Strategic Planning Analogy #427: Reporting Documents Vs. Managing Documents

THE STORY
Back when I was in college, I was a DJ on the college radio station. Near the end of one year, there was a student who suddenly realized she was about to graduate without any marketable skills. She decided to put in some time on the radio station to get some free experience.

The only position she could get on short notice was to announce sports news. Unfortunately, she knew absolutely NOTHING about sports (her passion was classical music). Before going on the air, she would ask me questions, like which sport did a particular team play, or what was the name of a sports team in a particular city. She literally knew NOTHING about sports.

As a result, her sports reports were the worst I ever heard. All she would do is state the name of a city and its score. One after another after another after another after another, with no commentary, no insights, no additional statistics, no excitement. It was painful to listen to.

THE ANALOGY
Sports scores are important. They tell you who won and who lost. But that’s about it.

They really don’t give you a feel for how the game was played. You don’t know what happened to create the score. You don’t know how many near-scores were prevented by great defense. You have no idea what any of the players did. You don’t know the team strategy. If all you have are the scores, you are missing a lot. And as a result, that woman’s sport’s report was missing a lot—which made it a terrible report.

The same is true in the business world. There are financial metrics which can tell you the results of how well a company did, like Net Earnings or Earnings per Share (EPS). These types of metrics are like the final scores in a sporting event. They are important to know, but they really don’t tell you a lot.

For example, did EPS go up because earnings went up or because outstanding shares went down? Did earnings go up because of increased volume, decreased expenses, or a one-time accounting adjustment? Are the results repeatable, or based on unusual one-time circumstances? None of this can be discerned from just looking at earnings.

What if you had a sport team coach who never watched the game he was coaching and only looked at the score? He wouldn’t be able to coach well, because he would not have any knowledge of what was happening on the field of play. He wouldn’t know how well individual players were playing or how effective particular plays were.

Similarly, how can you expect business managers to execute well if all they do is look at final results? They have no idea of what’s happening out in the marketplace. They don’t know who is performing well. They don’t know which tactics are working. Worse yet, they may be satisfied with final results, not realizing that they were obtained illegally, unethically, or by means of tactics which will destroy long-term performance.

You wouldn’t expect a coach or a sports announcer to only look at final results. Yet, so often we tolerate this in the business world.

THE PRINCIPLE
The principle here is that, by definition, “results” are the result of something which occurred in advance. Results are merely outcomes produced by prior actions. Earnings don’t magically appear by themselves. They are the result of a lot of prior activities. Therefore, if you want to impact results, you have to manage those prior activities.

As we saw in a prior blog, if all a coach does is yell at his players to “Make a higher score,” he has not provided any insight into how to get a higher score. His yelling is fairly worthless. If you want better results (a higher score), you need to dig deeper into how the game is played.

Similarly, if all we tell an employee is to “Get higher sales,” we have not provided any helpful insights. If you want higher sales, you need to dig deeper into how sales are made.

Reporting Tools are Not the Best Management Tools
Part of the problem is that businesses often use the same metrics to manage reported results (outcomes) as they do to manage operations (inputs).

“Results Reports” are the scoreboards of business. They are typically income statements, balance sheets, cash flow statements, or some variation of these. They tell the external stakeholders how well you did. They let the shareholders, debt holders, and government agencies “know the score.”

These are great reports. However, their focus is primarily on the outcome, not what caused the outcome. They let you know the score, but not what created the score.

Sports scores may be great for telling the external world how the team did, but they are not the best tools for helping the team improve that performance. To do that, they look at different data, like who is making errors, how successful are particular plays being executed, are people playing with the proper form, do they know what to do, are they cooperating as a team, and so on. You won’t find those answers in the final score. That’s why sports teams use tools other than the scoreboard to improve results.

Similarly, the reported results in an income statement or balance sheet won’t give an adequate enough picture to know how to improve those results for a business. They tell you the “what” but don’t tell you the “why.”

Therefore, businesses should be more like sports—use one tool to report results and another report to manage the process to get those results.

Example
We can see this in the example of a retailer. One of the key results a retailer wants is sales. Yet, as we saw earlier, just wishing for sales or yelling at employees to get sales will not create sales. Sales are the result of prior activity.

What are the prior activities which create retail sales? The formula looks something like this:

SALES = (# of customers) X (# of trips to the store) X (# of items bought per trip) X (the average price per item purchased)

In other words, if you want to increase sales, you need to do a combination of the following:

a) Get more customers;
b) Get the customers to come more often;
c) Get the customers to buy more items; and
d) Get the customers to buy more expensive items.

You can measure these items by looking at:

a) Customer Counts
b) Customer Frequency (which is easier to measure now that customers have loyalty cards).
c) Size and Composition of the Average Transaction (in units and currency)

Then you can design tactics to improve these activities. And then you can measure your success with these types of metrics.

However, none of these metrics can be found on an income statement. The first line on the income statement is “sales.” The sales are already assumed to exist and are reported as a done deal. It gives the “sales” score, but no insight on how to improve it. The income statement is a miserable way to manage sales. Instead of using that results report mechanism, one needs a management report with these other measures.

How Did We Get Here?
Although it may now seem obvious that different tools are needed to manage a business than to report results, many businesses tend to use results documents for both. Budgets are usually based on result metrics. Bonuses are based on result metrics. Management meetings focus on result metrics. It’s as if everyone is yelling about the size of the sales without ever bringing up the measures which truly impact sales.

How did we get to this situation? I think a lot of it has to do with the tight connection between the accounting function and the strategic analysis function in many companies. They are often the same people or exist in the same department.

The accounting orientation has a predisposition towards result reporting (it is what they were trained to do). In addition, it is a lot easier to report everything if everything uses the same report. Therefore, there is a temptation to force all reporting into a result-oriented template.

Yet this is not the ideal format to understand what is happening in those activities which really create those results. It is not the right tool to manage what causes those results. A different monitoring system is needed…a strategic one.

SUMMARY
Although results reports, like income statements, are useful (particularly for external stakeholders), they are insufficient. If you truly want to manage the important internal activities which cause these results, you need a different tool. You need a tool which monitors how well people are performing on the key inputs to that performance. Otherwise, all you are doing is shouting the score without any clue as to how to improve the score.

FINAL THOUGHTS
Sports media like ESPN, Sports Illustrated, and EuroSport spend only a small percentage of their time reporting scores. Instead, they focus their time on trying to understand the performance behind the scores. Is your reporting approach more like these companies, or more like the woman I knew back at the college radio station (who didn’t have a clue as to what was behind those scores)?

Analogy #188: Advice on Advice

THE STORY
Once there was a king who gathered his close advisors around his round table. He asked them this question: Do you think I should invade the neighboring kingdom?

The first advisor was head of the military. He thought to himself that his fighting men hadn’t been in battle for awhile, and he had an updated version of bows and arrows he wanted to try in real battle. Therefore, he answered “Yes.”

The next advisor was in charge of the King’s money. He knew such a battle would be expensive and use up much of the reserves. Later, if the King asks for spending money, he knew that he might get his head chopped off if he had to tell the King he was out of money. Therefore, he advised “No.”

The next advisor knew that if the king won the battle, there would be opportunities for promotion within the larger kingdom. Thinking he would benefit the most from this opportunity, he said “Yes, let’s invade our neighbor.”

The next advisor thought to himself that if the king wins the invasion, he will take all the credit. However, if the king loses the battle, he will blame the advisors. Therefore, seeing no personal upside to the invasion, but seeing plenty of downside, he advised, “No.”

As they continued this around the table, there were about as many people advising “yes” as advising “no.” The king was unsure of what to do. Therefore, he told his advisors “Give me your answer once again, but this time explain why your prior answer is in the best interests of the kingdom.”

The group of advisors started to panic, because none of them had answered based on what they thought was best for the kingdom.

THE ANALOGY
At some point, all leaders need to seek out advice. In the story, the king wanted advice on an invasion. Similar situations can occur in business, such as whether to invade a new sales territory, attack a particular competitor, introduce a new product, etc.

All of the king’s advisors give the king advice. Unfortunately, each advisor gave their advice based solely on what was best for their own personally-biased interests. None of them had considered the bigger picture.

When asking for strategic advice, it is important to frame the question in a manner which forces the advisor to look at the bigger picture. Otherwise, the advice is as worthless as what was given to the king.

THE PRINCIPLE
The principle here is about understanding the difference between strategic advice and implementation advice. If one is not careful, one may think they are asking for strategic advice, but get implementation advice instead. This confusion can prove to be disastrous.

Strategic advice is needed to determine what the optimal strategy should be. This is big-picture thinking. Implementation advice is used to determine the best way to achieve the already agreed upon strategy. This is more about tactical expertise. Both are important, but they require a different thinking process.

Although your advisors are probably not as selfish as the one’s in the story, they probably do have personal biases based on their area of expertise. These specialized areas of expertise are very useful at the implementation stage, but can get in the way if too narrowly applied at the strategic advice stage.

Let’s illustrate this with four types of expertise: legal, financial, marketing and operations.

Legal
Lawyers are trained in finding ways to reduce liability risks. This is an important area of knowledge, but if applied too narrowly at the strategic level, it can create bad advice. I once was working with a private school that took over a new school building. The question came up about what to do about a playground area. The legal and insurance advisors advised them to not have any playground at the school, so the school did not have one.

The legal and insurance advice was based on doing what produced the least liability. It was not based on what would produce the best school. The overall strategy—to run a great private school—was not factored into the advice. I’m sure that if you had asked these same advisors, they would have recommended that all the children stay home and never visit the school, since having children in the school would increase the liability risk significantly.

A wise person once told me that the role of a lawyer is not to tell you what to do, but rather to listen to you tell him or her what strategically correct thing you are doing and then have the lawyer advise on how to do that with the least legal liability. In other words, the specialized legal expertise is applied at the implementation level instead of the strategic level.

Financial
Pure financial discipline tends to look for ways to conserve cash and avoid risky investments. The best way to do that is to stop reinvesting in the old business and not venture into new areas. Over time, this will tend to choke off the future growth of the company. The company will starve to death because the money is horded, rather than fed to the business through investment.

As we saw in the story, the man in charge of the king’s money was reluctant to invade because that did not conserve cash, and it was risky. The financial bias always leans towards “no” when it comes to spending.

All profit streams, if not reinvested in, eventually dry up. If you take no financial risks, you will achieve no long-term financial rewards. You must continue to take risks and feed the business. Again, pure financial advice is great for finding the most prudent financial way to implement a strategy, but it may be poor approach towards finding that strategy. We talked about this in greater detail in a prior blog (see “Oh, my!”)

Marketers
Marketers are biased towards communication and selling. As much as pure financial biases tend to starve a business to death, pure marketing biases tend to spend a business into bankruptcy. Focusing only on the top line (sales) and forgetting the rest of the income statement and balance sheet can create a “growth at all costs” mentality. Rarely can you afford “all costs.” The marketing bias for “Yes” can be as deadly as the financial bias to “No.”

The dotcom bubble should have taught us that a single-minded quest only for market share can lead to poor long-term strategy. Marketing concerns need to be balanced with other priorities. Once again, a pure marketing expert can advise on the best way to market an already chosen strategy, but may give bad advice when choosing which strategy to market.

Operations
Most of the great operations people I have met are like great soldiers. If you tell them to “take that hill,” by golly they will find a way to accomplish that mission. Unfortunately, they are not always the best at deciding which hill to take.

Operations experts often have a bias towards cutting costs, since that is something they feel some control over, and something for which they have been rewarded in the past. However, if you don’t know what is the best strategy, then it is hard to know which costs are least critical to the strategy, and therefore the best things to cut.

A pure operations mindset tends to react with a bias to action—just do more of what we’ve done before, but do it a little more efficiently. However, sometimes the best strategy is to stop and do something differently.

As mentioned earlier, let these experts advise on how to take the hill (the tactics), but not necessarily listen to their advice on which hill to take.

This is not to say that people in these fields are incapable of strategic decision making. Many of them are actually very good at it. But this is only possible when they consciously take off the bias of their “departmental expertise” hat and put on their broad- thinking “corporate” hat. And this becomes easier to do if the leader makes it clear which times they are looking for the corporate hat strategic advice and which times they want the tactical expertise hat.

SUMMARY
The process of finding the best strategy requires a different type of thinking from the process of finding the best tactics. Strategy thinking requires a broad-based multi-disciplined approach. Tactical thinking requires more specific discipline expertise. Be clear about which type of advice you are looking for, or you may not get the advice you need.

FINAL THOUGHTS
Back in 2000, there was a move called Thirteen Days, which looked at the decision making that took place at the White House during the Cuban Missile Crisis of 1962. In the movie, President Kennedy kept asking all his advisors about what he should do. The military advisors were portrayed as being in a rut. Their advice on every question was to kill someone or blow up something.

President Kennedy kept telling them that his primary strategy was not the use of the military for killing or destruction. Yet, in spite of this, the military kept giving the answer formed by their military expertise bias. They were incapable of making the leap to broader strategic thinking. Make sure you surround yourself with people who can make that leap. (For more on this inability to leap outside one’s expertise, see “Henry the Hammer.”)

Henry the Hammer

THE STORY
Once there was a hammer named Henry. Henry the Hammer loved to fix things around the house. There was nothing he didn’t feel capable of fixing.

Today, Henry the Hammer was looking around the house for something to fix when he heard a squeek. “Aha,” said Henry. “One of the floorboards is loose. I can fix that.” So Henry took a nail to the floorboard and BAM! BAM! BAM! He nailed the floorboard back down so it would not squeek.

Then Henry the Hammer saw a picture which needed to be hung. Resourceful Henry found a stud in the wall, took a nail, and BAM! BAM! BAM! He made a hook out of the nail so that the picture could be hung.

Then Henry noticed that the television set was not working. Henry examined the situation and said, “I can fix that.” So BAM! BAM! BAM! CRASH! After examining the debris from hammering the TV, Henry said, “Hmmm…it’s still not working. It looks like this problem is going to need additional hammering.” But before he could get to it, he noticed that all of the windows were dirty.

“I’d better get to those windows right away,” thought Henry. “The TV can wait.” As a result, Henry went to all of the windows around the house with a BAM! BAM! CRASH! BAM! BAM! CRASH! BAM! BAM! CRASH!

Moral of the Story: To a Hammer, every problem looks like a nail.

THE ANALOGY
Strategy is about solving problems. Great strategy is about getting in front of a situation and making it better before the problem has a chance to get too large.

Just like strategists, Henry the Hammer liked to solve problems, too. Unfortunately, Henry—being a hammer—knew of only one way to solve problems: He would hammer them like a nail. BAM! BAM! BAM! Sometimes that was a very appropriate action, as in the case of the floorboard and the picture. Sometimes, it was a very inappropriate action, as in the case of the television and the windows.

But since Henry knew only one way to solve problems, he used that method to try to solve every problem. Even when it didn’t work, as in the case of the Television, he did not blame his methods. Instead, he felt that maybe he just didn’t hammer enough.

We can sometimes be like Henry the Hammer. We know a way to fix some problems, so we think this method is appropriate to fix every problem. And it may work often enough to make us believe that when it doesn’t work, the problem lies somewhere else. Unfortunately, along the way we break a lot of windows, causing more harm than good.

THE PRINCIPLE
The principle here is to embrace diversity. It is general human nature to want to surround ourselves with people who are similar to us. However, to quote former US Secretary of State Colin Powell, “If you surround yourself with people who think like you, then some of you are redundant.” We need to surround ourselves with people of different backgrounds and perspectives, so that we have more options on how to solve a problem. Having diversity is like having an entire toolkit rather than just a hammer. With an entire toolkit, you can find the right tool for each problem.

For example, people with a financial background tend to see problems from a financial perspective and, if working alone, will try to find a financial solution. Marketers tend to see problems from a marketing perspective and, if unchecked, will tend to look for a marketing solution. People from an operations perspective look for a solution via changing the operations. And so on…

Sometimes the problem actually is a financial one best served with a financial solution. Sometimes the problem really is about marketing. However, never are all problems just financial or all just marketing or all just operations. One approach cannot effectively solve every problem. In fact, quite often the problems are larger and more complex than any one discipline and require a multi-discipline solution. This requires getting people of diverse backgrounds working together.

From my experience, if you always take the same narrow focus to all problems, the result is like breaking windows. Even good individual solutions, if narrowly repeated too often in the same direction, can have unintended negative consequences from the cumulative impact. For example, one-dimensional financial approaches tend to avoid risk, hoard cash, minimize reinvestment and over the long haul can starve a company to death. One-dimensional marketing approaches try to buy their way out of a problem—which may be the right approach sometimes—but if done all the time tends to overspend a company to death.

One dimensional operational approaches look at trying to find a better way to do what works today. Eventually, however what works today may not work tomorrow, so the operators eventually end up working at trying to make an obsolete approach more efficient, causing death through becoming irrelevant. One dimensional technology approaches place the company in a perpetual cycle of waiting too long for something that costs too much and is too cumbersome, while someone else more nimble gets to the future sooner.

A glass of water is refreshing. A tsunami of water is destructive. Too much of one thing—although good in small doses—can destroy a company. Multiple approaches can help keep a better balance.

Even though we are smart and successful, we all have blind spots. The very disciplines that have helped us become successful cause those blind spots. Left to ourselves, those blind spots can start taking us down some of these paths of death before we realize what is going on.

Effective strategies are built upon a broad analysis of the situation. A broad analysis requires looking at the problem through different lenses—the lens of finance, the lens of the consumer, the lens of production, the lens of suppliers, the lens of human capacity, the international lens, the regulatory lens, and so on. Some people have better eyes to see through some of these lenses than others. Get the best eyes on your team.

Solving the mess in front of you is important. But wouldn’t it be better to get out in front of a situation and prepare a path to avoid future problems? Or even better, instead of getting bogged down in problem avoidance, work on how to take your company to the next great business opportunity before others get there? Then, instead of always trying to get out of a mess, you are moving towards greater success. This is where strategy is most effective, and diversity is important here as well.

When seeking the best future, one not only needs functional diversity, but also perspective diversity. Strategist Gary Hamel referred to this as “listening to new voices.” You need people on your team who are more in tune with leading edge thinking. These people tend to be younger, and also tend not to always look or act the part of a corporate executive. They may make you a bit uncomfortable, but they have a perspective you may need to hear.

Don’t surround yourself with just hammers. Get a whole toolkit.

SUMMARY
Past successes can give a false sense of security. It can get us to believe that because we have had he right answers in the past, we will always have the right answers in the future. Unfortunately, not all problems are the same. Different problems may require different answers. To ensure that we make the right decisions, it is a good idea to get multiple perspectives on the problem from a diverse group of individuals. If one is looking towards finding future strategies, it is often even more critical to bring into the discussion a diversity of new voices that may be more in tune with the leading edge.

Otherwise, you may end up like Henry the Hammer, whose intentions are good and who has a good solution for some problems, but can cause a mess if left alone to do what he is comfortable doing. Remember, not all problems are a nail, even if they sometimes look like it to a hammer.

FINAL THOUGHTS
Even the idea of embracing diversity, if taken to an extreme, can cause problems. It can lead to endless discussions which go nowhere, because the diverse group cannot reach a consensus. Just because you bring in a diversity of ideas, does not mean that the diverse group has to make the decision. At the end of the day, a leader needs to lead by making a timely decision.