Strategic Planning Analogy #555: Managing the Full Cycle

THE STORY
A friend of mine recently explained to me how his parents survived a lifetime of farming. He said their farm tended to run on a five-year cycle. In general, over that five-year span, one of the years would be extremely profitable, two would suffer big losses and two would be about break-even.

So this is what his parents did. When they had that one great year on the farm, they would shrewdly invest the windfall into the stock market. This investment would have enough of a return to get them through the four years of breakeven and losses. Then, when the next great year came again (about five years later), they’d start over again, investing the windfall in stocks to cover the next four years.

Over time, they got to be very good at stock investing. It makes you wonder if their true occupation was really farming or investing.

  

THE ANALOGY
This family was able to survive a lifetime in farming because they did not think in terms of individual years or growing seasons. Instead, they planned their business around the full five-year cycle. They knew there would be highs and lows across the five-year cycle which they did not have a lot of control over. For example, commodity prices would swing wildly and weather would change dramatically. You can compensate for a bit of this in the short term, but not most of it. Hence the highs and the lows in farming were pretty much a given.

Therefore, my friend’s parents needed a bigger plan—one that invested during the high points, so that they would have supplemental income to get through the low points.

Other businesses tend to be no different. Margins rise and fall based on all sorts of market pricing issues outside a business’ control. And, like weather, the external environment for businesses can also dramatically change. Fickle customers can abandon your business category for the next fad and cause as much damage as when the rain stops falling on the farm and goes somewhere else.

Hence, all businesses should consider their actions in terms of the full cycle. They need to reinvest the highs in order to be prepared for the lows. Unfortunately, as we will see below, not all businesses do this.

THE PRINCIPLE
The principle here is that if you try to optimize individual years rather than the full multi-year cycle, you will be on a path to destroy the business. First, if good years are optimized on their own, you end handing out the profits to all the stakeholders. That will not leave any money for the lean years. So then, the only way to optimize the lean years on their own is to cut back on everything (R&D, service, quality, etc.).

This starts the death spiral. The cutbacks in lean times make the company less viable when the good times return, so the highs get progressively smaller. Debt piles up in the lean years until it is unsustainable. None of the money ever gets reinvested for the long term, so the business gets old and unfit for the changing times. Bankruptcy is almost inevitable.

I was reminded of this principle when I saw a recent article online from Fortune. It was a list of the ten largest bankruptcies in U.S. retailing over the last few years. As I thought about this list, I realized that in a majority of these cases, the retailer failed because it did not plan for the full cycle. 

Bankruptcy usually came from a combination of:

1.     Taking out too much money in the good times (usually via a leveraged buyout)

2.     Taking on too much debt that could not be maintained when the bad times came.

3.     Was not ready when “bad weather” came (a negative change in the external environment).

4.     Did not invest the money from the good times into projects that would pay out in the future (adapting to the “new weather”).

Here are a few examples, which I’ve simplified for the sake of time.

Circuit City

Circuit City sold low margin electronics products. The margins suddenly got a lot lower when Wal-Mart and online retailers like Amazon aggressively went after the business. Circuit City did not have enough cushion to absorb the drop in prices. Then, Circuit City made matters worse in the lean times by cutting way back on sales service. It was the aggressive sales service team which was able to talk customers into buying the more profitable attachments and extended warranties for the low margin basic goods. Without the sales people to aggressively boost the margin in the shopping basket, the margins got even lower. Eventually the losses got too great to be sustainable.

Linens N Things

Linens N Things was almost identical to its competitor Bed Bath & Beyond. The only major difference was that Bed Bath and Beyond operated on a lower cost structure (a structure designed for lean times). When the lean times came, the lower cost structure allowed to Bed Bath & Beyond to still make money when Linens N Things could not. Bed Bath & Beyond became more aggressive with its coupon promotions, making it even harder for Linens N Things to compete in the lean times. Finally, Linens N Things sold out to leveraged buyout, which created a debt level that could not be maintained.

A&P

A&P is an example of a supermarket company that could not keep up with the changing weather. It had old stores, run the old way, with old union contracts. When the good times were there, A&P did not reinvest and modernize or build a lot of stores in the growing markets. Instead, it took the profits out of the stores. That left A&P with the oldest stores in the oldest neighborhoods without the changes needed for the modern grocery business. When the bad times came, A&P kept cutting back. But due to their old union contracts, they were forced to first lay off the younger, less expensive (and more productive) employees. This left them with even higher costs relative to competition. It’s hard to survive when you have a combination of the most outdated offerings and the highest cost structure.

Sbarro

Sbarro had most of their pizza restaurants in malls. They thrived in the good times by taking advantage of the traffic already created by the mall. Unfortunately, the weather changed. Malls became far less popular. Mall traffic dropped significantly. Eating in malls dropped significantly. Sbarro did not have a business model designed to draw its own traffic or survive on lower traffic. So when the mall traffic dried up, it was like when a farmer’s land dries up…profits evaporate. It didn’t help that Sbarro had also gone through a leveraged buyout, which drained them of the extra cash needed for lean times.

Blockbuster and Borders

Blockbuster and Borders were two retailers who sold tangible media (Blockbuster: movies; Borders: Books). The digital revolution changed their weather. When movies and books became digital, customers did not need brick and mortar stores any more. Plus, the price of digital movies and books were so low, that Blockbuster and Borders couldn’t compete on price. These company's failures wasn’t inevitable. Others invested to adapt to the new weather of the digital world. Blockbuster and Borders, however, did not make those heavy investments in a timely manner. Hence, they failed. They, like A&P, did not do like my friend’s parents and invest during the good times. You cannot live off the investments you do not make. And without investments into the new, you become obsolete.

Quicksilver

Quicksilver is a retailer specializing in clothing and gear for the surfing culture. Teens paid a premium to shop at Quicksilver because appearing to be part of the surfing culture made you look cool. But then the weather changed. Cool transferred from surfing culture to smartphone culture. The Apple store was now the cool destination. Money that used to go to clothes went to technology. The clothes still bought tended to come from cheaper stores, like H&M, because the money you saved on clothing could be used to buy more cool technology. Quicksilver could not adapt its cost structure and merchandising for these leaner times.

SUMMARY
Business life is not a straight line of consistency. Instead, there are periods of ups and downs. Many of the ups and downs are influenced by external factors that are not completely under your control.

Therefore, if you want your company to last over the long haul, it must be built in such a way as to survive the entire cycle of good times and bad times. That means, that in the good times, you should:

1. Put some money aside for the bad times.
2. Invest some money in things that will improve your relevancy as markets evolve.
3. Not let your cost structure rise to levels that can only be supported in good times.

Then, in the bad times:

1. Live off some of the money set aside in the good times rather than destroy your offering (and image) through overly excessive cost cutting.
2. If it looks like the weather has changed permanently for the worse, be ready to make radical moves to become relevant again. Don’t just try to wait it out if it looks like business is not ever coming back to your business model. In the best case scenario, you would have started investing in these changes back when times were still good.

FINAL THOUGHTS
To be a good farmer, my friend’s parents had to know more than just how to farm. They also had to be good investors. Similarly, good businesses cannot just be managed by people who only know how to operate the current business model. They also have to know how to invest in what will replace the current business model.

Strategic Planning Analogy #553 Part 5: Investment Statement & Putting it All Together

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In this blog, we will look at the fourth and final one of the documents to use in their place—the Investment Statement.

THE INVESTMENT STATEMENT
The purpose of the Investment Statement is to provide a strategic framework for understanding corporate overhead. “Investment” consists of spending for items which provide benefits for multiple years Yes, the balance sheet and cash flow statements also have lines describing various costs related to investments. However, the income statement doesn’t tell you why these numbers were chosen, how they relate to strategies, or what benefits are expected from these benefits. That’s why I designed the Investment Statement.

Since there are so many different types of business models out there, the Investment Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Investment Statement is used to carry forward the investments already made.  This should be fairly easy to do, because these investments are already recorded in a company’s financials.

2) Strategic Investments

The next step is to outline all of the investments needed to complete each of the strategic initiatives. This would include the upfront costs, depreciation/amortization impact, and return on investment (typically based on a discounted cash flow analysis or other, similar type of measure).

3) Net Results

The third and final section looks at the net impact of the first two sections on investments, including the total level of investment and the total impact to depreciation/amortization.

BENEFITS

The benefits from using an Overhead Statement are as follows:

• It proactively links all of your strategies to specific investments.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.

PUTTING IT ALL TOGETHER
Now that we have looked as all the documents separately, we can put it all together into a single process. It is illustrated in the figure below. The process has four parts:

1. Baseline Assumptions: First we do internal and external research to determine two things:
1. Where the market is going; and
2. How we will play in that space if we do not change our status quo.

The result of this work will be our baseline assumptions.

2. Strategy Development: Next, we devise strategies and strategic initiatives/tactics to optimize our performance and position in the future. This is your basic core work of strategic planning. 
3. Quantification/Validation of Strategies: This third step is where we get specific on the expected costs and benefits associated with the strategies and tactics. To do this, we use the statements mentioned in this and the prior four blogs—the Revenue Statement, Operations Statement, Overhead Statement and Investment Statement. There is a sort of circular process between steps two and three. As we start quantifying the strategies, we may see a need to modify our strategies a bit to improve their impact. Also, as we look at the four statements (revenue, operations, overhead, investment), we may see some gaps that weren’t covered by our original list of strategies. This may require adding additional strategic initiatives. We keep up this circular approach until there is agreement on the final list of strategies and their quantifications.
4. Translating to Standard Statements: Once the strategies and their quantifications are approved, one takes the data and translates it into the standard financial statements (income statement, balance sheet, cash flow). Now, you have the documents you share with the rest of your stakeholders. 

SUMMARY
Future projections in income statements, balance sheets and cash flow statements are only as good as the assumptions behind the numbers within them. To make sure the assumptions are solid, a lot of prior work needs to be done to properly quantify not only the tasks associated with those figures, but also the specific financials attached to each task. To help quantify the tasks and financials associated with them, I have devised the Revenue Statement, the Operations Statement, the Overhead Statement and the Investment Statement. When used properly, they can provide the missing link between what needs to be done and what outcomes are expected.

FINAL THOUGHTS
These forms were left a little bit vague, because each industry has its own nuances which will impact how the forms should look. But that doesn’t mean you should leave them vague. Your role is to customize them to your industry.

Strategic Planning Analogy #549: Toughest Investments to Make

THE STORY
It’s interesting to watch the debates between developers and preservationists. The developers say that if you invest a bunch of money to develop a wilderness area, you get a lot of measurable benefits:

·       Jobs

·       Economic Growth

·       New Tax Income

·       An Infrastructure that can lead to additional growth

The preservationists have a tougher sell. They say that if you spend a lot of money to preserve the wilderness, you only get what you already have—a wilderness. It’s hard to put a measurable return on an investment which returns nothing new. “What is to be gained by that?”, respond the developers. The only persuasive reply the preservationists have is that without investment in preservation, things (like trees and animals) will go away and possibly become extinct.

It can be tough for humans to mathematically compare the relative merit of using private money to create jobs and boost the economy (which both help humans) versus using public money to preserve a wilderness (which mostly benefits the animals under threat of extinction).

However, I suspect that if you asked the animals under threat of extinction, the decision wouldn’t be tough at all.

THE ANALOGY
A large part of business strategy revolves around investment decisions. The idea is to use strategy to determine where the best investment opportunities lie for a particular company.

Many times, these decisions can get framed to look like the wilderness example. The choice is between investments that:

1.     Create great new development opportunities with great new measurable sources of economic return; or

2.     Don’t really create anything new but just “sort-of” preserve the status quo.

When the decision is framed that way, the capitalist mindset will typically lean quickly towards option #1, the investments with a lot of measurable new benefits. After all, isn’t investing for a big new return better than investing just to stay about the same?

Here’s the problem. Without preservation, there is extinction. And that extinction could be your entire business. And if your core business goes bankrupt, all those other investment opportunities tend to disappear as well.

Therefore, we often need to look at these wilderness decisions from the perspective of the animal under threat of extinction, because we may, in fact, be the one that goes extinct if preservation investments are not made.

THE PRINCIPLE
The principle here is that incremental growth investments often rely on having a core foundational business for these incremental investments to leverage. It can be called synergies or scale or brand power or industry insights or distribution capabilities or funding cash flows or a host of other things. The point is that without a strong foundation to provide these benefits, there is no strategic benefit to making the incremental growth investment.

If all you bring to the investment is money, then you’d better be able to out-invest the professional investment funds which do this for a living and are competing against you for that same opportunity. Good luck with that. Your money is no better than their money, so you bring no advantage.

On the other hand, strategy is about leveraging current strengths and assets. It’s about more than just bringing money to the table. It’s also about all the skills, knowledge, power and infrastructure you have to leverage. Strategy is the process of assessing all that you have to determining where that bundle of infrastructure can create the greatest advantage. This increases your likelihood of success, because now you bring far more to the investment than just money (which is all the same). You bring all that has made your core business uniquely prepared to excel over others in the new investment.

Therefore, it is critically important to invest a portion of your money into preserving these core attributes, even if those investments do not create any additional returns. Their value is not in adding something new, but preserving something old—avoiding extinction. That’s valuable, because if your competitive advantages go extinct, you are back to having nothing but money (if you are lucky). In reality, you may be left with nothing but debt. Now, none of those investments look good.  

Example #1: Sears

I will illustrate this principle with two examples from retailing, starting with Sears. When Eddie Lampert took over control of Sears, he saw his investment opportunities as being like the wilderness example. On one side, he saw this wonderful new opportunity in bringing Sears into the forefront of internet commerce. There were lots of positive new returns on his spreadsheets by diversifying into internet commerce.

On the other side were investments in preserving the Sears retail store foundation. When he ran those investments through the spreadsheets, Lampert didn’t see any additional returns. Lampert reasoned that it was foolish to invest in a place where there were no new returns when he had other incremental opportunities where there was the potential for large new returns. Therefore, Lampert essentially stopped investing in the foundation and poured the money into internet ventures.

The problem was that by not investing in preserving the Sears core, the core was starting to go extinct. The stores became ugly and undesirable. The merchandising suffered. And worst of all, the image of the brand suffered. Customers were abandoning Sears and all that it stood for.

As the Sears brand suffered, its connection to the internet ventures created a negative influence rather than a positive influence. The connection made people less likely to embrace the internet venture. In addition, when the core deteriorated to the point that it became a major cash flow user rather than a cash flow provider, there was no longer any money to invest in the new venture.

By letting the core approach extinction, Lampert not only destroyed the core, but lost any benefits the core could bring to the success of the internet ventures. Without the synergies, his internet ventures had no advantage in the marketplace. In fact, now they had the disadvantages of being associated with a “loser” brand and being stuck in a place that no longer had any cash flow to fund it. Now, the situation is so dire that manufacturers are reluctant to ship any product to Sears. The end of the entire company may be near.

By contrast, if Lampert had diverted some of that investment money into preservation, he might not have seen a lot of new returns in the core, but the core would have been preserved to the point where it could be an asset to internet venture and given that strategy more of a competitive edge.

Example #2: Target

The technology and equipment necessary to convert from magnetic stripe credit cards to chip-embedded credit cards has been around for years. It has been up and functioning in Europe for years. But retailers and banks in the US failed to make the investments in the chip technology, even though it provided far superior security.

Why? When they ran the numbers through the spreadsheets it didn’t look good. A lot of investment money was required to make the switch, but there really weren’t a lot incremental returns. They didn’t think that converting to chip credit cards would create any meaningful additional sales. No new benefits were seen that would justify the expense. Therefore the investments weren’t made.

What they failed to take into account was that without the investment in chip credit cards, their credit operations were at high risk of being hacked by criminals. Yes, there may not have been any new benefits from the investment, but without the investment, the core was at risk.

Eventually that day of risk came. The hackers started attacking the old style credit cards. Target was probably the retailer which suffered the most from the hacking. Not only did Target immediately suffer huge financial losses, they suffered losses to the brand image. Customers were more fearful of shopping at Target. They were less likely to want to pay any extra money for the privilege of shopping there.

These losses to the strength of the core reduced Target’s longstanding competitive advantages. So now, Target has been faced with abandoning Canada (at great loss) and laying off thousands of employees and struggling to find a new position of strength in the US marketplace. Of course, Target’s current problems were caused by more than just the credit card hacking. But, by not investing in this core, they certainly made the problem worse than it would have been, both in terms of cash flow, management distraction, and image.

SUMMARY
Without strong competitive advantages, a company brings nothing to an investment except money. And most of the time, just bringing money is not enough, because others can also bring money plus their own set of competitive advantages. Therefore, it is important to continue to make investments which preserve and strengthen those core competitive advantages, even if the investments themselves create no direct additional return. For without the preservation of these advantages, the entire company is put at risk of extinction.

FINAL THOUGHTS
Investments in preservation can be the toughest investments to make. They are extremely difficult to justify on a stand-alone basis via spreadsheet analysis. Yet, without them, the entire foundation of the business may crumble. You have to continually remind yourself that these investments may not create something new, but they can keep you from extinction—and that is worth a lot.

Strategic Planning Analogy #477: Waiting for Avocados

THE STORY
There’s a story about the early days of the Chipotle Mexican Grill restaurants.  They had a winning formula which looked poised for rapid growth.  McDonald’s invested in the company in the 1990’s, because they could see the huge growth potential as well.

But there was this little green mush getting in the way, called guacamole.  As the story was told, guacamole was only a minor item on the menu, but a significant roadblock to rapid growth.  The key ingredient in guacamole is avocado.  Avocados are not a particularly widely grown crop.  The acreage devoted to avocado trees in the US at the time was very small.  If Chipotle Mexican Grill was going to hit their growth targets, there would have to be a lot more avocado orchards than currently existed.

But there were three problems.  First, you cannot just plant an avocado pit into the ground and get a tree full of avocados.  Avocado trees grown from seed tend to be barren of fruit.  To get the tree to grow avocados, you need to graft branches of fruit-bearing trees onto the seedling.  That takes a lot of time and effort.

Second, even after the tree is sprouted and grafted, it can take from 5 to 12 years before the tree starts to bear fruit.  So even if Chipotle got an immediate increase in avocado orchards, it would be many, many years before it would impact their ability to make guacamole.

Third, farmers needed to be convinced that demand for avocados would skyrocket before they would make such a commitment to increasing the crop.  Why should they believe that this small restaurant chain of a few dozen outlets (primarily in Colorado) would have enough growth to absorb all of the extra avocado output?  If Chipotle doesn’t follow through on its growth plans, they’d be stuck with crops they couldn’t sell at a profit.  And for the first 5 to 12 years, the farmers wouldn’t have anything to sell from those trees to anybody.

Eventually the folks at Chipotle convinced farmers to increase the output of avocados.  And now, about a dozen years later, Chipotle is selling a lot of guacamole in their more than 1,300 restaurants.  Chipotle claims that on an average day they go through 97,000 pounds of avocados (or about 44,000 kg).  That’s over 17,000 tons of avocados in a year.

Even little things can become big things if you grow large enough.

 

THE ANALOGY
Some issues can be resolved quickly.  Others take more time.  Avocados are an issue which takes years to adjust.  If you want a lot of avocados in 10 years, you have to start planning for them right now.  Even though avocados were a minor part of the entire menu, they became a major concern when plotting restaurant growth.

A similar situation can happen in many other businesses.  Small items can make a mess out of carefully crafted long-range plans because they cannot be adjusted fast enough to accommodate the plan.  This is particularly true if one ignores the slow changing issue until the last minute.

Therefore, when planning the big picture, you also need to look at the small picture.  You need to find those little “avocados” that can destroy the big picture if you did not start adjusting them soon enough.

 

THE PRINCIPLE
The principle here is that a large strategy can only move as fast as its slowest component.  Therefore, if you want to move quickly, you need to find where the slowest components are and find ways to speed them up. 

Not Just Avocados

This applies to a lot more than just avocados.  The US version of the Mars candy bar was originally designed with hazel nuts.  However, Mars was not proactive in getting a grip on the small, slow-adjusting hazelnut market.  As a result, the supply and pricing of hazelnuts was erratic.   It was destroying the elaborate growth plans for the US version of the Mars Bar.  As a result, after introducing the candy bar to the market, Mars changed the formula from hazelnuts to almonds.  The almond market was larger, more stable and could more quickly adjust to the growth requirements of the Mars Bar.   

Of course, using almonds made the Mars Bar less distinctive in the market place and probably made the strategy less successful than originally planned.  But at least it kept the brand alive (at least until 2002).

Another story was less successful.  Back in the 1970s General Mills came out with a cereal called Buc Wheats.  It was sort of like corm flakes except made from buckwheat.  Like avocados and hazelnuts, the buckwheat supply was small and slow adjusting.  General Mills never fully got control in the supply of this ingredient.  As a result, even though the cereal was in high demand, they ceased production.  All because they didn’t do like Chipotle and put early effort behind shoring up the weak link in the strategy.

Not Just Food

This principle also applies to non-food issues.  Many industries, like mining and pharmaceuticals have very long lead times before an investment becomes productive.  I worked with a mining company who understood the long lead times and had already done the hard, slow work to find and secure a replacement site for a mine.  That way, they were prepared for when the current mine was no longer viable and could continue operations uninterrupted.  Had they waited until the first mine was nearly depleted before looking for a replacement, there is a good chance they would have spent years without any mining output (like waiting for avocado trees to reach fruit-bearing years). 

Lately, there has been a large movement in both the mining and pharmaceutical industries to shift strategies more towards acquisitions.  But that’s what you have to do when your efforts to build a pipeline of new products fails and you still want to grow.  You have to buy someone else’s pipeline.  And when you have to buy the pipeline, a big chunk of the profits from that growth are given to the person you bought the pipeline from.

Amazon

A great example of a company who really understands this principle is Amazon.com.  In the early days of e-commerce there were a lot of companies that wanted to become a huge player in this space.  Nearly all of them quickly disappeared.  Amazon.com is one of the few left standing from those days and it is standing strong.

Why?  Amazon understood that to become a massively successful e-commerce firm for the long haul, it would need a lot of capabilities that are time consuming or expensive to develop.  There were a number of “avocados” they had to deal with, like search capabilities, recommendation engines, one-step check-outs, big-data algorithms, efficient distribution centers, and so on.  Amazon worked very hard in the beginning to master these skills, knowing they would pay long-term dividends. 

With an avocado tree, you don’t get any fruit for many years, but once you reach fruit-bearing years, you get a big crop every year.  Similarly, Amazon did not produce any meaningful profits for a long time because they were putting all the money into growing their avocado trees.  Now those trees are bearing fruit year after year after year.  Not only is Amazon benefitting from those plantings, but they are becoming an outsourcer of choice for other ecommerce firms who did not prepare in advance to plant their own avocado tree infrastructure.

And Amazon hasn’t stopped.  Recent profits were depressed because of the massive spending Amazon was doing to expand internationally.  But Amazon knows that a half-hearted effort will fail.  It needs to really invest big into slow returning infrastructure.  Otherwise it won’t have enough avocados (infrastructure) to handle the growth plan.

And Amazon did not wait until the demise of analog media to work on its replacement.  It made the early investment in Kindle so that it was ready and strong with a replacement when the current stream of profits dry up.

Lessons Learned

So what can we learn from all of this?

1. Make sure you understand what is needed to make your growth plan succeed (from yourself and from your supply chain).
2. Put special effort around those issues which require more time and attention in order to not derail your growth plan.
3. Don’t wait until a need arises before trying to resolve it.  Anticipate what you need and prepare in advance to be sure it is already established when needed.
4. Be willing to invest in slow-returning areas if they help build long-term enduing strength.   

 

SUMMARY
Most strategies involve growth.  And growth both requires and causes change to the status quo. If you do not anticipate and prepare for the type of change needed to make your growth strategy a success, your strategy will most likely fail.  Since that preparation can take a lot of time and effort, start working on it early in the process.  Otherwise, you may not be prepared in time.  Then, your well-crafted strategy will become a worthless piece of paper.

 

FINAL THOUGHTS
I guess what I’m asking for is “Patient Greed”—an understanding that you might become a lot wealthier in the long run if you are patient enough to invest early in the right slow-returning activities.  Unfortunately, greed and patience rarely seem to go together.  Greedy people rarely want to wait for the avocados to grow.  But if you are able to put these two qualities together, you will gain a competitive advantage.

Strategic Planning Analogy #465: Put Another Log on the Fire

THE STORY

One time while camping I began cooking dinner on a campfire.  The fire was nice and hot, so I thought cooking would be easy.  I filled a pot with some soup and put it on the fire.

The fire was so hot that it burned a hole in the bottom of the pan.  Not only did I lose my dinner as the soup fell through the hole, I also lost my fire which was doused by the soup.


THE ANALOGY
The purpose of a campfire is to provide light and heat for your camp.  This needs to be managed.  If the campfire gets too large and too hot, it is no longer useful for cooking and you cannot get near it to warm yourself.  It also can become very dangerous and quickly get out of control, perhaps burning down your campsite and the surrounding forest.

Conversely, if the fire is ignored and allowed to go out, then it takes forever to restart the fire and get it back to a reasonable size.  In the mean time, it is cold and dark.  And if you run out of matches, you may never get the fire restarted.

In my story, I mismanaged both extremes—I got the fire too hot to cook, which caused the fire to go out when the soup fell through the hole.  And the wet logs didn’t want to re-light.

In the business world, you can think of the logs as being like investments in the business and the fire as being like the financial output of the business.  If you don’t manage these inputs and outputs properly, you can end up in a mess, just like I did with my campfire.

THE PRINCIPLE
The principle here is that future growth should be managed in relationship to the current situation.  In other words, you are more likely to have a strong future if it is leveraged off the current strengths.  We can see how to do that by looking at the lessons of the campfire.

Lesson #1: All Fires Left Without New Fuel Eventually Die

There is only so much fire potential in a log.  Eventually, it will be completely consumed by the current fire and no longer produce additional fire.  Therefore, if you do not want the fire to go out, you have to keep adding new logs to the fire.

The same is true in business.  Like each particular log, each particular business strategic initiative eventually fails.   Times change; customers change; competition changes; technology changes; the environment changes.  New, superior solutions for the evolving customer needs make your old strategic initiative obsolete.  It no longer provides any financial output (the flame goes out).

As a result, you cannot just sit back and enjoy the success of today.  Even a perfect campfire right now will eventually go out if you do not add logs to it.  Similarly, perfect financial output today does not guarantee that it will go on forever.  You have to keep investing in the business (adding more logs).  Otherwise the business will die.

That investment can take two forms.  First, you need to invest in maintenance and upkeep.  As a lifelong retailer, I know what happens if you do not reinvest in the look of your store.  Eventually, it becomes so ugly and worn out that customers refuse to come back.  The fire goes out.  

Second, you need to invest in modifications to your business in order to keep it relevant to the changing marketplace.  

Remember, if you tie the success of your business to a single initiative, your business will die when the original logs of investment in that initiative are spent.  If you want your business to last beyond that, you need to keep investing in the business.

Lesson #2: Big Logs Require a Big Fire to Ignite

Big logs do not automatically combust into flame.  If you want to get a big log lit, you have to stick it in a place where a big fire already exists.  It then uses the current flames from the older fire to start the process of creating its own flames.

The same is true in business.  It is a lot easier to get a new initiative off the ground and running successfully if it can leverage off the power already inherent in the base business.  That power can come from strong customer relationships, a great distribution network, economies of scale from the base business, and so on.  The new business can “borrow” these strengths just as a fresh log “borrows” the flames of the old fire to get going.

This implies two things.  First, the best time to invest in the future is when you are still strong in the present.  If you wait until the flames go out before adding the new logs, the new logs won’t ignite.  You have to add the new logs while the old flame is still strong if you want them to quickly take off.

Although this is common sense with fires, this idea is often ignored in the business world.  In retail, I saw executives wait until people no longer wanted to shop a store before remodeling it.  By then it was too late (the fire had gone out).  Since customers no longer patronized the store, they did not see the improvements   They had already moved on to someone else’s store.  It was a wasted investment which didn’t catch on.  No, the best time for that remodel would have been while the customers were still in the store and had a positive feeling towards that store.  Then they would have seen the improvements and then felt even more positive about that store.  

For a more dramatic example, think of Kodak.  It stayed with the analog film “logs” way too long—all the way until their flame was nearly extinguished—before adding on the digital “logs.”  It was too late.  There was not enough power in the weakened core to ignite the new business. It never caught fire.  Instead, the digital fire belonged to the competition. 

Had Kodak made the transition to digital when they were at the peak of analog power and still had a strong brand and consumer franchise (i.e., when their fire was still strong), those digital logs would have had a better chance of catching on.  

The reason for waiting too long to invest in the future is usually a fear of cannibalizing the current core business.  But do we worry about cannibalizing the old logs of a fire when putting a new log on top of them?  No.  We understand that those old logs are going to die anyway and that they are most useful to perpetuating the flame if you put a log on them while they are still strong.  And besides, the goal is not to optimize a single log, but to optimize the entire campfire.  So we toss the new log on without a second thought. 

We should have a similar attitude in business.  Assume cannibalization is going to occur anyway (either by us or by someone else).  So if it is going to die anyway, it may as well be us to gets the future business.  And we are more likely to get it if we put the log of the future on now, when the flame of the current business is still strong enough to ignite it.  Leverage your strengths while they are still strong.

The second implication is this:  just tossing a log near the current fire won’t do anything.  It will just lie there unlit, even if the other fire is still blazing strongly, because the new log does not touch the current flame.  This is what happens when we invest in a future that does not leverage the current strengths.  It there is no fit with the core, it cannot leverage the flame from the core.  It is like trying to start a completely new fire next to the old one. 

And we all know how hard it is to start a new fire.  You cannot start with big logs.  You have to start with small sticks and easily ignitable tinder.  Then you can gradually increase the size of the sticks over time (if the small fire does not go out—which is common).  Eventually, you might be able to get that new fire to support a big log.

Wouldn’t it just be easier to leverage the fire you already have?  So as you invest in the future, find a future that can leverage what you already have built.  It makes the chance of it taking off quickly more likely.   Don’t be lured to invest in the hot new thing just because it is a hot new thing.  If it has nothing to do with your core, you bring no advantage.  You are starting a new fire from scratch.  You will most likely lose out to others who bring an advantage to the business.

Lesson #3: Managing Multiple Fires Can Be Difficult

This leads to the next point.  It is easier to manage one fire than two.  With two fires, one can become distracted and lose control of the situation.  This can lead to one of the fires either going out or burning up the camp.

That is why the principle of focus is so important in business.  Focus eliminates the distractions and allows you to excel at the point of focus.  It is better to have one great fire which goes on forever through careful, focused management than a handful of unrelated flames that are weak and always going out.

Lesson #4: Don’t Use Up Your Logs Too Quickly
If you toss too many logs on a fire too quickly, two negative consequences can occur.  First, you can lose control of the fire.  It becomes too hot to use and may engulf your entire campsite in flames.  Second, it uses up your logs too quickly, so you cannot keep the fire going a long time.

In business, there are also negative consequences to investing too much, too fast.  You can lose flexibility because all the resources are committed up front.  And if you invest faster than your company can manage it, you lose control of the business.  Instead, invest wisely for the optimum long-term results.


SUMMARY
Managing a business is like managing a fire.  To keep the fire burning successfully for a long time, you need to:

a) Put new logs of investment on the fire while the old flame is still strong.

b) Make sure the new logs can leverage off the strengths of the old flame by having strategic fit.
c) Make sure you don’t put too many logs of investment on too quickly (faster than you can manage).


FINAL THOUGHTS
Fires are fun to watch, but if all you do is watch, then the fire will go out. 

Strategic Planning Analogy #451: Too Much Cotton in the Bottle

THE STORY
The other day I bought a bottle of ibuprofen. I bought it to help with the occasional headache I get with my spring allergies.

When I opened the bottle, I couldn’t get the pills out. There was so much cotton stuffed in the bottle that I couldn’t get to the pills. It was quite a struggle to get that cotton out of the jar.

I understand why the cotton is put in the bottle. It is to protect the pills from bouncing around in the bottle and getting damaged during shipping.

But here is my question: What is the benefit of having perfectly undamaged pills if I am unable to get to them and use them for my headache? If they are locked up in a bottle behind too much cotton, they cannot help my headache. They are worthless to me.  I’d rather have easier access to a slightly damaged pill.

THE ANALOGY
That ibuprofen is only useful to me if I can get those pills into my bloodstream. Having them in a bottle does nothing for the pain.

A similar situation can occur in the business world. Businesses have all sorts of resources. They can be financial, technological, intellectual or a wide range of other resources. These resources are like those ibuprofen pills. If properly used, they can be productive and solve problems.

However, if the company tries too hard to protect those resources, it can be like over-stuffing the medicine bottle with cotton. The protection makes it nearly impossible to get access to those resources. And if you cannot use the resources, it is irrelevant that you kept them in top condition. They become worthless to you in your battle to increase your prosperity in the marketplace. THE

PRINCIPLE
The principle here has to do with risk. The problem is that if a company gets overly protective of its resources in order to eliminate downside risk, they will not only prevent undesirable activity—they will prevent all activity. Like over-stuffing the medicine bottle with cotton to prevent any damage, over-stuffing your business with policies to prevent any risk leads renders your resources worthless.

The only way to be 100% certain that activities with downside risks are eliminated is to eliminate all activity. And that leads to another 100% certainty—100% certainty that the company will cease to exist due to a lack of investment. And so, ironically, the policies intended to minimize downside risk actually increase the likelihood of the greatest downside risk—the risk of destroying the entire business through resource starvation.

As the old saying goes, you have to take some risks in order to receive any rewards. So, the goal should not be to stuff the medicine bottle with as much cotton as possible. The goal should be to find the best way to use the pills in the bottle. Or, to use business terms, the goal is not to avoid risk by preventing investments, but to find the most prudent ways to invest.

Now I understand the need to prevent wasteful and reckless use of resources. For example, if I had been reckless and swallowed all of those ibuprofen pills at once, I would have killed myself. But, if used properly, ibuprofen can do wonderful things. And similarly, wise use of company resources can do great things.

So the rest of this blog will look at ways to prevent over-stuffing the bottle with cotton and promote more prudent investing.

Problem #1: Personal Biases
Scientists and researchers tell us that most managers have built-in biases when it comes to making decisions. They say that the typical manager over-emphasizes the potential downside risk and under-emphasizes the upside potential. As a result, managers become too protective and miss out on making perfectly sensible investments.

I have a theory about why that occurs. I believe the problem is that the upside and downside risks for the company are not always in sync with the upside and downside risks for the individual making the decision.

For example, let’s assume that a manager has a tough decision to make. If you just look at the math from a probability analysis, you would see that although the downside risk is large, the upside risk is a little bit larger and a little bit more likely. Therefore, the “experts” would say that the manager should make the investment.

However, that is just considering the risk to the business. Now consider the risk to the manager making the decision. The manager may think that if the upside potential occurs, he/she may only get a minor recognition. After all, it is their job to make good decisions, so if the decision turns out well, they were just doing their job properly.

On the other hand, if the downside were to occur, the manager may rightly assume that he/she would lose their job. Just look at what is happening at J.P. Morgan. Some trading deals went bad and the downside scenario came to pass. And as a result, a number of people at J.P Morgan are losing their job.

So, from the manager’s perspective, there is very little personal upside potential from recommending the deal and if the downside potential occurs, he/she could lose their job. Therefore, it is no wonder that executives appear irrational (from the company’s perspective) in saying no to “reasonable” risk. After all, from a personal perspective, saying no seems highly rational.

Consequently, if you want management decisions to be in the best interests of the company, you need to make the personal risk profile more similar to the company risk profile. Otherwise, you can end up with managers overstuffing the medicine bottle, which hurts the company but protects their career.

Problem #2: Departmental Biases
Large business decisions often impact large sections of a business. Problems can occur if the risk profile varies between the sectors of a business impacted by a decision.

For example, one part of a business might bear the biggest brunt of the investment while another department may reap most of the benefits. In such a circumstance, the department needing to make the investment may resist the move, because the math may not make sense when just looking at that particular department in isolation.

To prevent this “irrational” cotton stuffing, one needs to get all of the affected parties to share in the entire company-wide risk profile. That way, decisions will be made for the good of the company rather than the good of the individual department.

Problem #3: Excessive Busyness
Just because a resource is kept busy does not mean it is being invested properly. There is an opportunity cost risk in missing out on potentially huge gains because resources are focused on surer, but much smaller gains.

Take, for example, your human resources. Since the start of the great recession, there has been a push to keep those human resources as busy as possible. Individuals are often doing a workload previously done by two or three people before the recession. At first, this may be admired as a wonderful productivity gain.

However, if someone is too busy with the mundane, they will not have the luxury of time to ponder larger issues which produce major breakthroughs. As we’ve seen in prior blogs (here and here), some down time is needed if you want the brain to discover that next huge breakthrough.

As a result, excessive busyness can act like that cotton, and prevent you from being able to use those resources for greater benefit. Therefore, one may need to program in some more “slack” time in order to get the most out of the resource.

Problem #4: All or Nothing
Often times, an investment can look scary because it is positioned to appear so massive. It is proposed as an all or nothing deal. You are told you are either in or you are out. And if you are in, you have to make the big bet all at once. And that can scare people away.

Well, this is often a false premise. Most big deals can be broken down into smaller deals. You may be able to test it in a small fashion before rolling it out. You may be able to borrow or rent resources before committing to purchase. You may be able to do a joint venture with a firm rather than have to acquire it.

Tactics such as risk-sharing, stage-gating or real options theory can help keep the risks manageable by placing them into smaller chunks. If a small chunk goes bad, you can stop before investing in the next stage.

Problem #5: A Portfolio of One
One of the best ways to overcome downside risk is to avoid putting all of one’s eggs in a single investment basket. That is just another scare tactic akin to the all or nothing approach mentioned above. Instead, invest in multiple investments. With a portfolio of investments in your pipeline, then the odds increase that the entire mix of investments will be positive (even if some of the individual investments are negative).

Therefore, to encourage better levels of investing, two actions should occur. First one needs to diversify the risk by building a portfolio of investments (at least in their initial stages). Second, one needs to move away from treating risk in isolation but look at the risk in terms of the whole portfolio. Accept some individual failures as a necessary part of the overall quest to create a positive portfolio.

Problem #6: Fear of Obsolescence
Often times, there can be a fear of investing in something new out of fear that it will hurt the core business. For example, Kodak did not aggressively invest in digital imaging for fear of hurting the core analog film business.

But here is what one needs to realize. If it is a good investment, somebody else will make it. Consequently, the core business is at risk whether you make the move or not. So in most cases you’d be better off making the move, since at least then you would be a part of that which destroys your core. Otherwise, you core is destroyed by someone else and you are left with nothing.

SUMMARY
There are many factors which can act to hold people back from making the investments which they should. We were only able to scratch the surface here. However, in the areas we looked at, it was seen that these factors can be minimized/reduced by becoming proactive in addressing them. By getting in front of these issues, we can establish approaches which keep people from stuffing the investment bottle with too much cotton.

FINAL THOUGHTS
By first investing in policies and approaches which help us to better handle risk, we will end up making more good investments in the business.

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 #386: Embracing Maturity

THE STORY
I enjoy talking to new first-time parents about their small children. The new parents truly love their little baby and think parenting them is such a wonderful thing.

Then they will mention some little parenting problem they are having. I warn them that this little problem is nothing compared to all the problems they will face when that child becomes a teenager.

Many of those who have had experience or knowledge about parenting teenagers have half-jokingly mentioned to me a desire to hand off their children when they become teenagers and pick them back up when they reach their twenties. Of course, the problem would be finding someone to hand them off to during that period.

THE ANALOGY
Being the parent of a cute little baby can seem like such a wonderful, fulfilling experience. Being the parent of a teenager, however, can often seem like torture—something to be avoided if possible. Unfortunately, those cute little babies eventually grow up into those frustrating teenagers. You can’t just stop being a parent when the child is no longer a cute little baby.

A similar situation appears to happen with many strategic planners. In general, strategic planning for brand new baby businesses can be seen as wonderful and fulfilling. You get to set the direction and positioning from scratch. With all that potential growth in front of it, there are lots of fun strategic options to consider.

However, when a business reaches maturity, strategic planning can seem more frustrating. Positions are already set and difficult to change. The fun of growth has been replaced by the pain of intense competition. Rather than talking about great strategic options, the discussion moves to cutting costs. In business maturity, it appears as if strategy is less influential on outcomes (sort of like parenting a teenager).

Like those parents, many strategists would be happy to just deal with the baby businesses and hand off those mature businesses to someone else. But guess what? Most industries and most businesses in the world are relatively mature. That’s where most of the action is. If strategists want to be relevant, then they had better get excited about building strategies for mature businesses.

THE PRINCIPLE
It bothers me that the discipline of strategic planning is out of favor in so many areas of business. Its influence has diminished significantly. There are many reasons for this phenomenon. I believe that one of the many reasons why strategic planning is seen as irrelevant is because the discipline tends to be pre-occupied with early stage businesses. Little focus from strategic planning thought leaders is given to strategic planning in the mature stage of a business. Therefore, it is no wonder that mature businesses see little value to intense strategic planning. And since most businesses are mature, that makes strategic planning appear irrelevant in most places.

One way for strategic planning is to regain its stature is by making it appear more indispensible in the way mature businesses are run. In this blog, we will look at four ways to do this.

1. Reclaim Productivity as a Strategic Agenda
As I have mentioned many times before, I believe that there are three components to effective strategic planning;

a) Positioning – A reason for consumers to prefer you.

b) Pursuit – Aggressively achieving as many ways to exploit that position as possible (top line orientation)

c) Productivity – Making the most money off the areas where you pursue (bottom line orientation).

Although all three are important at all phases of a business lifecycle, productivity tends to be the area requiring the most attention during the mature phase. Therefore, for strategic planning to be relevant and essential during maturity, it needs to take ownership of the productivity agenda.


In many places, productivity is not even seen as a strategic activity (even among some strategic planners). Strategists aren’t even invited to the table when productivity is discussed. It is just seen as a cost cutting exercise, or at best, a budgeting exercise. Just tell people to cut 15% of costs from their budget and you are done.

In reality, productivity is very much a strategic issue. Not all cuts are created equal. Some cuts hurt your strategic position more than others. If strategic implications are not addressed during cost cutting, the wrong cuts can be made—cuts which can totally undermine a business.

For example, a few years back the consumer electronics retailer Circuit City wanted to increase productivity. They noticed that labor was one of their largest costs at store level. They also noticed that their most experienced sales people tended to be the most expensive sales people. Therefore, to increase productivity, Circuit City got rid of its most experienced sales people. It wasn’t too long thereafter that Circuit City declared bankruptcy. As it turns out, those experienced sales people were a critical component of the strategic success of Circuit City. Eliminating those people also eliminated the chance of strategic success.

Strategists need to be at the table to point out the strategic implications associated with various cost-cutting options (and perhaps provide cost-cutting options of their own). This isn’t an option. The destiny of the business is at stake.

2. Move the Discussion Away from Merely Cost-Cutting
Some of the best ways to increase productivity have nothing to do with cutting costs. Often the productivity problem is not how much you spend, but rather what you do. It is a more a question of effectiveness of process rather than efficiency of spending.

For example, I could be the most efficient Morse Code operator on the planet. However, that does not make me the most effective communicator on the planet. Almost nobody understands Morse Code anymore, so nobody will hear my Morse Code message, no matter how efficiently I use it. Rather than trying to make my Morse Code process more efficient, I need to switch to a more effective communication process, like Twitter, Facebook or Email.

If you only focus on cost-cutting, you may miss far more effective options for improving the bottom line via changes in process. Strategists can be an important source for discovering and championing alternative processes.

Strategists can also play a vital role in helping companies avoid new processes which negatively impact a strategy. Take outsourcing, as an example. It makes a lot more sense to change a process from in-house to outsource when the process is less critical to the overall strategy. By contrast, if you outsource a core competency, you may destroy your ability to control your destiny and destroy your competitive advantage.

3. Help People See Productivity as an Investment Opportunity
Productivity is ultimately about increasing profits. Sometimes, you can increase profits faster by investing rather than cutting. If the return on investment is high, investments make sense, even in the mature phase of a lifecycle. Strategists can play a key roll during maturity by discovering and championing those types of investment opportunities.

Strategists are already often a key part of investment decisions during the early phases of a lifecycle. Why not continue that roll into the mature phase?

4. Change M&A to M&A&D
M&A stands for Mergers & Acquisitions. These are activities which tend to do with building and growing a business. However, as a business reaches maturity, it makes sense to give more consideration to the strategies of shrinking and eliminating businesses. This would be the strategies of Divestiture.

Most companies do not take a proactive approach to divestitures as a strategy. Instead, it is seen as the option of last resort—to be used only when backed into a corner with no other option. The thought of divesting while a company is still doing well is often never considered. Yet, the most profitable time to divest may be when the company is still doing well.

Look at the chart below. Outsiders often tend to overestimate the value when a company is just reaching maturity. They may mistakenly see it as still in the growth phase or see a longer mature horizon than you do. Conversely, once there is no longer any doubt that a company is in decline, the potential pool of people to sell to shrinks dramatically. The “bottom-feeders” who go after distressed companies tend to be very cheap and pay very little. As a result, in decline, others tend to underestimate your value. As a result, divesting early can be a great strategic option. We talked about this more in earlier blogs (here & here).


Therefore, divestitures can be just as strategic as acquisitions (read more here). And just as strategists are often a part of the acquisition discussion, they should be a part of the divestiture discussion. And this is more likely to happen if you change M&A to M&A&D—Mergers & Acquisitions & Divestitures.

SUMMARY
One way to improve the stature of strategic planning in companies is by making strategic planning appear more vital in the mature phase of the life cycle. This can be done by:

1. Reclaiming Productivity as a Strategic Agenda
2. Moving the Maturity Discussion Away from Merely Cost-Cutting
3. Helping People See Productivity as an Investment Opportunity
4. Changing M&A to M&A&D

FINAL THOUGHTS
There’s an old poem which goes something like this:

“The problem with kittens is that,
They eventually grow up to be cats.”

We need to move beyond a focus on cute kittens and embrace the reality of mature cats.