of how things get done at your company. Most companies have a bias towards rejecting threats to the status quo. So if you really want innovation, focus on ways to fight this bias. That will be far more beneficial than efficiently monitoring a system biased against innovation.

The monitoring itself can be a detriment to innovation. Studies have shown that if a new innovative idea gets high visibility too quickly, it can choke it before it has a chance to take root. Non-monitored incubation time at the beginning can be a good thing.

Therefore, if you really want a great (rather than efficient) innovation process, I recommend the following.

1) Have access to innovative people
Great ideas usually come from those who are good at coming up with great ideas. You could have 100 people watch an apple fall from a tree, but it took a great thinker like Newton to find the notion of gravity in that observation. Even if these other people had better measurement tools when observing the apple, they still did not see the concept of gravity. Get access to people like Sir Isaac Newton, who find the innovation in common observation.

2) Have access to people comfortable with breaking the status quo
Not everyone is comfortable being the rebel who breaks the rules. Bringing innovation to market is hard enough by itself. Don’t make it even harder by putting it in the hands of non-rebels. I worked with a company once on an innovative new concept. The idea part worked great, but then it was handed over to a status-quo guy who was not a rebel by nature. The forces of the status quo took over and the innovation never saw the light of day.

It may not feel comfortable handing over the project to a rebel who likes breaking YOUR rules. You may not want them as your next door neighbor. But you do want them fighting your wars to get the innovative idea around the obstacles which can prevent success.

3) Empower the people in #1 and #2
Getting the right people is half the battle. The second half is empowering them so that they can actually do what they are good at. They need power. That power can take the form of freedom to think, access to funds, access to other resources in the company (knowledge, people, systems, etc.), the ability to make decisions, the ability to experiment (and sometimes fail).

There was an article in the June 2008 edition of the Harvard Business Review which looked at about 125,000 instances of strategy execution from over 1,000 companies. What they found was that the most successful implementation came from companies that got two things right: decision rights and information flow. In other words, if you want successful implementation

a) Give clear powers for decision-making and let everyone know who has them for each type of decision. Take the second-guessing, passing-the-buck, and bureaucratic red-tape out of the equation. (This provides the power to act without always looking over your shoulder and re-justifying everything all the time)

b) Let information (and the people who have it) flow freely throughout the organization so that everyone is acting based on the proper knowledge. Don’t horde knowledge; be generous with access. (This provides the power of access to the tools that will improve the intelligence of your actions).

These two factors were found to be far more important than getting the organizational chart right or getting the motivational incentives right.

4) Only after this, do you worry about measurements and efficiencies
We need policemen to catch the criminals, but we do not want to live under a police-state, where everyone is assumed guilty until proven otherwise. Innovation measurement and efficiency tools are similar. Use them to catch the really bad behavior (innovation criminals, or really bad concepts), but don’t create a police-state.

SUMMARY
Great outcomes are more important than efficient processes. In fact, you can make a process so efficient that it chokes the outcomes. If you want great innovation, it is more important to have innovative thinkers and operational rebels with access and power than it is to have efficient measuring processes.

FINAL THOUGHTS
I am not advocating that it is okay to use ANY means to achieve your ends. Engaging in illegal/immoral/unethical behavior is not the right path to innovation. The banking industry came up with a lot of innovative financial tricks recently which helped bring down a global economy. Some feel that the means to that innovation fell into the illegal/immoral/unethical realm. Bad means will eventually come out and you will pay the price.

Strategic Planning Analogy #302: Strategy Paradox

THE STORY
Years ago, I was revising my resume. I showed a copy to an expert in resumes. This expert had two comments.

First, he complained that my resume was way too long. He wanted it to be only one page long. My draft was about 3 pages long.

Second, he complained that my resume was not fully describing all my abilities and accomplishments. He wanted me to add lots and lots of additional details about my background.

I was a bit perplexed by the advice, so I asked him, “How do I triple the detail while at the same time cut the size by two-thirds?”

He did not have any suggestions on how to accomplish this. All he said was, “Go back and re-write it so that it is shorter and has more content detail.”

After that, I no longer asked for his “expert” advice.

THE ANALOGY
Writing a business plan or strategy is a lot like writing a resume. There is this paradoxical problem of trying to pack in enough content to be effective (sell the person/idea) while at the same time keeping is short enough for small attention spans (not lose the audience).

On the one hand, you want to make sure that the plan includes enough detail so that everyone truly understands it and is motivated to support it. Simple platitudes like “We want to make a lot of money by selling desirable products at a profit” are worthless. Nobody will back you with millions of dollars and teams of employees based on such flimsy puffery. There needs to be substance, based on substantiated facts, concrete objectives, and sound strategic logic.

This is similar to resume advice, which tells people to fill the resume with documented “proof” that they are capable of delivering substantial and measurable benefits to their employer. Words in a resume like “at my last company, I improved sales by 37.4% and reduced returns by 50%, and I can do the same for your company” are powerful. They convert puffery into believability and desirability.

On the other hand, experts say that the average resume only gets a few seconds of attention. If you cannot grab the reader in the first few seconds, the resume gets tossed out. Long-winded discussions in a resume are “the kiss of death.”

The same is true for business plans and strategies. Big, fat planning books full of boring tables and numbers are the kiss of death. People will not take the time to figure it all out. The book will just be put on the shelf and quickly forgotten. Twitter has redefined “completeness” as 140 characters…far less than a page of words (and much shorter than this blog).

So the dilemma for planning is the same as for resumes: How do you pack in enough detail to be meaningful while being brief enough for the audience’s attention span?

THE PRINCIPLE
The principle here is that the only way to effectively overcome this paradox is to no longer think of a business plan or strategy as a single document or a one-time event/meeting. Think of it as a conversation—little bursts over a period of time.

Although a lot could be said about how to optimize this strategic conversation, we will briefly focus on just five points.

1) Credibility of the Communicator
Since the audience does not have the patience to fully evaluate every little detail of your plan, they look for short-cuts to get a level of comfort with what you are saying. One of those short-cuts has to do with the credibility of the strategy communicator. If the audience has developed a sense of trust over time in the credibility of the communicator, then they will transfer some of that trust over to what the communicator is saying.

In other words, not only are you selling a strategy, you are selling yourself. Everything you do every day helps to either build up or destroy your reputation as a strategist. The better your reputation, the easier it is gain the attention of your audience and to convince them in manageable sound bites that you have something worth listening to.

Why do you think companies pay so much money to all those big strategy consulting firms? A lot of it has to do with the trust in their reputation. Because of that trust, they feel they can overcome the paradox—get good substance without wasting a lot of their attention span pouring over unending boring details.

Learn from the consultants and build increasing credibility into your reputation on a daily basis through everyday interactions and conversations.

2) Consistency of the Context
Strategic plans tend to be presented within a strategic framework, or context. Michael Porter has provided strategic frameworks in the past (like the five forces). There are also newer frameworks, like the Blue Ocean approach. In the hands of a good strategist, almost any one of these frameworks will suffice.

The point here is to just pick one and stick with it. Your audience is not as enamored with all of the latest fads and fancies of the academic world of strategy. All they want is a successful plan. If you keep changing your strategic framework, then you are burdening your audience with having to learn all of the new jargon and all of the new charts and diagrams that go along with it.

It’s hard enough getting the time and understanding of your audience without complicating it with layers of new strategic gimmicks to also understand. Don’t keep changing the language. Stick with a process they have comfort in. Then they can focus their limited time on the essential details.

The other advantage is that you can use the comfortable framework in everyday conversation as a form of short-cut. For example, I have been using some version of my own 3P framework for about 20 years (Positioning, Pursuit, Productivity). Once the audience is comfortable with the substance behind these three P’s, I only have to bring up one of the words in daily conversation, and people immediately understand the strategic context of what I am trying to say…short and to the point.

3) Frequency of the Interaction
If planning is only a topic of conversation once or twice a year, it will never get integrated into the everyday activities of your business. It will just be like a book sitting on the shelf that nobody reads—irrelevant.

It’s hard to make a relationship work if you never talk or see each other. In the same way, strategy must be a continuing topic of conversation with frequent interaction. Get out of the Ivory Tower and mingle. If people will only give you a short burst of attention, then give them lots of little bursts. Build the strategic foundation one brick at a time. Build your reputation through many short conversations. Keep the framework in constant relevancy by constantly showing its relevance. Get on the agenda whenever there are decisions being made.

4) Compellingness of the Story
People love stories. They not only touch the mind, but they touch the heart and the soul. Stories are more memorable than tables of numbers. People will pass along a good story to others.

There is a reason why I start my blogs with stories—they are effective at getting points across. Don’t be afraid to use stories to overcome the paradox. When I was at Best Buy, we had a number of stories, like the Tornado Story and the Apollo 13 Story that could rally the troops and quickly remind people of what Best Buy was all about, since the lore behind the stories was commonly known within the organization.

5) Consideration of Opposing Points of View
Leaders don’t typically like having points of view shoved at them. Instead, they want to have a say in the conversation. Strategy is not a monologue, but a dialogue. A strategy is only as effective as its implementation, and so you have to get the implementers to buy-in to the strategy. You are more likely to get buy-in if the implementers feel like they had a part in the conversation.

By having a regular, ongoing dialog with the leaders, you can discover their various points of view in a non-threatening way. This gives you time to build an effective way of handling these points of view (either incorporating them into the strategy or finding effective means to disarm them) over time in future conversations.

As a result, when it comes time for formal strategic decision-making, a lot of the posturing has already taken place and been resolved, so the meeting time can be more effective.

SUMMARY
Effective planning processes are a lot like effective resumes. They find a way through the paradox of providing adequate substance while being brief enough to fit a short attention span. This is most effective when you think of the strategy as a conversation, rather than a book or a presentation or a meeting. These conversations are most effective when a) the communicator has credibility, b) the context is consistent, c) the interaction is frequent, d) the stories are compelling, and e) Opposing positions are dealt with.

FINAL THOUGHTS
I once worked at a company that hired a new CEO. I wanted to impress the CEO with my ability to help him, so I put my thoughts and recommendations together in a big fat four-inch binder (10cm). Without any conversation, I just sent it to the CEO. That was an utter failure. I will never do that again.