Strategic Planning Analogy #507: Hammers Are Lousy As Saws

THE STORY

Joe the carpenter wanted to be as efficient as possible, so he decided to only carry around only one tool—a hammer.

Joe had three tasks that day: hammer some nails, screw some screws and cut some boards. Joe decided to do all three tasks with his hammer. Hammering the nails went quite well with the use of the hammer.

Getting the screws into the wood with the hammer, however, was far more difficult. By the time Joe could bang the screw into the wood with the hammer, the screw was all bent, the wood was a bit shattered, and the screw was doing a lousy job of holding the wood together.

Finally, Joe discovered that if you whack at a board long enough with a hammer, you can break it into two pieces. But when compared to cutting a board with a saw, whacking it with a hammer was less accurate in getting the cut in the right place, and the edges where it was “cut” with the hammer were all distorted and ragged. This made the board less useful than if a saw had been used.

But in spite of all the problems with the results, Joe the carpenter was still proud of his work. After all, as Joe put it, “I simplified my work by having to carry only one tool.”

THE ANALOGY

Joe’s approach to his work was rather misguided. What good does it do to simplify the number of tools you carry if the end results are awful? Replacing the screwdriver and saw with a hammer lead to a rather useless outcome. Not only would the results have been better if Joe had used a different tool for each task, it would have taken less time and been easier.

Business leaders wouldn’t be as misguided at Joe, would they? In one way, I think many are. There is this tool that businesses use, called a “budget.” The budget is a good business tool, just as a hammer is a good carpentry tool. But just as a hammer cannot effectively do all the work of carpentry, a budget cannot effectively do all the work of business.

Three of the key tasks of business management are to:

1. Effectively manage the treasury function;
2. Make sure the business operating divisions are doing the right things; and
3. Provide incentives for employees to act in the best interests of the company.

Many companies rely primarily on the budget process to do all three tasks. But as we will see in this blog, that is like using a hammer to tighten screws and cut boards. The budget is an effective tool to help the treasury function, just as the hammer is effective in hammering nails. But for the other two tasks, there are better tools than budgets. By trying to use a single budgeting process to do all three, one ends up with a mess. There are better tools for monitoring the operating functions and providing employee incentives, and they should be used instead of the “hammer” of budgets.

THE PRINCIPLE

The principle here is that companies are not doing themselves any favors by using budgets as a tool where it doesn’t belong. It is great for the treasury function, but inappropriate for many of the additional places where it is used.

1. The Budget “Hammer” Works Well on the Treasury “Nail”

The key function of treasury is to ensure that the cash of the business is properly managed. It looks for efficient (and cost effective) sources of cash when internal cash flows fall short of need and looks for efficient uses of excess cash produced internally. Timing of these actions is very important, so that the proper level of funding is available to match the fluctuating cash flow needs.

The budgeting process is a rather good tool to help in this treasury function. It provides a broad overview of cash flows over time. This helps the treasury function plan in advance so that the right amount of money is in the right place at the right time at the best price. The budget is also a good tool to share with the debt and equity community, so that they will cooperate more favorably with your cash needs. It helps build trust, so that they will provide cash at a favorable rate. Treasury should be the primary goal of the budget.

2. The Budget “Hammer” is a Poor Choice for the Employee Incentive “Screw”

However, when budgets are also used as the primary tool to incentivize employees, it destroys the integrity of the budget. Employees will try to “game the budget system” in order to insure easier and higher bonuses. This creates a budget which no longer reflects best estimate of cash flows, because the numbers are padded to improve the likelihood of a bonus. As a result, it damages not only the ability of the budget to get employees to work harder but it damages the ability of the budget to accurately help the treasury plan accurate cash flow estimates.

In addition, employees understand that there is usually more than one way to hit a budget number—and not all of these ways are equally good for the long term health of the business. For example, this quarter’s budgeted profit number can be hit by doing lots of actions harmful to long term prosperity, like improperly cutting investment in the future, cutting research, cutting maintenance, cutting quality, cutting service, overcharging customers, and so on. Since both good and bad behaviors can be used to hit a budget number, the budget is not very effective as an incentive for ensuring right behavior. It is like trying to secure a screw by banging at it with a hammer.

3. The Budget “Hammer” is a Poor Choice for the Operational “Board”

Similarly, the budget is a poor choice as the primary means of determining the specific actions of the operating divisions. The main problem is that budgets are frozen well in advance, before the year begins. As we all know, the marketplace is a dynamic, rapidly changing environment. It is impossible to fully anticipate all of these potential changes. It makes no sense to tie up your operations into budgeting straightjackets, unable to adjust to the changing business environment just because the best guess estimate put into the budget nearly a year earlier has proven to be off.

Does it make sense to not exploit a great opportunity merely because that opportunity was not in the budget? That would be like a miner refusing to take advantage of a huge find of gold in the mountain because they only budgeted to take a meager amount of silver out of the mountain. And the opposite is also true…why continue a particular action merely because it is in the budget if the changing situation makes that action no longer viable?

Budgets are typically broad-based numeric documents. They are not good at understanding strategic nuances, competitive dynamics or the actions behind the numbers.  To expect that out of budgets is like expecting a hammer to effectively cut a board.

Recommendations

To get around these problems, I suggest the following:

a) Get A Screwdriver. Get a tool specifically designed for incenting employees. To insure people are incented to do the right things, specifically outline what right things those are and reward achieving behaviors instead of numbers. For example, if you want an employee to master a skill, make skill mastery the criterion for bonus. Or if you want an employee to successfully roll out a new product or enter the Brazilian market or reduce the time to convert a plant to a new production run, then spell it out IN WORDS (specific enough to be difficult to game).  In the old days, we called that Management by Objectives which then morphed into Balanced Scorecards and now Key Performance Indicators (KPI). I think the migration may be going in the wrong direction towards fewer behavior-based words and more game-able numbers, but at least it is better than bonuses based almost exclusively on budgets. In fact, I might suggest doing the “screwdriver” in the spring and the “hammer” in the fall in order to keep budgets from creeping too deeply into the incentive process.

b) Get A Saw. Get a tool specifically designed for directing operations on what is an acceptable approach to their sphere of influence. This tool would tend to set up measures using a more strategic language. It would explain the strategic role that operational unit has within the organization. It would explain what “winning” would look like for that group. It would explain what the proper trade-offs are on attributes and outcomes. It would point the direction in which the operations are to migrate to in order to reach future strategic goals. Then the company delegates the specifics, to free up the operating unit to bob and weave with the changing environment in order to exploit the moment, provided the actions remain within the strategic boundaries.

c) Improve the Hammer. Budgets can be more dynamic. Draw up some contingency budgets in advance (based on different scenarios) so that you are ready if situations drastically change. Consider rolling budgets that adjust quarterly or semi-annually (depending on your business). Note: this becomes easier to do when the budget is freed by no longer having to also work as a screwdriver and saw. Also, consider doing the screwdriver and saw work PRIOR to finalizing the budget. That way, the budget more accurately reflects what will actually be done, instead of being just a wish list. Remember, the budget shows financial outcomes which are determined by action inputs. So get the inputs figured out before declaring the outcomes.

This is not to say that budgets are totally ignored outside of treasury. The budget provides discipline for the more routine aspects of business. The budget can help to determine if the desired strategy is achievable under current cash constraints. And if the budget has no connection to actions, it ceases to accurately reflect what the future cash situation will really be. So a little bit of the strategy needs to permeate the other areas. But it shouldn’t be the primary driver.

SUMMARY

Budgets are very useful, but they should not be the master tool to drive all of your management concerns. Budgets are most effective when centered primarily on the needs of the treasury function. A second, more action-related tool would be used to incent employees and a third, more strategic tool would be used to manage operational units.

FINAL THOUGHTS

Efficiency is not the same as effectiveness. Having a single tool may appear efficient, but it may be so ineffective that it destroys your ability to properly run your business.

Strategic Planning Analogy #499: Planning by Intimidation

THE STORY

Back during the middle of the 20^th Century, Yugoslavia appeared to be a relatively stable country.  With the exception of the time around World War II, the borders of the country remained relatively constant from about 1918 until around 1990.

Internal strife during most of this time seemed relatively minor to the outside world. In fact, the country seemed so stable that in 1984 the Winter Olympics were held in Sarajevo, Yugoslavia.

Yet it was not many years after the Olympics were held that the nation began to fall apart. Violent warfare and ethnic pride during the 1990s eventually dissolved Yugoslavia into seven separate countries: Croatia, Macedonia, Montenegro, Serbia, Slovenia, Kosovo, and Bosnia & Herzegovina.

So much for what seemed like stability in Yugoslavia. Instead, it became a bloody war zone until the dissolution was complete.

As it turns out, that appearance of stability and unity in Yugoslavia was not a natural condition. It only existed because the people felt forced to get along. First, the nation had been run for generations by a series of strong totalitarian regimes. These leaders used their power to create fear of rebellion or disunity. Whenever small uprisings occurred, these leaders quickly used their power to brutally squash the rebellion (and put fear into anyone considering future rebellion). The strongest of these leaders was Josip Tito, who ran the country with an iron fist from 1963 to 1980.

Second, there was a feeling that if Yugoslavia became too unstable, the Soviet Union would step in to restore stability. And the type of actions anticipated by the USSR to create stability were feared to be even worse than the totalitarianism of their own rulers, like Tito.

Therefore, the people of Yugoslavia held their internal disputes in check, fearing that any attempt to show their true ethnic pride would just make matters worse. It wasn’t that they liked each other during the 20^th century—they just felt forced into an undesired tolerance.

After Tito died in 1980 and the Soviet Union dissolved in 1991, the forced pressure to co-exist began to fade away. Without this strong outside pressure to conform, the ethnic pride and hatred of the people was allowed to come to the surface. This lead to the bloody battles of the 1990s. The end result was separation into new nations defined by the more natural ethnic boundaries.

THE ANALOGY

The story of Yugoslavia shows that just because there is an appearance of unity and stability, that does not mean that unity and stability lie in hearts of the people. All that hatred and ethnic pride was still there under the surface.  The only reason it didn’t erupt until the 1990s was because powerful forces had kept it from erupting. The moment those forces disappeared, so did the superficial unity.

This is an important lesson for those in charge of enacting strategy. There are two ways to get employees to comply with a strategy.  The first is to take a Yugoslavian approach. In other words, you use intimidation, power and fear to force people to comply, whether they want to or not. The second approach is to change the hearts of the people so that they voluntarily want to comply. As we will see in this blog, the Yugoslavian approach is usually the less desirable option.

THE PRINCIPLE

The principle here is that coerced actions are never as effective as actions driven from the heart. Just as a mercenary soldier never fights as hard as a soldier who believes in the cause, an employee complying due to fear is never as productive as one who believes in the cause. As a result, the Yugoslavian approach to strategy implementation tends to be rather unproductive.

High productivity is a result of getting relatively large output from relatively low input. The Yugoslavian approach tends to lose on both fronts; it requires higher input for lower output.

1. The Cost of Gaining Compliance Through Intimidation

In totalitarian dictatorships like Yugoslavia and North Korea, a great deal of time, effort and money has to go into building the force of intimidation.  Large armies and police forces are needed. Spy networks are needed. So much effort has to go into the mechanisms of fear that little is left for growing the economy and benefiting the people.

A similar situation exists in business. The intimidation approach to strategy is very costly.  You have to build a huge infrastructure to manage every little detail to make sure the work gets done. Nothing can be left to chance. Every decision has to come from the top and be constantly monitored for compliance. Systems of punishment are needed when people deviate from plan. It becomes like the top-down communist economies. Everything is planned from the top, yet the people starve from shortages.  It doesn’t work well.

Instead of spending time on the large, critical issues for success, management gets bogged down into the minute details. Nothing can be delegated, because the people cannot be trusted to voluntarily comply.  So much time is wasted monitoring incremental changes in performance that little time is left for discovering the large innovative transformations needed to stay relevant in a changing marketplace. You end up perfecting the obsolete.

2. The Lowered Response Due to Intimidation

There was an old saying by the people in the old communist countries: “You pretend to pay us and we pretend to work.” The idea was that the local currencies were worthless, so the people did not work hard to earn it.

That’s what happens when people are compelled to comply with something they do not believe in their heart. Sure, they will stay the course so as not to be punished. But they will not work hard at it. They will not go the extra mile. Instead, you will get the bare minimum effort. And that is no way to win the battle in the marketplace.

When people believe deeply in the strategy, the effort level skyrockets. You don’t have to force people to do well—they WANT to do well. They will work longer and harder for a cause they believe in. And best of all, they will volunteer innovative ways to get things done—far better than that which is dreamed up in the ivory towers at headquarters.

I worked with a company that went through a transition from having employees who deeply believed in the strategy to one where they felt compelled to do that which they did not believe. The employees started going home earlier and worked less while in the office. Productivity dropped dramatically.

3. The Inevitable Breakdown

As we saw in the case of Yugoslavia, eventually the pressure to hold down rebellion becomes too great and the instant there is weakness at the top, the rebellion will occur. The nation of Yugoslavia was quickly destroyed at a very high human cost. 

The same thing can happen in business. As soon as there is a slip in the oppressive power and control, rebellion will occur and everything can become lost very quickly.

A lot of strategic initiates look great at first, when top management is watching it closely. However, if compliance is only by intimidation, those results will quickly go away once top management’s attention moves on to something else. It won’t be sustainable.

4. The Better Approach

Rather than rely on intimidation, a better approach is to get people to want to naturally comply with the strategy. This is easier to administer, creates greater output, and gains from the insights and innovation of the entire organization.

How do you do this? First, have a compelling strategy which makes sense and leads to victory. Don’t expect employees to buy into hollow platitudes. They know a lie or deception or hollow wish when they hear it. Instead, create a position and plan that really can win in the marketplace…something worth believing in.

Second, relate the company goals to individual goals. Show how the path for the company to win will also be beneficial to the individuals who make it happen. Create a win-win scenario where compliance is the best path for everyone. Share the wealth.

Third, don’t micromanage. Allow people to internalize the strategy and make it their own. Then they will come up with creative ways to move the mission forward which far exceed what would come out of micromanaging.

Finally, don’t choke on excessive monitoring of minutia. KPIs (key performance indicators, or whatever 3 letter acronym you use for measurement metrics) are an important part of a strategic process. But that doesn’t mean that ever more KPIs are better. At some point, you can have so many KPIs that you choke on the specifics and lose sight of the big picture.

This is especially true in a Yugoslavian environment. There can be so much fear and intimidation put behind hitting the numbers, that people will do anything to hit the numbers. Unfortunately, numbers can be achieved by both doing the right behaviors and the wrong behaviors. Often times it is easier to hit the numbers with wrong behaviors that are contrary to the plan. So the intimidating process encourages wrong behaviors.

It reminds me of an old process used at a company which prided itself on innovation. To measure innovation, they used the KPI of “% of sales from products introduced in the last five years.” The pressure was so great to hit this number, that managers started achieving it by discontinuing perfectly good older products from the mix. This got them the desired number, but it hurt sales and did not promote innovation.

Spend less time ruthlessly enforcing KPIs which can be hit via bad behavior and more time encouraging people to do what’s right because they believe good will come from doing what’s right.

SUMMARY

Intimidation and fear may create strategy compliance for a short time, but eventually rebellion will occur. And even during the period of coerced compliance, performance is sub-optimal because it typically requires extra management effort and achieves only bare minimum performance. To get optimal productivity, it is better to convince people believe in the strategy in their heart. Then they will work harder with less supervision and add ideas of their own to make it even better.

FINAL THOUGHTS

Next time someone tries the fear and intimidation approach to strategy, remember the fate of Yugoslavia.

Strategic Planning Analogy #412: It’s Rational To Me

THE STORY
There’s an old story about a champion swimmer who lost one of his little pinky fingers in an accident. After the accident, the swimmer said that he was unable to swim anymore and refused to get back into the water.

His fans thought he was acting crazy. Okay, maybe his swimming might be a tiny bit slower without that finger. But to claim that he couldn’t swim any more at all? This didn’t make any sense to them.

Finally, one of the fans asked the swimmer why he couldn’t swim any more. The swimmer responded, “I use my pinky finger to get the pool water out of my ear after I swim. Without the pinky finger, I can’t get the water out, so I can’t swim anymore.”

THE ANALOGY
To an outsider, a lot of actions look irrational. The fans in the story thought that the swimmer was acting irrational. They didn’t understand how losing a finger prevented the act of swimming.

The problem was that the fans didn’t see the big picture. They were only looking at what happens in the pool. In the pool, the finger loss was not such a big deal.

The swimmer, however, saw the bigger picture. He knew that after he was out of the pool, that finger was essential to maintaining ear health. Without that finger, his ear would get infected and he would not be able to swim in the future.

So, even though the fans thought his refusal to swim was irrational (because they only looked in the pool), the swimmer felt he was being very rational, because he saw the larger implications.

It seems that a similar problem frequently occurs in business. Executives are constantly making decisions. Many times outsiders will look at these decisions and question the rationality of the decision. They will think the executive was crazy or misguided.

Literature in recent years has referred to this supposed irrationality as “decision bias.” The argument for decision bias goes something like this:

1) The decision maker has biases;
2) The biases in the mind of the decision maker triumph over logic;
3) Therefore, the decision maker makes an illogical decision.

However, I’m not so sure this is always the case. Executives don’t make it to the top because of a propensity for illogic. I think there is often something else going on. The ones claiming this so-called illogic are like the swimmer fans. Their view of the decision is too narrow (just looking in the pool). The executive may be looking at a larger scope (outside the pool) and see a reason why his decision is very logical (at least from their larger perspective). So before making a quick judgment about someone’s rationality (or supposed lack thereof), try to understand the perspective of the one making the decision.

THE PRINCIPLE
The principle here is that if you want someone to make the right strategic decision, then you have frame the decision within the context of the framework used by the decision maker. In other words, don’t blame bad decisions on irrational biases. Blame bad decisions on having created a system where the decision maker’s logic is contrary to the success of the strategy.

This is an important distinction. For if you believe the problem lies with illogical beings, you will try to fix the problem by trying to change the way people think. However, if you believe that the person is very rational, but has been put into a system where his/her personal logic is contrary to business goals, then you will try to change the system.

The Pool Example
Think of the business executives as being like that swimmer and the business environment as being like that swimming pool. As an investor in that business, you focus on what is happening in that pool and how well the swimmer is performing in that pool. You don’t care about what happens outside the pool.

The swimmer (the executive), however, has a life outside the work environment (the stuff outside the pool). In the story, this caused him/her to stop swimming.

The investor thinks this is illogical, since they see nothing in the pool to cause concerns. The investor sees the solution as trying to change the way the swimmer thinks about swimming (try to replace the so-called swimming illogic with logic). Since all the investor looks at is the pool, they try to find the solution within the pool (the way the person performs relative to the business). For example, they might focus on telling the swimmer that, logically, the hand stroke in the water still works with a missing finger (and to think otherwise is crazy).

However, had the investor assumed that the swimmer had a logical reason for his/her actions, the investor would have looked outside the pool at the swimmer’s concern for getting water out of the ear. They would have then come up with a replacement for the pinky to get the water out of the ear. With such a replacement, the swimmer would gladly get back into the pool and do what the investor wants. In other words, the best way to fix what was happening in the pool was to take care of a systemic issue outside of the pool. No amount of lecturing on the best way to swim would have fixed that issue.

The Real Example
I was reminded of this concept in a recent article from September 2011 in the McKinsey Quarterly. The article was entitled “A Bias Against Investment?”. The article was based on a recent survey of executives. According to the survey, executives claimed that their companies were not investing enough in their businesses. And the folks at McKinsey felt that underinvesting at this time was illogical.

McKinsey blamed the illogic on “well-known biases.” As “proof” of these biases, they pointed to some hypothetical questions in the survey. One hypothetical scenario was about a doing a deal with the potential of a small loss or huge reward. Many of the executives refused to do the deal. McKinsey claimed that this was mathematically illogical, in what they referred to as the “loss aversion bias”. McKinsey thought this illogical bias was even more tragic when applied to smaller investments (which were also looked at in the survey and had similar results). To quote the article, “Even if it made sense to be so loss averse for larger deals, it still wouldn’t make sense to be as averse to loss for smaller ones.”

But I think there may be a lot more going on here. There may be some sense here after all. I think those executives may be very logical. They are just using logic from outside the pool. These executives are not only worried about the health of the business, but the health of their career (like the swimmer who cared about the health of his ear).

The executive may have logical reasons to believe that being seen as responsible for losses, even small ones, could put their career at serious risk. They may get fired, not get a bonus, or never see a promotion because of that loss. However, if the upside occurs, the amount of the profits on a small deal may not be large enough to cause any personal benefits to the executive. They were already expected to do well, so doing well does not trigger extra bonuses or promotions.

Given that logic, the executive doesn’t just see what’s in the “pool”—big profit gains versus the risk of a small loss. Instead they see it as gaining nothing personally versus potentially losing their job. No wonder executives have a tendency to be averse to these types of options. From outside the pool, rejection of the deal looks very logical.

The Implications
Depending on which of us is correct (me or McKinsey) there is a major difference as to how to solve the problem. McKinsey’s approach would lead to the conclusion that companies should focus on getting people to change the way they think—to root out those nasty biases—or at least downplay them during decision making.

My approach would be to understand what is happening outside the decision at hand (outside the pool) which is causing a logical person to “rightly” (for them) make the “wrong” choice for the business (inside the pool). Once that is determined, then change the system so that the two are compatible. For example, in the scenario above, the company may need to change compensation and rewards/punishment policies which cause people to act contrary to what is in the best interests of the company. The companies need to get personal risks to be consistent with business risks.

Although luck may be a contributing factor, I believe most people make it to the top of a business because they logically made the right choices regarding what it takes to get to (and stay at) the top. The real problem is that the logical choice for getting to or staying at the top is not always consistent with the most logical choice for the business. If you want to fix some of the bad decisions, look at how to get the logic behind personal and business decisions to be more similar.

SUMMARY
Don’t automatically assume that bad decisions are caused by illogical executives. Instead, start by assuming that the executive is being perfectly logical from their perspective. Then try to figure out why the current system is causing personal logic to be out of sync with business logic and fix the system. Otherwise, your “logical” strategy may not get implemented, because it conflicts with the personal logic of the people implementing it.

FINAL THOUGHTS
A personal benefit from looking for a solution by changing the system is that it keeps you from having to go to senior executives and tell them to their face that they are illogical.

Strategic Planning Analogy #379: Strategy Leash

THE STORY
Young dogs seem to think that everything outdoors is an exciting invitation for investigation. Every object, every smell, and every other animal seem to call out to their wilder nature. The young pups want to run and see it all, smell it all, chew it all or leave their mark on it. This makes taking a young, untrained dog on a walk quite a challenge.

My daughter has a young, relatively untrained dog named Stella. Stella is large enough and strong enough to make holding her back a challenge and a half. Whenever I take Stella for a walk, I am constantly fighting her urges to leave the path. She always seems to dragging me with her leash over towards something to put in her mouth—be it a paper food wrapper she finds on the ground, or an old mitten, or an abandoned toy.

Other times Stella struggles against her leash to get across the street to sniff another dog locked up in its backyard. Of course this gets the other dog all worked up and barking as well. And if Stella sees a squirrel, all bets are off. She will practically drag me down the sidewalk to get to that squirrel.

My action with the leash is not just to pull her back. Sometimes I have to drag her forward. Many of the trees and bushes have interesting smells and Stella will freeze in her tracks for what seems like forever to smell them (and to leave a smell of her own). In those cases, I have to try to use the lease to drag her away.

Although the purpose of those walks is to exercise Stella’s legs, I think my arms get even more exercise trying to control Stella with the leash.

THE ANALOGY
The purpose of strategic planning is to design a path to reach a more prosperous future and help the company move up that path. Unfortunately, a lot of companies are like that dog Stella. They have trouble sticking to the path.

Sometimes companies get distracted by exciting looking opportunities off the path and they want to leave the path to pursue them (like Stella seeing a squirrel). Other times, companies resist the change of moving forward and are as hard to budge as when Stella gets busy sniffing a tree.

The only way I could get Stella under control was by aggressively using a leash. As a strategist, you need a leash to control your company as well.

THE PRINCIPLE
The principle here is that it is not enough for a strategist to just draw the map and show how to get to the future. The strategist needs to be right alongside for the entire journey—to keep the firm moving along the path—like I needed to do with Stella. And to do that, you need a strategy leash.

What is a strategy leash? Well, just as a dog leash connected me to Stella, a strategy leash connects a strategist to strategy implementers. By being connected, one has more control over the actions on the other end of the leash.

In many companies, there is no leash connecting the strategy to the implementers. The implementers run loose like Stella would if I didn’t control her with a leash (and I know that would cause all sorts of major problems if Stella got loose).

Too Many Companies Lack a Leash
Back in October of 2005, Kaplan and Norton had an article in the Harvard Business Review, called “The Office of Strategy Management.” In this article, they discussed some statistics about the lack of connection between strategic plans and implementers:

a) 60% of companies do not link strategic priorities to the budget.

b) Two-thirds of HR and IT organizations develop strategic plans not linked to the organization’s strategy.

c) 70% of middle managers and more than 90% of front-line employees have compensation not linked to strategy.

d) The vast majority of executive teams spend less than one hour per month discussing strategy.

e) 95% of employees in most organizations to not understand their organization’s strategy.

It is no wonder that most companies are disappointed in how their strategies are executed. They’ve let the dog loose without a leash and then wonder why the dog doesn’t stay on the trail.

Here are three reasons why a strategy leash improves execution.

1. It Keeps a Firm on Focus
Just as lots of sights and smells would entice Stella to run off the path (if not on the leash), business implementers get enticed to stray off the strategic path. There is always some hot, new thing trying to grab their attention. However, not all hot new things are appropriate for your business.

Just because the new iPad is hot or Facebook is hot does not necessarily mean that your company should abandon everything it is doing and try to imitate these products. First of all, those strategies are already taken and it is unlikely you could unseat the current leaders. Second of all, the capabilities needed to succeed in that space may not have anything to do with your own internal capabilities. You my not have what it takes to win there. Third, why try to become an also-ran in a hot (but crowded) space if it means abandoning a strategy designed so that you can win?

Even though Stella wants to get loose and chase every squirrel she sees, Stella does not ever get the squirrel. They are too good at escaping up a tree. Just as the squirrel eludes Stella, most of these hot new things will elude your company if you run after them. Not only will you not catch the squirrel, you will no longer be on the path to catch your own strategy. Instead of both, you have neither.

To win, one needs a winning plan and a focus on achieving it. A firm’s limited resources need to be aimed at the strategy. If the resources get diluted into too many random decisions of the moment, there will not be enough power to win.

That is why you need a strategy leash connected to whenever meaningful decisions are being made about how to use those resources (time, people, money). You need to be there when actions are being determined so that you keep the company on the path, rather than being off in the distance, watching them hopelessly trying to run after every squirrel they see. If you only have a voice once a year during the planning cycle, then you cannot stop the firm from running around like a dog on the loose the rest of the year.

2. It Keeps Things Moving
Many people in business are reluctant to change. They do not want to move into the unknown. They resist moving forward just like when Stella refuses to stop standing still to sniff a tree. You need a strategy leash to tug on to get them moving forward.

The “tyranny of the immediate” tends to freeze people into the present and make it harder to focus on getting to the future (see here, here, and here). That is why strategists need to be connected on a regular basis to help people get beyond the tyranny of the immediate and think about long-term issues.

3. It Allows Flexibility
The goal here is not to dictate every move made by every implementer. Implementers need flexibility to use their skills in adapting the strategy to the environment. That is why, so long as Stella stays on the path, I give Stella a long leash. She is free to move around as she sees best, so long as those movements are consistent with moving forward on the path.

The same applies to business. Strategies work best when implementers are free to use their expertise as part of the implementation process. So long as they are moving down the path at a good pace, give them enough leash to add their improvements.

How to Create A Strategy Leash
So how do we create strategy leashes? One way is by making sure strategists have a voice at the places where day-to-day implementation decisions are being made on a daily/weekly/monthly basis. They need to be invited to the meetings where choices are made about what to do, even if none of it sounds very “strategic” at the moment. After all, a journey consists of all the steps one takes. Every step which leaves the path hurts the overall journey.

Second, link self-regulating tools to the strategy. People tend to act in accord with how they are rewarded, how they are reviewed, and how their budget is set up. Use budgets, reward systems and other such tools as a leash by making sure that the motivation tools motivate people to implement the strategy. Stop those awful statistics mentioned by Kaplan and Norton by making sure everyone knows the strategy and is rewarded for implementing it.

Third, Kaplan and Norton go even further to suggest forming a new Office of Strategy Management—a small team of people whose sole purpose (and only job) is to act as the strategy leash. This may or may not be appropriate for your situation. However, the general principle is sound—the more the strategy leash is seen as a valid part of a job description, the greater the chance it will be used.

SUMMARY
To make sure strategies are properly implemented, one needs a strategy leash—a strong connection between the goals of the strategy and daily decisions about what gets done. The leash holds back company desires to stray off the path, tugs people to move forward when they want to stand still, and provides some freedom of movement when moving along the path. This can be done by getting strategists more involved in the daily decisions and by connecting motivational tools more tightly to strategic goals.

FINAL THOUGHTS
Years ago, I had a dog of my own to take on walks. Her name was Barkee. I did a good job of training her, so that eventually I could take Barkee on walks without a leash (and she still stayed near the path). If you can train your company to naturally think strategically, you might be able to loosen up on the leash as well.

Strategic Planning Analogy #314: One Strategy

THE STORY
Early in my career, I was working on a project with another guy in the department. He seemed more motivated than normal get this project done. He also wanted me to be more highly motivated.

Trying to get me excited, he said, “I was talking to the boss, and he said that if we do a really good job on this project, I will get a big promotion.”

So I started thinking…this guy had less seniority than me and a lesser position. If he were to get a big promotion, it would mean that he would become my boss, putting an additional layer between me and the top of the organization. In essence, his reward would have the indirect effect of acting as if I we getting demoted, or at best having my career path made worse.

So, if WE work hard, HE benefits at MY expense. What’s in this for me? Would not I be better off if the project has a little less than a stellar performance? The status quo looked a lot better to me than the so-called “rewards” that would come from working harder.

I could see the look on the face of the guy I was working with. He was starting to realize what was going through my mind. Now he regretted having told me about his potential promotion.

THE ANALOGY
Business is ultimately about getting things done. One of Strategic Planning’s key roles is to help determine what should get done. However, just deciding what should get done does not necessarily ensure that it will, in fact, get done.

In the story, there was a disconnect between what the company wanted to get done and what I wanted to get done. Project success and my personal success were at odds with each other. As a result, I was not fully motivated to make the company goal a reality.

These types of situations happen in the business world all the time, often on a far larger scale than the project in my story. Businesses will make grand pronouncements of wonderful new strategic initiatives. They will explain how these new strategic plans will make everything for the company so much better.

Then, over time, you stop hearing much about that grand strategic initiative. Worse yet, there is no real evidence that the key elements of the strategy ever got accomplished. Status Quo prevails.

A year or two later, the business will make grand pronouncements about an entirely new and different set of strategic initiatives. Forget those old initiatives. Let’s embrace the new ones. Of course, the success in implementing the new initiatives turns out to be no better than the failure of the old ones.

Why? Usually in these situations, there is a disconnect between the ones declaring the initiative and the ones who are supposed to accomplish the initiative (just like what happened to me). Unless you fix the disconnect, the strategic initiative will not succeed.

THE PRINCIPLE
The principle here is that strategic planning needs to be more than just a source of great ideas or mandates. It also needs to get involved in the messy work of implementation. Otherwise, the forces of the status quo will usurp control and render the strategy powerless.

I was reminded of this principle today while reading an interview with one of the authors of a book called “One Strategy.” The book, which was published late in 2009, tells the story of the project to design and release Windows 7.

The premise of the book is as follows. Most companies have two strategies: The “explicit” or “directed” strategy (the declared strategic desire from the top) and the “implicit” or “emergent” strategy (what emerges from the everyday activities of the organization). If those two strategies are not aligned, you will fail.

The book’s prescribed solution is to seek “strategic integrity”—where both strategies are one and the same. This is done by working on all those forces which cause the “emergent” strategy to vary from the intended “directed” strategy. This includes things like policies, procedures, organization, rewards, incentives, management style, and so on. In addition, there needs to be constant communication between the keepers of the directed strategy and the keepers of the emergent strategy so that they can stay on the same page. The book uses blogs by the Windows 7 project manager to illustrate how Microsoft created strategic integrity through this process.

In my story above, my rewards and incentives were not aligned with the project, so I was less than fully motivated to make the project a success. There was the potential for me to lose strategic integrity.

What is amazing to me is that this is considered a radical enough new idea to warrant a book. Isn’t this just common sense? Let’s assume for a moment that I owned an auto repair shop and decided to turn it into a gourmet restaurant. I tell the head mechanic to make the change and then go away for a few months. When I come back, I find out that nothing had changed. When I ask the mechanic why the new strategy was not implemented, he says:

“You didn’t give me any money to make the conversion from auto repair to gourmet restaurant. I had no policies or procedures for running a restaurant. All the employees here are compensated as a % of the labor costs in automotive repairs. If they stop doing auto repairs, they stop getting paid. In addition, all the mechanics figured that they would soon be out of a job (replaced by chefs) if they cooperated. Finally, I’m more comfortable managing a repair shop than a restaurant. So we decided to keep things as they were.”

Common sense should tell us that this would be an expected response. If you truly wanted to make the conversion from auto repair shop to gourmet restaurant, you would need to get rid of all those barriers to conversion and stick around to make sure that the forces of status quo do not win.

But I guess it is not common sense, since strategic failure (lack of strategic integrity) is so common.

Part of this is the fault of the professional strategy community. We often don’t like getting our hands dirty with the messy task of implementation. We voluntarily cut ourselves out of the daily conversation where the “emergent” strategy takes place. This is a mistake. No wonder so many companies see strategy professionals as irrelevant.

Part of this is the fault of the operators who try to block strategists from “meddling” in their affairs. Strategists cannot help remove the barriers if they are forbidden from entry into the world of everyday business activity.

So how can we help fix this situation?

1) Create Incentives for Cooperation
If the natural tendency is for the two sides to not want to work together, create incentives to overcome these natural tendencies. Tell the strategists and the operators that neither is rewarded unless both do their part to build the One Strategy. Suddenly, their success is dependent upon each other, so there is more incentive to work together.

2) Blend the Teams
The operators are more likely to trust the “meddling” of the strategists if some of the members of the strategy team are current or former operators. In addition, the strategists are more inclined to get their hands dirty if members of their team are used to getting their hands dirty. So if you want one strategy, build one blended team.

Professional strategists and professional operators both have something to offer. Blend them together, so that they offer assistance to each other rather than offering two distinctively different strategies.

SUMMARY
Strategic plans are doomed if they are mere words handed off to people who are incented to keep the status quo. Strategy & Implementation need to be blended into a single, ongoing process.

FINAL THOUGHTS
I witnessed a company where about 90% of the organization believed that the “directed” strategy would have a negative impact on their career path. This was like my little story above, only multiplied by the thousands. As you may have guessed, the 90% revolted against the 10% and won. Never underestimate the potential resistance of people who feel that change threatens their personal agenda.

Strategic Planning Analogy #137: Stop Lying to Yourself

THE STORY
Have you ever heard of people like this?

I’ve heard of women who want to lose weight. To help motivate themselves to lose weight, they purchase an entire wardrobe of clothing which is smaller than the size they currently wear. The idea is that the desire to want to wear those smaller clothes will be a strong enough incentive to get them to take the weight off.

Unfortunately, I have heard that this plan often fails. The clothes may increase the desire, but desire alone is often not enough. Increasing the desire to lose weight does not always translate into increasing one’s ability to lose weight. Now, instead of just being overweight, they have a wardrobe full of clothes they cannot wear. These clothes are a constant reminder of their failure and increase the frustration.

THE ANALOGY
Just like overweight people, businesses also have areas where they would like to improve. It could be a desire to trim a little weight out of a bloated high cost structure. It could be a desire to improve market share, reduce defects, or increase customer loyalty. Inevitably, the ideas ultimately relate to some way of increasing profitability.

In the story, the women did not create effective plans to reach their goals. All they did was establish a desirable goal (go down a couple of sizes in their clothing) and then put an incentive out there (the ability to wear nice new smaller clothes). Businesses often do the same. Rather than build an effective plan, all they do is set up desirable goals/targets and give out incentives if the goal is reached.

Targets and incentives can be very effective if the goal is reasonably attainable. However, if there is no effective plan for reaching the target or goal, it becomes nothing more than a desire that cannot be fulfilled.

This will tend to result in destructive behavior. Either people will become de-motivated by the impossibility of the task and give up, or they try to “cheat” their way to the incentive by looking for ways to meeting the requirement without achieving the desired goal. (We’ve talked about this type of activity in prior blogs “Your Stock is Too High” and “Raking Up Losses.”) Either way, just as the women were stuck with clothes they could not wear, the businesses were stuck with results they did not want.

Worse yet, the unrealistic target and the incentive give a false hope to management that the goal will be achieved. Therefore, they do not spend the time developing a better, more achievable goal, or a better plan to achieve the original goal.

THE PRINCIPLE
The principle here is to “stop lying to yourself.” If we set up unrealistic goals and targets, we are for all intents and purposes lying to ourselves. A target is like a proclamation to the world that “We can indeed achieve this.” If there is no realistic plan for achieving this, then we have lied.

One of two things needs to happen. Either we need to spend more time trying to figure out what needs to be done to make the target more achievable (turn the lie into truth), or perhaps we need a new goal (abandon the lie for truth).

This principle is especially true when a company falls into the “death spiral.” The death spiral typically starts when a company becomes less competitive in the marketplace. To shore up the lost profits cause by customer defections, activities and expenditures get cut. Without those activities and expenditures, the company becomes even less competitive and loses more customers. So then, to desperately get customers back, prices are slashed. This causes profits to plummet, so costs need to be cut even further. The good employees can see the handwriting on the wall and start to leave, further weakening the company. This type of activity continues until the business unit dies.

When a company starts down this decline, one may at first see it as a mere aberration, rather than a new trend. As a result, goals are set to return to historical growth rates. In addition, because there is a belief that nothing fundamental has changed in the competitiveness of the business model, there will be no plans to meaningfully change the business model.

This can result in disaster. First, by assuming no need to change the basic business model, one will not confront the fundamental issues causing the loss in competitiveness. Hence, the loss in competitiveness will continue. Second, by assuming an aberration rather than a new trend, one sets unrealistic goals, which drive bad behavior.

Back in the 1990s, when I worked at Supervalu, they were the leading food wholesaler to independent grocers. However, two external trends were weakening the competitiveness of their business model. First, independent grocers were losing share to the growth of large supermarket chains. Second, the rise of Wal-Mart Supercenters was not only creating problems for the independent grocers, but was changing all the rules for the entire grocery supply chain.

As it turns out, no matter how effectively you run warehouses for independent grocers, if the independent grocers are going bankrupt due to the chains and Wal-Mart, you have a broken business model. For awhile, Supervalu tended to live in denial, assuming the problem was only minor. Goals were set to grow as in the past, and the basic business model did not change much. This lead to several years of stagnation.

It wasn’t until they stopped “believing the lie that everything was still fine” that things changed. At that point, they changed the business model (primarily through the acquisition of Albertson’s), and are now back on a good path.

It’s like what they say about alcoholism. Until you admit you have a problem, you will not fix the problem. By lying to ourselves, we give ourselves an excuse not to do the difficult work of reengineering the business model.

Over the course of time, companies tend to go through a life cycle. Rapid growth is followed by maturity and maturity is followed by decline. If we are still thinking rapid growth after having reached maturity, we may make bad business decisions regarding investment. If we are still thinking maturity after having reached decline, we may miss out on all the ways to more profitably deal with decline.

Going down with the ship may be admirable in the navy, but not in business. If you know that your business is about to go down, the best move may be to look at liquidation or divestment. Usually, the earlier you take that option, the better, so living in denial is not helping the situation.

Strategic Planning can serve several roles to help eliminate a number of these problems. First, by keeping a close eye on the environment, strategic planning can help build a more realistic point of view about a company’s competitiveness. It can help determine if current problems are an aberration or the start of a new trend. Being the bearers of truth is not always a popular job, but it is a necessary job. Otherwise, a company may be believing a lie.

Second, strategic planning helps discover a path to get to the goal. We don’t want to end up like those women who desire to wear smaller clothes, but have no plan to make it a reality. Perhaps the goal is unattainable with the current business model, but becomes attainable if the business model is changed. Strategic planning can help find that new business model.

In other cases, perhaps the situation has changed so much that new strategic goals are necessary. Strategic planning can help discover what that new goal should be.

SUMMARY
Goals and incentives are most effective when they are in tune with the realities of the marketplace. If your view of the marketplace is flawed, you may set up goals and incentives which are inappropriate. Such inappropriate goals and incentives will support bad behavior and keep you from correcting/changing your business model to one which is more appropriate.

FINAL THOUGHTS
I had a friend who successfully lost a lot of weight. Thinking he would always be at that new weight, he spent a small fortune getting all of his clothes altered to the smaller size. What he didn’t realize was that the short-term plan he had been on to lose that weight was not something he could sustain over a longer period. As a result, some of the weight came back and now none of his clothes fit.

Sometimes, we need to take a longer term perspective in order to truly understand our condition. Being too hasty to change when change is not necessary can be just as bad as too slow to change when change is necessary.

Strategic Planning Analogy #136: Your Stock is too High

THE STORY
Once upon a time, there was a man who owned an apple orchard. It was the beginning of harvest time. Unfortunately, the man heard a weather report which said there would be a hard freeze that night. If he did not get all of the apples picked before evening, he would lose the crop to the freeze.

Not wanting to lose his crop, the orchard owner went out to find as many people as he could to help pick the apples that day. He found a young man. The orchard owner told the young man, “For every bag of apples you deliver to me before nightfall I will give you one dollar.” The young man agreed to the offer.

Then the young man started thinking about what he agreed to. “The man wanted bags of apples, but did not specify the size of the bag. I will use the smallest bags I can find. The man did not say the bags had to be full to the top. He just said they had to be ‘bags of apples.’ Two apples per bag would satisfy being ‘bags of apples.’

“Finally, he didn’t say where the apples have to come from. I can fill a lot more bags a lot faster if I don’t have to waste time picking them. Therefore, I will buy pre-picked apples from his competitor. Even though I have to pay for them, it is still more profitable than picking them myself due to the time I save.”

Therefore, at the end of the day, the young man delivered 1,000 bags of apples to the orchard owner. Granted there were only two apples per bag and the apples did not come from his orchard. But the young man felt he had lived up to the offer as originally worded and demanded $1,000. The hard freeze came that night and destroyed the orchard owner’s crop.

THE ANALOGY
In this story, the goal of the orchard owner was to get as many of his apples picked before the hard freeze came. However, the incentive program he set up with the young man did not cause his goal to be accomplished. As a result, the orchard owner was out $1,000 and still didn’t get his apples picked before the freeze destroyed the crop.

Be careful about how you set incentives. Incentives do not always lead to the desired consequences.

This is also true with strategies. One may have a strategic goal. However, if the incentives are set up improperly, the resulting activities may not lead to the desired strategic goal.

One of the tools often used to incentivize management is to reward them based on stock performance. Unfortunately, if the linkage to stock performance is set up loosely like the incentive program set up by the orchard owner, the resulting behavior may indeed raise the stock price in the short term, but have no connection to achieving the strategy.

Just as there are many ways to deliver bags of apples, there are many ways to raise a stock price. And in both cases, people can find ways to greatly benefit from the incentive without achieving the desired company goal.

THE PRINCIPLE
The principle here is that incentives often have a greater impact on determining your true strategy than any amount of strategic planning or mission statement building. Your true strategy is not what you say you will do. In reality, your true strategy is what you end up setting out to actually do. If management sets out to get a big personal reward from their incentive, then your true strategy is to maximize that reward.

The hope is that there is enough linkage between the reward and the strategy that the true strategy will end up being about the same as the stated strategy. However, this will not happen unless two events occur:

1) The setting of incentives is treated as an integral part of the strategic planning process.

2) Incentives are carefully designed so that rewards are maximized only if the strategy is successfully pursued.

Otherwise, employees will be like the young man in the story and find ways to maximize their rewards without achieving the desired goal of the one who developed the incentive. Never underestimate the cleverness of people to find ways to beat the system and reap high personal rewards without bothering to do the hard work of advancing the stated goals of the strategy.

Take stock options, for example. Rather than focus on ways to raise the future stock price through strategy implementation, management in many companies instead focused on how to backdate the option granting date so that they started with the easiest possible goal.

Even if you leave out the problem of backdating, there are lots of ways to raise a stock price near term that have nothing to do with achieving the desired long-term strategy.

1) One can buy back shares.

2) One can make outlandish promises which cause the stock price to go up near-term, but falls back down later after you fail to deliver on those promises.

3) One can cut back on maintenance investments, which boost profits in the near-term, but may cripple the company long term when everything falls apart.

4) One can raise profits near-term by cheapening the offering to the consumer. It may take awhile for the customer to realize the decline in quality, so in the near-term there is a benefit. However, once the customer realizes the value has been lowered, they will likely take their business elsewhere.

5) One can take the money earmarked for investing in a strategic transformation and not spend it, hoping to coast for one more year on the old strategy. You may increase profits in the current year by doing this, but once the old strategy winds down, you are left with nothing, because you did not invest in the future.

6) One can confuse the market through a lot of complicated financial maneuvering, which makes it difficult to see how poorly a company is doing. There are lots of ways to do this, including complex financing, complex intertwined ownership, off-balance sheet activity, and so on. To quote one CEO I knew, “It looks like we are going to have a tough year, so make a big acquisition in order to no longer have comparable financials to last year.”

Over my many years in business, I have seen pretty much all of these activities take place in some form or other. If left to continue in this fashion, one’s true strategy becomes destroying the long-term viability of the company.

After Enron fell apart, I got to talk to a few of the former employees. They told me about how the incentive program worked. Every quarter there was a review of performance. If you improved the earnings of the most recent quarter, you got a ton of stock options. If you did not improve the earnings of the most recent quarter, there was a good chance you would be fired. These are the types of incentives which lead to the behavior which destroyed Enron. Based on these types of activities, the value of the stock becomes too high, too soon and eventually implodes.

Here are some suggested incentives which may improve the link with achieving a long-term strategy:

1) Link bonuses to achieving specific strategic business objectives.

2) Hold back some of the incentive until a multi-year strategic objective is fully achieved.

3) Rather than measure stock price, measure the components which determine stock price, such as changes in return on capital, changes in market share or growth projections.

4) Link bonuses to customer feedback.

Although these approaches are an improvement over mere stock price, even these factors can be manipulated in ways that are counterproductive (although it is more difficult). Therefore, to overcome the “gaming” of formulas, one may want to have part of the incentive be without a formula—a judgment call by the superior on one’s efforts to achieve long-term strategic goals.

SUMMARY
You can spend months creating an elaborate strategy to a wonderful future. However, if the incentive program is not linked to that strategy, then you have wasted your time. Stock prices can be manipulated in ways that are beneficial in the short run but destroy a firm’s long-term strategic viability. Therefore, be careful in how you use stock as an incentive. Finally, make sure that discussion of incentives and strategies occur at the same time.

FINAL THOUGHTS
Employees may feel all fired up at the end of a big strategic planning summit and start chanting the mantra of the strategic mission. However, this is not the point at which you can gauge success. Success is measured weeks or months later when one sees whether the day to day actions are moving in the direction of the mission. If they are not, a good place to start in trying to fix the situation is to look at how people are incented.