Strategic Planning Analogy #516: Avoiding Driveways

THE STORY
My wife and I disagree on which types of roads are safer. I think expressways are safer. She thinks city roads are safer.

My logic goes like this: Accidents happen when the unexpected happens (like someone turning off or entering the street) or when change occurs (like a change in speed). By that reasoning, on a city road every driveway, every parking lot entrance/exit, every intersection, every stop sign, every traffic light is a place where an accident can happen, because they are potential sources for the unexpected or change. So, in a few miles of city driving, you may drive past literally thousands of these potentially dangerous locations.

By contrast, on an expressway, I only have to worry about the few cars immediately surrounding me and the rare entrance/exit ramp. That’s a lot fewer potential accident triggers.

My wife’s logic is simpler. The higher the speed, the more dangerous the accident, so drive on slower roads to be safer.

THE ANALOGY
Business strategies can take you on many journeys, including acquisitions, joint ventures, start-ups, brand extensions, new geographies, new customers, and so on. And statistics show that most of these actions end up as failures. There is no safe alternative—acquisitions, joint ventures, start-ups and other business changes all are statistically more likely to fail than succeed.  

It’s like driving when you know that you are more likely to have an accident than not. It’s enough to make one hesitant to get in the car.

But if you don’t get in the car, you will never reach your strategic destination. And because of all the changes in the environment, the status quo will eventually become obsolete. Therefore standing still is not an option, either. It too will eventually be a failure—a horrible accident.

So the business strategy dilemma is similar to the one in the story: What is the safest route to take to avoid terrible accidents?

THE PRINCIPLE
The principle here is that tactics like acquisitions, start-ups, joint ventures, and diversifications are not by themselves the salvation of your company. In fact, they statistically increase your risk for failure. Instead of being your salvation, they are merely tools—and dangerous ones at that. To be successful, one needs a strategy for how to use these tools—a path which optimally avoids most of the accidents which often accompany these tools.

So which path should one take:

1. My wife’s approach (go slow in the city to avoid the biggest accidents);
2. My approach (go fast on the expressways which avoid the uncertainties which increase accidents by avoiding driveways and intersections);
3. Or a combination of paths?

Going Slow

Applying my wife’s advice, the answer would be to go slow. In some cases, that is good advice. Remember, the strategic goal is not to be the first to arrive, but the first to succeed. A strong and savvy follower is often more successful than the reckless trailblazer. As the old saying goes in US westerns, it is the advance scout who gets hit with the most arrows.

For example, Coke did not invent diet cola or cola in cans or caffeine-free cola or sports beverages or pretty much any other beverage innovation in the last 50 years. Yet, Coca Cola is a leader or strong player in just about any non-alcoholic beverage segment currently in existence. Why? Coke is a great fast-follower. By building superiority in distribution, points of customer contact and marketing, Coke can overcome the small innovators over the long haul. Coke lets everyone else take all the risks and then—once a successful innovation becomes apparent—they swoop in and eventually take over. They let other, faster people have all the accidents.

There are several effective tools in the “go slow” approach, like stage-gating and real options. The basic idea is to chop up a grand goal into smaller sub-goals. You aim for the nearest sub-goal. Depending on the success of that early effort, you will make changes in subsequent sub-goals or perhaps halt the project completely. This keeps all your accidents small.

A similar approach is doing a lot of beta-testing. Rather than speeding as fast as possible down a path, you pause to consumer-test the concept and make adjustments based upon the tests. Amazon is famous for doing a lot of testing.

However, the “go slow” approach often has its limits. Sometimes, the dynamics of the market do not provide the luxury of going slow. Faster competitors can get too much of a first-mover advantage (not all of us have as much power to overcome as Coke).

And even the “go slow” approach can eventually require big moves into big acquisitions, big joint ventures, big divestitures and the like. So even though you have eliminated some of the potential accidents, there can be many more that the go slow approach cannot avoid. So going slow it may be part of the solution, but it is not the whole answer.

Avoiding Driveways

So that leads to my go fast approach on the expressways. Accidents are minimized on the expressway because many of the causes for accidents are taken away—driveways, intersections, stop signs and traffic lights.

The business equivalent to avoiding driveways is to look at where the inherent risks are in each business tactic and then try to eliminate them. For example, key sources of accidents in joint ventures come from items like divergent objectives, conflicts between core businesses and the joint venture, governance issues, power issues and so on. The more you can eliminate these sources of accidents up front, the fewer the accidents. These are joint venture equivalents to driveways, intersections and stop signs. The more you can specifically eliminate risks in these areas, the less likely your joint venture will have an accident.

Similarly, in acquisitions many of the risks have to do with things like over-evaluating synergies, paying too much, poorly integrating the two companies, dealing with divergent corporate cultures, underestimating negative customer reactions, and so on. If you can eliminate these sources of accidents, your acquisition is more likely to be successful.

The folks at McKinsey did research and discovered that the companies which are most likely to avoid accidents in acquisitions are the ones who do a lot of acquisition and have built core competencies in how to do acquisitions well. In other words, the successful acquirers have enough experience to know where all the driveways and intersections are and have competencies in finding paths to avoid them (their expressways).

So the idea here is to first understand the key sources of risk in whatever tactical tool your choose. Then, take a path of implementation which avoids these sources of risk (Better yet, make understanding and avoiding core competencies of the firm).

For example, don’t even try to do a joint venture with someone who has a radically conflicting strategic agenda. That’s like driving the wrong way on a one-way road. You are just begging for an accident. Instead, take the expressway where that intersection doesn’t even exist.

A Combination

In reality, a combination of the two approaches can often work best. Don’t be so hasty that you take needless risks. Taking time out for stage-gating or beta testing can be very prudent. On the other hand, large, gutsy moves may eventually be required to reach a better tomorrow. Rather than delay them too long, move forward quickly, but smartly by proactively avoiding specific areas which are most likely to increase the risk of a failure/accident.

SUMMARY
Tactics like acquisitions, start-ups, joint ventures, and diversifications are not by themselves the salvation of your company. Instead, they are necessary, but dangerous tools which increase one’s risk of failure if used improperly. To improve one’s likelihood of success with these tools, consider the following:

1. Before rushing full speed ahead, take time to de-risk the overall strategy. Consider additional tools like stage-gating, real options, and beta-testing to make sure your ultimate goal is correct.
2. Consider building competencies which can make you a great fast-follower towards good strategic goals “proven” by riskier firms.
3. When implementing tools like acquisitions to reach the goal, understand the risks inherent to the particular tool. Then specifically address those risks prior to acting, so that those risks can be avoided.
4. Consider building core competencies in handling these tools before using them.

FINAL THOUGHTS
So, in a way, I guess my wife and I are both a bit right in our approaches to safe driving.

Strategic Planning Analogy #447: You’re Buying People

THE STORY
Years ago, I was working on a deal to do a joint venture with a company in Korea. We had all sorts of lawyers on our side helping to craft the proper legal document. We noticed that our potential Korean partners were not using a lot of lawyers. We asked why.

The response? They said that they would rather save their money and have us spend all the money on legal issues. Then, at the very end, and only at the very end, would they bring in their own lawyer to help make the final changes.

We thought that was a bit risky on their part, but we went along with it. After all, that put our lawyer in control of the contract, so we figured we were getting a better deal.

Later on, as we started preliminary work on the joint venture, we learned that within the large family Korean business with which we had been negotiating, there were many different family factions. As it turns out, we had negotiated with the wrong faction of the family. As a result, the joint venture failed.

We may have had a superior legal document, but since it was negotiated with the wrong people, the deal was worthless. In the end, we took the bigger risk by relying on lawyers rather than in understanding the people.

THE ANALOGY
A lot of strategic planning involves doing deals with others. It could be joint ventures, mergers, acquisitions or some other arrangement. In doing these deals, it is easy to fall into the trap of seeing the deal as a legal or financial arrangement between two companies. Under that assumption, you would do as we did at that company in the story and put the emphasis on making the best legal arrangement we could. In other words, do a good job at doing the deal.

But successful strategies are not just about doing deals. Doing the deal is just a means to an end. Supposedly, the deal was done in order to accomplish a strategic objective. And supposedly, that objective could be better accomplished working with this partner rather than by doing it alone.

So, in reality, the most important aspect is not the creation of a deal between two companies, but in the creation of great working relationship between two groups of people. For, as we found out in Korea, if you are connected with the wrong group of people, it is irrelevant how good the deal was structured. The work was not going to get done.

So when structuring a strategic plan, don’t look at it as a series of deals which need to get done between companies. Look at it as a series of objectives which must be done by people, regardless of who they work for. Then focus on ways to get the best people in the best situation to get the best outcome.

THE PRINCIPLE
The principle here is that companies are made up of people. And if you want to do great things, you need to get the right people together in the right way. The best deals are not the deals with the best contract or the best pro-forma financial model. No, the best deals are the ones with the best results. So, rather than fretting primarily over the words and numbers on the piece of paper, focus on what creates the best results—the people and their working environment.

Listed below are a few examples of how to put this idea into practice.

1. People Due Diligence
Before deals are done, most companies will do due diligence. In other words, they will investigate the company before purchasing it. A lot of the items on most due diligence lists have to do with looking for hidden risks. The idea is that you don’t want to purchase a company with a lot of unknown legal or financial liabilities. Therefore, companies have their legal and financial experts “scour the books” of the acquisition target (that is, read all the legal documents and financial reports to make sure you know what you’re getting).

This is not a bad practice, but it is not enough. What you are purchasing most of all (in most cases) are the people who work for the company, along with the culture and the practices by which those people work. That’s where the biggest risk lies. The company may have wonderful documents and great balance sheets, but if the people, the culture and the practices are wrong, it really doesn’t matter. The work won’t get done. Therefore, the main focus of due diligence should relate to the people, practices and culture.

I can think of more than one occasion in my career when I was negotiating with another company and had to tell my superiors that we needed to stop the negotiations right away because we are dealing with the wrong people. They were untrustworthy and/or had questionable business practices and/or the culture didn’t fit. It was useless to work any further on hammering out a deal, because you could never work well with them under any contractual scenario.

So make sure your people due diligence is just as thorough as your financial and legal due diligence (if not even more thorough). My Korean friends in the story understood this and put more emphasis on people and relationships than they did on having hoards of lawyers trying to protect them with a piece of paper. If we had done the same, our people due diligence would have shown us that we were negotiating with the wrong branch of the Korean family.

2. Get the A Team
Over the years, I have dealt with a lot of consultants and financial advisory companies. People will ask me which are the good companies. I always answer by saying, “If you get the A Team, they are all good. If you get the B Team, they are all bad.”

In other words, you are not really doing a deal with a company, you are doing work with a group of people. If you get the wrong people, it really doesn’t matter which company they came from.

Therefore, when negotiating with consultants, financial advisors, other service companies, or potential joint venture partners, don’t just focus on terms and prices. Focus on the people. Request that particular people be a part of the team working with you (and that they spend at least a meaningful part of their time on your behalf). Make it a key condition for doing the deal. Put it in the contract.

3. Think Through the Process in Advance
Even if you have great people, you can still fail if the surrounding process and culture is wrong. Therefore, you should consider how the work is to be done before doing the deal. Then you can put the topic of how the work gets done into the negotiations.

For example, the two companies may have differing visions on how to do the work. If you find that out after the deal is done, it may be too late to reconcile the differences.

A key point of contention is often about intellectual capital or proprietary information. How much sharing of knowledge will take place? What skill sets or technology will be contributed? Will your teams be working side by side or will the work be segregated so that the other does not see how you fulfill your part of the deal? Don’t assume anything in this regard. Talk it out in advance.

In addition, by talking out the process during negotiation, one can get a great window into understanding the culture at the other organization. If the cultures are too divergent, it may not be possible to find a great working relationship. And even if you are acquiring the entire company, that does not mean that one can instantly fix such a cultural divide by merely imposing the acquirer’s culture onto the one being acquired.

Remember, companies are made up of people, and the people may resist the cultural change. These people were likely at the other company because they enjoyed that other culture. You could end up with defections, resistance, and demoralization if you push a foreign culture too quickly on a situation.

When you look at literature on acquisitions, a key source of failure is lack of cultural fit. Figure this out in advance.

4. Negotiate With Outcomes in Mind
In the end, success is not the deal but the outcome. Therefore, it may be desirable to negotiate the outcome as part of the deal. For example, some of the price can be pegged to future outcomes. Or outcome incentives can be negotiated as part of the deal. Buyout or separation clauses could be pegged to performance. At the very least, the deal could outline in detail what the outcome expectations are (by party), so at least you are going into the deal with a common goal.

SUMMARY
Strategies shouldn’t be focused on doing deals. They should be focused on accomplishing strategic objectives which improve the positioning and performance of the company. This is the ongoing work that is done by the people long after the ink on the deal has dried. Therefore, strategy needs to concern itself with the people and the processes and culture in which these people operate. Otherwise, you will have a lot of deals that get you nowhere. And that isn’t worth a whole lot.

FINAL THOUGHTS
How much of your strategic time is spent on looking at people and culture versus time spent on getting a deal done? Is your desk cluttered with legal documents and financial proformas or is it covered with people and cultural assessments?