Why Most Strategies Fail: Reason #2

BACKGROUND

I recently saw a blog by the Cascade strategy software company entitled “The 5 Reasons Why 70% of Strategies Fail.” You can read it here.

Since I disagree with their conclusions, I decided to write my own blogs on why strategies fail. I came up with three major reasons. The first reason why most strategies fail is because they are too internally focused at the expense of an external orientation. I covered that topic in the first blog.

The second major reason why strategies fail is because they focus too much on “doing” rather than “being.” That is the topic of this blog.

PROBLEM #2: STRATEGIC FOCUS ON DOING RATHER THAN BEING
In an earlier blog I started by looking at children. Children don’t talk about what they want to “do” when they grow up. No, they talk about what they want to “be” when they grow up. Strategists need to imitate children by asking what their companies want to be in the future rather than what they want to do in the future.

“Being” Keeps You Relevant

Why is a focus on “being” so important? One reason is because the world is full of change. Technology changes, competition changes, social norms change, and so the list goes on in so many areas. The cumulative impact of all of this change causes behaviors and actions which used to be right and normal to appear quaint and obsolete.

Just think of all the change resulting from the internet or the smart phone. They have turned many conventional behaviors on their head. The right behaviors before the internet and the cell phone now look so add and out of place. This is one reason why many millennials cannot tolerate watching old movies and TV shows. The activities in these old shows seem so wrong or odd from the millennials’ modern perspective that they cannot relate to them.

This is why a strategic focus on “doing” can lead to failure. If you do the “right thing” for a long enough period of time, the changing world will eventually make it the “wrong thing.” Your strategy becomes obsolete and you fail.

Just look at Kodak. It didn’t matter that Kodak perfected the way to do analog film. Digital imaging made that type of doing obsolete. A strategy that finds the best way to do something is worthless when customers no longer want you to do it.

That is why focusing on “being” is so much better than a focus on “doing.” “Being” transcends a changing environment. For example, if instead of focusing on “doing” film, Kodak had focused on “being” the best solution for capturing memories, it could still be a thriving company today.

There is always a need to capture memories. The best solution may vary over time, but a solution will always be needed. If you focus on the big picture of what you want to stand for in the marketplace (your choice of what to be), you will remain relevant. By contrast, if you focus on what you want to do, you will become irrelevant.

Example: Wal-Mart

Over the decades, Wal-Mart had had a relentless focus on what it wanted to be. It’s founder, Sam Walton, wanted the company to be the best at offering retail value, starting first in rural communities.  Back in the 1950s the best way to “do” that was with variety stores. So Sam Walton operated Walton’s variety stores.

By the late 1950’s Walton could see that discount stores were becoming a superior solution for being the best at offering retail value, so he abandoned doing variety stores and began to do Wal-Mart discount stores.

In the early 1980’s it looked like warehouse clubs could be an even better way to be the best value provider, so in 1983 the first Sam’s Club was opened. By the late 1980’s Walton could see that supercenters had the potential to be a better value than either discount stores or warehouse clubs, so he stopped doing discount stores and started doing supercenters.

Now, shopping by smart phone appears to consumers as the best value, so Wal-Mart is pushing very hard to become a major player in that space.

Through it all, Wal-Mart has changed many of the ways they have done things. But it has stayed true to what it wanted to be: the best value in retail. By focusing on the being rather than the doing, it has survived around seven decades, whereas most of its competitors (who focused on doing) during that time have disappeared.

“Being” Increases Preference

Nearly every wildly successful brand creates a meaning and purpose which transcends the current product offering. It is this added purpose which causes customers to want to identify with the brand. 

As we talked about in the prior blog, successful strategies create natural preference without resorting to bribes. When your company becomes something grander that customers want to be identified with, they will prefer your brand and pay a premium to do so.

Think of Nike. It does not make shoes. Others own the factories and do the work.  Nike focused instead on being the embodiment of what is aspirational in athleticism. Anyone wanting to identify with that aspiration became attracted to Nike and was loyal to them.  That strategy allowed Nike to successfully expand into many athletic areas beyond shoes while charging premium prices.

BMW’s success is not due so much to “doing” automobiles as to “being” the purveyor of “the ultimate driving machine.” Everything BMW does is focused on this higher level of being. Those desiring to be associated with that type of being flock to BMW and pay a premium for the privilege.

Apple’s success has far more to do with the being it represents than the products it offers. It became the essence of coolness and hipness. Those who also wanted to be seen as cool and hip flocked to Apple.

This is not just a consumer products thing. Back in the days of the big mainframe computers, IBM won the day. It was not just because IBM was good at doing mainframe computers. It was that they created this aura of professionalism and service which transcended the product. It impacted everything all the way down to the professional-looking dress code of the service technicians who came to the customer’s building for repairs.

IBM executed becoming this sense of being professional and reliable so well that there was a saying back in those days that “nobody ever lost their job recommending IBM” for their company. It was the brand IT professionals wanted to be identified with.

Being Needs to Influence Everything

As IBM and other successful brand show, strategy focused on being is a lot more than just a clever slogan or public relations. It has to become a consistent way of life for the entire organization. The corporate culture has to have a similar sense of being. Every facet of the business has to reflect that sense of being, from product design to customer service to how the brand interacts with society.

Steve Jobs made sure everything in every area of what Apple did lived up to what the brand wanted to be. Similarly, there is no tolerance at BMW anywhere for something that is not driven towards being the ultimate driving machine.

These companies show that success comes not from a completing a list of tasks but from an integrated approach aimed at becoming something with a much higher purpose that permeates the essence how a company sees itself. This goes well beyond just a check list of tasks. It is an exercise in identity management.

Dire Consequences When Strategy is more about Doing than Being

When doing dominates strategy, activities are drawn towards performance metrics rather than how a company is perceived. As long as you do what it takes to meet the performance metric, you are rewarded. Unfortunately “what it takes” can destroy who you are.

For example, Wells Fargo got so focused on the task of doing more multiple account activities that it lost sight of its role to be a financial institution preferred by its customers. The result was that Walls Fargo angered its customers by opening many accounts in the customers’ names without their approval. Now they have a big mess to clean up.

Similarly, Volkswagen got so hung up on doing whatever it took to get good diesel mileage ratings that it resorted to lying and cheating. This severely damaged Volkswagen’s ability to be the type of company customers want to identify with. And now they are paying a steep price (in both money and image).  

Warning Signs that Your Strategy is on a Path to Failure

So, what are the warning signs that one is more focused too much on doing rather than being?

First, how seriously do you take your business mission? Do you even know what you want to be? Does your mission explain a higher reason for being that customers will want to identify with or is it just some clever phrase? Does the company try to live out the mission or is it just meaningless rhetoric?

After the collapse of Enron, I talked to many former employees looking for a job. They all said that Enron had a business mission paper explaining the essence of what Enron wanted to be. It was called RICE and it stood for Respect, Integrity, Communications and Excellence. However, they also said that Enron totally ignored this paper.

Instead, Enron became one thing: a place for doing whatever it takes to increase short-term stock price. The incentives all hinged on doing that one thing. So that is what people did. At the extreme, it became illegal stock manipulation.

This leads to the second warning sign: what do you measure? Wells Fargo, Volkwagen and Enron were measuring an activity (adding cross accounts, increasing fuel economy, raising stock price) rather than measuring how their being was perceived in the marketplace. This destroyed their strategy.

That is why I see KPIs as a necessary evil rather than a salvation for strategy. KPI’s tend to focus on doing, because doing is easier to measure and attribute to an individual. Too many and too much focus on these doing-related KPIs lead to the problems at Enron, Wells Fargo and Volkswagen.

Instead, we need more measurement tools that look at how we are managing our image and sense of being that we want customers to identify with.

The third warning sign is how a company reacts to the changing environment. Does it change with the environment so that its being remains relevant (like Wal-Mart) or does it stick with improving the old process and become obsolete (like Kodak)?

A fourth warning sign is a strategic process where corporate culture is not integral. As the saying goes, “culture eats strategy.” Ignore culture at your own peril.

SUMMARY
Depending on which study you look at, somewhere between 60% and 90% of strategies fail. If we don’t address the deep-seated reasons why strategies fail, we will not be able to raise the percentage of strategic successes. I believe that there are three major reasons why strategies fail and my reasons do not always agree with conventional wisdom. The second reason I believe most strategies fail is because the strategic effort is too focused on doing rather than being. Real success occurs when everything about a company reflects the reason why customers would want to identify their sense of self-worth with the identity of your brand. This requires a strategy that is rooted in knowing what your represent (your sense of being) and what type of culture is needed to personify it. Otherwise, employees will do the activities that boost personal gain and destroy the brand and the strategy behind it.

FINAL THOUGHTS
If you don’t look in the mirror, you won’t know how attractive you are. A key role in strategy is to be the mirror, so that the company can see how attractive it is becoming to its customers

Strategic Planning Analogy #570: The Magic Word

THE STORY

There is a magical word in the English language. That word is “Normal.” Normal represents that which is to be expected: the routine, the average to which everything else is compared. If something is better than normal, we rate it with a positive number. If something is worse than normal we rate is with a negative number. And normal remains the eternal midpoint of 0.

What makes “normal” a magical word? It’s magical because it can change your entire perspective on life. For example, let’s say your life falls into a terrible routine—you’re locked in a prison camp, or you’re living every day in poverty with little to eat, or some such situation. It looks bad. You’d think you’d rate it a low negative number.

But…

If your situation stays like that long enough, it becomes your expected routine. It becomes your normal to which you compare everything else. It is your new reference point of 0. Now it is no longer the definition of bad. Bad is that which is worse than that new normal, no matter how bad the starting point of your new normal is.

That is why people who have lived their entire life in poor impoverished nations often seem so happy. This situation is their normal. It is pretty much all they know. It is their stating point of zero. Since it rarely gets worse, they don’t rate much in negative numbers. And since it sometimes gets better, they have many positive moments.

So, if you find your life taking a bad turn, just pull out that magic word of “normal.” Classify your current state as the new normal. Suddenly, it moves from being a big negative to being your new zero. And zero feels a whole lot better than a big negative number.

THE ANALOGY
Many companies have learned the magic in the word “normal.” When times get bad for a business, they explain it away as being “the new normal.”

“We can’t do anything about this situation,” they say. “It’s just the way things are. It’s the normal way the marketplace will work from now on. We just have to accept it and live in this reality.”

They make it sound so logical. They claim these aren’t really bad times. These are now normal times. This is all that can be expected in times like these. Instead of the situation being rated a negative number, things are now recalibrated to zero.  

And in recalibrating to zero, the business accepts the new status quo. They settle for the new point zero. They stop aspiring for anything much better. It’s okay now to be this way well into the future because it is normal.

And this is where the strategic problem arises. Once you accept a bad situation as normal, you are trapped into thinking that this current situation is the baseline for strategy. It is the norm from which you try to eke out minor improvements. The parameters of your assumptions are bound by the mistaken belief that the events causing your situation to be bad are normal, and therefore nearly impossible to change.

As a result, the expectations in one’s strategy tend to drop. After all, it is difficult to pull off abnormal results when the forces of nature are pulling you back to normal, right?  This causes weak, ineffective strategies which perpetuate a bad situation. Significant improvement doesn’t happen, because you no longer expect it or plan for it. You’ve let the magic of normal lull you into complacency.

THE PRINCIPLE
I first learned about this principle in a college political science class. Although my college professor didn’t quite say it in these words, he believed that most social unrest and political revolts were a result of changes in the perception of normal.

His logic went something like this. As long as the citizens of a nation saw their situation as normal, they were relatively content. You can’t change normal, so you may as well accept it. So even nations with horrible conditions were relatively stable. This is all the people knew and it was all the people expected, because it was their vision of normal. There was no reason to change, because they did not see anything to change to.

But then, in the middle of the 20th century, mass media started penetrating the far corners of the earth. People in the poor, repressive nations started to see how life was lived in other places. They saw how other places had a totally different type of normal life. The normal in these other nations looked MUCH BETTER than what they were experiencing. Suddenly, these nations decided that the superior normal in these other places should be their normal, too.

By accepting this new and better definition of normal, the people in the poor, repressive nations changed their perspective. Now, their current circumstances were no longer rated as zero. By comparison to the new idea of what should be normal, the current situation was a huge negative number.

Nobody wants to live in a highly negative situation, so the people in these nations started to revolt. They were willing to make great sacrifices in order to achieve their much higher expectations of what normal should be. So, according to my professor, mass media and its impact on people’s expectations is what ended colonialism and put the world on a better path.

Application to Strategic Planning  

So how does this principle apply to strategic planning? Businesses can be like those repressive nations before the mass media. Everyone pretty much accepts the current situation. It is all they know and they think it is all that can be achieved. It is the normal we have to live with.

The nations did not revolt and work to improve the situation until they could imagine a potential new normal that was worth fighting for. Without first creating the ability to conceive of a new reality, there was no reason for the people to rock the boat and take radical action.

From this, one of the most important principles of strategic planning can be seen: Before you can convince a company to take on the difficult task of radical change, you must first convince the people that there is a new and much better version of normal that can be attained from that change effort.

Therefore, one of the chief roles of the strategist is this: to help the people within the business redefine their perception of what normal can be. The strategist has to paint a picture of a future which is not only much better than today’s norms, but also something which they can envision as becoming their new norm if they are willing to work for it.

Making Insiders Into Outsiders

This is one of the reasons why most revolutions in an industry are started by outsiders. Because outsiders have not lived inside the industry, they aren’t brainwashed into thinking that the norms of the industry are the way things need to be. Outsiders have an advantage in dreaming up and going after a new definition of normal, because:

·         The minds of outsiders are not clouded by years of living under the old normal. They don’t have to unlearn the old conception to form a new one, because they never lived under the old conception.

·         Outsiders have no vested interest in the current normal. It is not theirs. By contrast, insiders have to change their thinking about their identity, which is tied to the current normal.

·         Outsiders have nothing to lose if the normal of the status quo is upset. By contrast, insiders worry the change will make their situation worse. Kodak didn’t aggressively move from film-based to digital-based imaging because that new normal looked less profitable. What they missed is the fact that bankruptcy from not adapting to the new normal is even less profitable.

Therefore another key role for the strategist is this: to help insiders think more like outsiders. This means helping people look at the industry with new eyes that are not clouded by the past. This helps people to conceive of a better normal.

SUMMARY
One of the enemies of strategic planning is complacency. If people feel the status quo is all that can be achieved, they will resist any effort to change. Therefore, one of the key roles of strategic planning is to help people to do two things: 1) Envision a new and better normal; and 2) Help them believe that the new normal is achievable.  Sometimes, it helps if you can get people to see their industry more like an outsider than an insider.

FINAL THOUGHTS
The inability to envision a better normal is not an excuse to view the status quo as being acceptable. Bad is still bad, even if you cannot see a way to make it better. In these cases, perhaps the best move is to sell out to someone who is willing to accept that poor reality…preferably before an outsider finds a way to make that view of normal obsolete.

Strategic Planning Analogy #534: You’re Older Than You Feel

THE STORY
According to a study reported in the Psychonomic Bulletin and Review in 2006, adults tend to feel younger than their chronological age. Beginning around age 25, people start reporting a sense that they don’t feel as old as they really are.

The gap between their subjective and chronological age continually increases between age 25 and 40. By the time adults are 40, most adults report feeling about 20% younger than they really are. This 20% gap tends to remain for most of the remainder of their years.

So if we are “only as old as we feel,” then I guess we’re not that old.

THE ANALOGY
Perception is a powerful thing. If we feel younger than we actually are, then we will act younger than perhaps we should. This could lead to foolish behavior and get us a trip to the emergency room at the hospital.

I dare say that the same phenomenon can occur in the business world. I think a lot of executives feel that their company (or business model) is not as old as it really is.

There’s this sense that maturity doesn’t apply to their business. They feel like their industry is still young and growing and that their company is still a growing youngster, too.

But let’s face it. Businesses and industries have life cycles, just like humans. They may start out young and growing, but eventually they reach maturity and then decline. You may not always feel like your company is progressing through these life stages, but it is. And it is probably further along on this path than you think.

The problem is when you manage your company based on the way you feel about its age rather than what its age really is. Each stage of a business’ life requires a different type of strategy. If your company has reached maturity and you still feel like you are in your growth phase, you will be using the wrong strategy. And just as adults when not acting their chronological age can do foolish things that get them into the hospital, managers who do not manage to their business’ actual life stage age can get their companies into serious difficulties.

THE PRINCIPLE
The principle here is that although the growth phase of an industry may appear to be the most fun and most desirable, the truth of the matter is that in most mature economies, most of the industries are mature as well. Therefore, most of us should be focusing on mature industry strategies.

IBIS World Data

This was really brought home to me when I was looking at a report produced by IBIS World. IBIS World produces reports on a wide variety of industries. To give a perspective, each report shows where that industry fits on the industry life cycle. They do this with a comparative scatter plot showing where about 700 industries fit on the life cycle path. I’ve put a sample of one of these charts in this blog.

As you can see in this chart, the largest number of industry dots are in the mature phase. And although the later growth phase gets the next largest number of dots, the decline phase is not all that far behind. Early growth has the fewest number of dots.

This chart shows just how old most industries are. Mature and decline together dominate the landscape.

The Disconnect

Yet when one looks at business literature and strategic discussions, it seems that the topic of growth dominates. There appears to be a disconnect between the reality of maturity and the desire to act as if maturity has not yet occurred.  Just as our society is preoccupied with youth culture, our businesses are preoccupied with younger business stages.

We may feel younger, but the disconnect between that perception and reality can get us in trouble. Talking like we are in the growth phase or acting like we are in the growth phase does not alter the reality that for many of you, you are already in the mature or declining phase. And by not acting your age, you could be doing your business a disservice.

The Downside of Not Acting Your Age

Here is a list of the major negative consequences from managing to growth when you should be managing for maturity.

1.     Overinvesting in the industry: Because you over-estimate the growth and life expectancy of your industry, you tend to value investment opportunities within the industry as higher than they really are.  This leads to paying too much for bad deals. Hence, you destroy value by overinvesting in areas where the returns will never cover the cost of capital.

2.     Working too hard to grow the top line: If you think there’s still a lot of growth in the industry, then you will have high expectations for what your own growth should be within that industry. However, in maturity, those high growth expectations may be quite unrealistic. Therefore, the only way to hit those high sales goals is to start a price war rampage in order to steal sales from the other mature competitors. This destroys the profit margin for you and the entire industry. If competitors follow your downward pricing, you may not end up with any additional business—just lower margins. But even if competition does not follow you in this downward spiral and you get some of their sales, you may still end up as less profitable because of how you destroyed the margins in order to get the business.

3.     Under-investing in future business models:  If you think there is still a lot of growth and vitality in the current business, then you will see little incentive to investigate or invest in the next big thing that will make your status quo obsolete. The problem is that your business model’s obsolescence is probably a lot closer than you think. By ignoring that, you will be unprepared for when that day comes. You will end up like Kodak, who saw their entire world fall apart because they delayed making the transition from analog film to digital imaging until it was too late. For more on Kodak, look here.

So, as you can see, acting as if your business is younger than it really is is not a small issue. At best, it will cause you to destroy value. At worst it will cause you to destroy the company.

A Better Approach

To avoid these negative consequences, consider the following:

1.     Continually monitor your life cycle using objective tools: Don’t rely on your feelings. They can deceive you. Use objective tools to monitor your path through the business life cycles.

2.     Act Your Age: If you are in maturity, then use the appropriate strategies for maturity such as:

a.      Moving the focus from top-line growth to process efficiency and cost control.

b.     Focus on reaping the maximum return from prior industry investments rather than creating new ones.

c.      Consider shifting emphasis to pockets where maturity is further away, such as emerging nations.

d.     Examine the relative merits of consolidating the industry versus selling out to someone else who wants to consolidate the industry.

e.      Invest in the next big thing that will replace the status quo.

I love what I see in the packaged food industry. P&G realized that its corporate culture and business model were optimized for growth industries. P&G also realized that its food products portfolio had moved on to maturity. Therefore, it sold its mature food businesses to other companies, like Pinnacle Foods. It was a win-win. It freed up money so that P&G could invest in growing industries like health and beauty. And, since Pinnacle Foods has a corporate culture designed to excel in mature businesses, the food businesses were under better management.

In fact, it worked so well that P&G is considering a more massive divestiture of brands.

SUMMARY
The business world is a dynamic place, where new business models replace the old. As a result, businesses do not stay in the growth phase forever. Maturity and decline occur. Unfortunately, many business leaders think their business model is younger than it really is. This leads them to manage for growth when they should be managing for maturity. By using the wrong strategies (growth strategies instead of mature strategies), these leaders destroy value. The better move is to align your strategy with the reality of where your business model lies in its life cycle.

FINAL THOUGHTS
You can use this disconnect to your advantage. If you know that your business is in maturity or decline and someone else still thinks it is in its growth phase, you can sell your business to them for more than you think it is worth.

Strategic Planning Analogy #525: Budget Madness

THE STORY
Well, here we are in the middle of March Madness, when Americans go nuts over college basketball. Millions of people choose who they think is going to win all the games. Warren Buffet is giving out a billion dollars to anyone who chooses the correct outcome for every game in the NCAA basketball tournament.

The Wall Street Journal has come up with their own version of how to pick the teams. They put together a site where the names of the colleges are eliminated. All you have to look at are statistics. Over the years, they have found that people are more accurate at choosing winners if they are not biased by seeing the team name before making their choice.

They call it the “blind” bracket. I guess sometimes we see better when we are blind.

THE ANALOGY
We all have built-in biases. These biases affect our objectivity. Eliminate the bias and we make better choices. This is true in picking the winning college basketball team. I believe it would also be true in business budgets.

Most companies have horribly uncreative budget processes. They consist of little more than just taking last year’s numbers and tweaking them a little (sales go up a little and costs go down a little). And even with that, the budget targets are often missed.

I think the problem has to do with too much familiarity with the company divisions. This creates biases anchored around the status quo (what we know). I believe we would get better budgets if we could do it more blindly (like the Wall Street Journal Blind Brackets).

Why do I say this? Look at how most companies do M&A work. The M&A folks tend to know less about who they acquiring than what their company knows about their own divisions. Yet the M&A people tend to do a much better job of thinking through their forward forecasts than the budget folk.

The M&A crew tends to look as much as 10 years out and do sophisticated discounted cash flow (DCF) analyses. They try multiple scenarios, with different levels of investment and synergies. They look at ways to change the business model in order to justify the acquisition premium.

All this for an outside company they are somewhat blind to. Yet, for our own divisions, which we should know far more intimately, we take a far less sophisticated approach—just look out a year or so and do a small tweak on what was done last year. Something here just doesn’t seem right.

THE PRINCIPLE
The principle here is that budgeting processes won’t dramatically improve unless we find ways to reduce the bias towards the status quo. There is no reason to believe that the status quo optimizes the current portfolio. We don’t expect the status quo for acquisitions. Why should we expect any less for our divisions?

Short Time Frame

The problem with a one year budget time frame is that one year is usually too short to complete a radical transformation of a division. In a radical transformation, the first year typically has added investments and a disruption of sales. As a result, if you are only looking one year out, the budget for a radical transformation scenario looks awful.

What executive wants to accept a budget where sales go down and costs go up? They know that the status quo looks a lot better than that, so they opt for a minor tweak of incremental improvement rather than the first stage of a radical transformation into a far better future.

That’s why companies like Kodak couldn’t make the radical transformation to digital imaging. The bias towards the status quo looks so much better only one year out. Unfortunately, as you string together a series of these “one year out” budgets, you never get around to making the transformation. It keeps getting tabled for an unknown future date until it is too late.

I’ll bet that if Kodak had not already been in the photography business, and had their M&A team examine the business (more blindly), they would have come back with an aggressive transformation to digital imaging as a condition to purchase.  

Go Blind

Is there anything we can do to reduce the bias and budget our divisions more blindly? Sure, perhaps we could make the budgeting team act more like an M&A team that looks at outside businesses more objectively on a longer DCF basis. Or maybe you could disguise a few of your divisions (without the division name) and give it to the M&A team to look at as an acquisition and see what they come up with.

I know that many investment bankers (and activist investors) look at companies from the outside (somewhat blindly) and make proposals about how a company can do something radically different with their assets. I’m not saying they are always right, but at least it can stimulate some non-status quo thinking.

Right now, a lot of these suggestions come unsolicited. What if you proactively sought out more of these less-biased points of view from trusted outsiders?

Even something as simple as benchmarking and best practice analyses could provide a new perspective on what to do differently. These potential budget-line inputs are not biased by what YOU do, but by what best-in-class do. And it could be something radically different.

The Importance of Pursuit

Over the years, I have continually stressed the threefold strategy requirements of:

1.     Positioning (A place where you can win)

2.     Pursuit (Having the Competencies and Capabilities needed to win)

3.     Productivity (A business model that can earns an optimal profit off the winning position)

In the typical one-year budget cycle, it is usually assumed that the positioning stays about the same and the focus turns towards getting more productivity out of the status quo model. The issues of pursuit are rarely discussed.

But pursuit is a critical component to success. If you want to grow, you need to build the capacity to effectively handle that growth. This includes the size of your sales force, the limits on your current supply chain, the capacity of your IT systems, and so on. If you don’t plan in radical changes to capacity, then you won’t effectively be able to capture that growth.

You also need to build in radical improvements to competencies. The world is changing. Today’s status quo is tomorrow’s obsolescence. Are you staying on top of what you need to know to win in the future? How’s your R&D spending? How about educational programs? Are you pro-actively bringing in new talent with the new knowledge you will need?

We can often miss these pursuit issues in a typical budgeting process because of that bias towards the status quo. It makes us falsely believe that we already have the capacity required and competencies needed. After all, we are only tweaking the status quo for the next year.

As a result, the needed step-wise leaps in capacity and competencies never get into the budget. Eventually, that chokes the division’s ability to do what is needed. Then, even the status quo no longer works any more.

I dare say that if we were looking at are divisions more blindly, as we would an acquisition, we would do a better job of factoring these types of investments into our analysis.

SUMMARY
Biases tend to cloud our judgment and make us less objective. This is particularly true when it comes to annual budgets. The bias towards the status quo keeps us from seeing a more radical—and much brighter—future. By changing up the typical budgeting process and adding blinder, more objective eyes, we can find these radical transformations and incorporate into the budgets the radical “pursuit” changes needed to make them a reality.

FINAL THOUGHTS
Most vision statements talk in some way about being leaders or best-in-class. Achieving exceptional results like that don’t come from perpetuating the mediocre status quo past. So why accept a budgeting process which encourages perpetuating the mediocre status quo past?

Strategic Planning Analogy #495: The 3 Keys to Success (Part 2)

THE STORY

I was excited the first time I was to visit the Museum of Modern Art in New York.  The museum is full of famous works of art.  I had read about or seen pictures of this art in books, but now I was going to get a close up look at the original paintings. I imagined that it would be a very inspiring visit.

Instead, it turned out to be a very disappointing visit.  As it turned out, not only do you see the greatness of the paintings when you see them up close.  You also see all the imperfections.  In particular, I remember looking at some very famous Picasso paintings.  When you studied them up close, you could see the rough pencil sketch underneath the paint.  They looked a lot sloppier than the little photographic reproductions I had seen of them earlier in art books.  After awhile, I became so fixated on the imperfections that I couldn’t enjoy the paintings.

I kept thinking to myself that I could probably find many artists who would be able to reproduce all of these paintings and have fewer imperfections. But in later reflection, I realized that I was missing the point.  No matter how much more “perfect” these reproductions would be, they would never be more valuable than the original.

THE ANALOGY

Copying is a lot easier than creating something entirely new. Imitators may even be able to make small improvements over the original.  But in the world of art, the value belongs with the original, no matter how flawed it might be. 

A similar situation exists in the business world.  The ones who create, get known for and exploit exciting new business models first usually create more value than the later imitators.

Therefore, you’d think that there would be more business people striving to be the next Picasso—creating something new, exciting and very valuable. Yet, when I look around, it seems that the business world is more often filled with imitators and copiers. The idea seems to be that “People like that original over there, so if I make something just like it, they will like mine just as well.”

But as we all know, a “just like Picasso” is never as valuable as a real Picasso.  Why should we expect the rules to be all that different in business?

THE PRINCIPLE

We are currently on the second blog in a series on the three characteristics which tend to determine whether a business is a great, lasting winner, or a long-term loser. In the first blog, we looked at “Passion” and saw that the winners have a passion for the business and the intricacies of the business model which makes it work in the marketplace.  The losers focus their passion on the money that comes out of the business and are only tangentially concerned about the details in how it is made.

In this blog we will look at “Direction.”  Winners tend to move in new and different directions, like Picasso.  Losers direct themselves to follow what is already working (the imitators).

The Problems With Following

There are many reasons why the followers rarely become the great companies. It doesn’t matter if you are following the standard rules of convention for your industry or following the innovation of the leaders.  You are still following.  And followers rarely reap great rewards.

There are three problems with focusing on following the conventional rules for how your industry works.  First, if everybody is doing the same things in the same way, then you tend to have parity of offerings amongst the competition.  How do you win over the competition if you are all perceived as being the same?  This tends to lead to price wars (“everything is the same, but we cost less”), and we all know that price wars are not the path to creating above average prosperity.

Second, even if you can execute within the conventional rules a little bit better than everyone else, it is usually only a temporary advantage. In an earlier blog, we looked at the battle between Fuji and Kodak in conventional analog photographic film.  Sometimes Fuji would have a slight advantage; then Kodak would get a slight edge—back and forth it went with no clear winner.  The real winners were the innovators who abandoned the conventional rules of photography and brought digital imaging to the masses.

Third, there are limits to how much better one can become by playing by the same rules. The law of diminishing returns tells us that ever increasing improvements tend to lead to ever smaller perceived benefits.  For example, I could make an ever more perfect nail, but at some point, the guy hammering that nail into a board won’t be able to see how those perfections improve his hammering.  In other words, superior executions of the status quo often do not create enough of a differentiating benefit to shift habitual shopping patterns for the customers.

So what about following the innovators?  Well, you’re still a follower.  The last time I checked, followers never win races.  Just as Picasso gets superior credibility for pursuing a new path, business innovators get superior credibility over their followers.  The innovator becomes synonymous with the innovation.  The rest are seen as mere copiers. 

For example, Google means search.  Even though the follower Bing claims a slight superiority in blind tests, Google still wins the war for market share in search.  Why?  We are not brand blind.  The emotional bonds associated with the leader brand overcome the slight differences.  The same thing happened when follower Pepsi claimed superior taste in blind taste tests over Coke.  Coke still won the war.

Finally, the follower usually is one step behind the innovator.  By the time the follower catches up to where the leader was, the leader has moved on to the next innovation. That is why hockey great Wayne Gretzky attributed his success to ignoring where the puck currently is and instead going to where the puck is going to be.  Rather than following the puck, he got in front of it. 

There are only two ways to win by following.  First, you can win by having your competitors make colossal mistakes. Their failure becomes an opening for your gain.  But a strategy that depends on others to make mistakes is not much of a strategy.  In addition, if you are a follower, you will probably follow them into similar mistakes.  For example, the financial collapse which triggered the great recession was caused by colossal mistakes in the banking industry.  But because most of the big banks tended to be following each other and playing by the same flawed rules, most of them fell victim to the flaw and could not gain meaningful advantage.

The second way to win playing by conventional rules is if you are substantially larger than everyone else and can leverage your size to your advantage.  However, this begs the question of how one gets to be so much larger than the others in the first place.  Usually the bigger players got to be so much bigger because they were the innovative leaders which rewrote the old conventional rules into what became today’s conventional rules. It was their leadership which made them big, not any form of followership.

The Value of Being Different

There are two ways to be different.  First, you can create a new business model which is inherently superior to the status quo model at delivering value.  For example, Southwest Airlines has been a consistent success competing against other airlines who struggle to survive.  Why?  Southwest Airlines played by a different business model, focused on point-to-point (among other things).  It’s unique business model allowed it to provide superior value that those playing by conventional rules could not imitate.  Even the best player by conventional rules could not exceed the value offered by Southwest’s different approach to the business.

Another example would be Salesforce.com.  While others were playing by the old rules of installing and supporting software scattered everywhere, Salesforce.com eliminated the software paradigm and was a leader in putting everything up in the cloud.  That change in business model gave Salesforce.com inherent advantages that the conventional operators couldn’t match if they stayed in the old paradigm, no matter how well they executed it.

This helps reinforce the first differentiation we talked about in the prior blog—where winners focus on business models.  You won’t find the success of a Southwest Airlines of Salesforce.com unless you spend time focused on business models. 

The second way to win in difference is by creating a new value proposition which did not exist before.  Apple has been a winner by creating wholly new types of value expectations.  The iPod, iPhone, and iPad changed the whole way people thought about how to live and enjoy their lives.  They created new values in new places.

The “Fast Fashion” operators, like H&M, Zara and Forever 21, helped change the definition of what to value in fashion for a significant segment.  Instead of defining fashion by Exclusive Labels, High Prices, High Quality and Fashion Seasons, they made fashion more disposable, where frequent change/variety combined with low prices (and lower quality) was a new winning formula.

If you look across the spectrum of business, you will find that nearly every great company at some point took one of these different directions.  They either came up with a new business model which had inherent advantages over the old model in the conventional industry, or they invented whole new industries by redefining or creating new value formulas.

SUMMARY

One of the key differences between business winners and losers is the direction the leaders take the company.  The losers tend to move in a following direction—either following the conventional rules or following the innovators.  By contrast, the winners tend to move in a new direction, either by finding new ways to better satisfy old values or by creating new values through new industries.

FINAL THOUGHTS

Artists create; craftsmen copy.  Are you an artist or a craftsman?

Strategic Planning Analogy #480: Landing a Strategy

THE STORY
I used to live in a city which had a small regional airport.  The city wanted to get more of the large airlines to land at this airport, but the airlines kept refusing.

The airlines said that they would not schedule flights to that airport because the runway was too short.  Sure, it was long enough to land the smaller planes that the airlines use, but not long enough to land the largest jets.  Because the airlines want flexibility in the use of their airplane fleet, they didn’t want to schedule flights into airports which couldn’t handle their largest planes.

After hearing the complaints, the city invested in building longer runways.  And not long after the longer runway was built, a large 747 jumbo jet landed at the airport in grand fashion.

I think it was many, many years later before the second large jet landed there, but it didn’t matter.  The renovations and the longer runway resulted in getting more scheduled flights at the airport.

 

THE ANALOGY
I like to use the term “landing a strategy.”  This concept refers to getting a strategy from being just a cool idea floating in the clouds to being a reality playing out on the ground where the company is operating.

Landing a strategy is a lot like landing an airplane.  If the airport’s runway is too short, the larger jet will not be fully landed before it runs out of runway.  The plane will keep moving at a high rate of speed beyond the edge of the runway and crash into something, creating a total disaster.  That’s why airlines insist on having long runways before committing to an airport.

It takes a lot of time and money to land a strategy (to get it from idea to reality).  If you run out of time and money before the strategy is fully landed, you are like a pilot in a big plane that ran out of runway.  Your strategic attempts are about to go off the runway and crash into something, creating a total disaster.

Due to our optimism, we may think we need a shorter runway (less time and money) than we really need to land our strategy.  As a result, we may already be well into the strategic transformation before we realize that we are trying to land our strategy at an airport (i.e., company) whose runway is not long enough (not enough time or money to finish the transformation).  Then we find ourselves frantically trying to lengthen the runway at the same time our plane (i.e, strategy) is already approaching the runway.  That’s not a very wise approach.

When a strategic transformation runs out of runway, the worst possible scenario occurs.  The old strategy is bankrupt because all the time and effort and money went into the transformation.  The old strategy is too obsolete to create sufficient cash flow to keep the transformation going (running out of money). The time for bankruptcy under the old model keeps getting closer (running out of time).  Yet, because there is not enough time and money left to finish the transition to the new strategy, you don’t end up the replacement strategy, either.  Instead, you are stuck with neither strategy.  A total disaster.

Think about Kodak.  It didn’t start trying to land a digital strategy until the analog business was almost dead.  The old analog business was not producing cash flow and was soon to die (no time or money).  As a result, Kodak’s runway was too short.  They ran out of time and money before a digital strategy could be landed.  The company ran off the runway and imploded.

The airlines in the story had a safer approach.  First make sure the runway is plenty long enough.  Then, only after the long runway is built, will the airlines consider trying land planes there.  Our strategic approaches could learn from this.

 

THE PRINCIPLE
The principle here is about change management.  Nearly all new strategic initiatives require significant change in the business in order to become reality.  You may have a great new strategy, but if you mis-manage the change process to get there, you will not effectively land the strategy.  It will crash and make a disaster.  

If you cannot effectively land the strategy, it is irrelevant how great that new strategy was.  It will crash when you run out of runway, just like a bad strategy.

Therefore, a key piece of change management needs to be assessment of the length of your runway.  If the runway isn’t long enough (not enough time and money), then the process is doomed.

Option #1 Lengthening the Runway

If the runway is too short, one solution may be to lengthen the runway.  In other words, before embarking on the transformation, look for ways to either:

1. Increase Cash Flow; or
2. Slow Down the Demise of the Status Quo.

These actions may not have any direct relationship to the change you are trying to accomplish, but if you do not do them, you will not have enough time or money to do those things which directly relate to the change.  So you need to do them as well.

Tactics to lengthen the runway could include:

1. Selling off peripheral assets.
2. Restructuring the Balance Sheet.
3. Massive layoffs in peripheral areas
4. Sale and lease-back of properties.
5. Looking for legal or governmental protections of the core to keep threats to the core further away.

One of the main reasons why Ford Motor Company did not have to go through bankruptcy and government bailout while GM and Chrysler did was because Ford had taken many of these types of steps to lengthen their runway prior to the great recession.  As a result, Ford’s runway was long enough to last until they could transition through the economic recession and get to their revitalized strategy.

GM and Chrysler ran out of runway because they did not do enough of these types of things.  Without a lot of outside help, they would have crashed when their runways ran out.

Option #2 Shortening the Plane

If lengthening the runway is not enough, you can try to switch to a smaller plane.  By this, I mean that instead of trying to create massive change all at once, you can chop up the change into smaller bundles (like smaller planes) which require less time and money to land (and thus can use a shorter runway).  Those smaller changes with the quickest payback can be done first and create the new money and extra time needed to land the rest of the transformation.

Thus, you fund the latter change by strategically creating funding via the early changes.

Netflix was originally designed to be a digital downloading service (which is why the company was called Netflix instead of Mailflix).  However, the company realized that it would take massive amounts of time and money to create the Netflix model.  Therefore, Netflix started with a smaller plane (movies by mail). 

Movies by mail required less time and money to start up.  And it got Netflix a huge subscriber base and clout in the marketplace that could be applied to the ultimate vision.  And because the near-term model was profitable, it could fund the efforts needed to make the ultimate transition.

Option #3 Changing the Flight Schedule

A third option is to change the scheduling of your flight—prepare to land your plane earlier.  The idea here is that if you start the transformation earlier, before the status quo deteriorates too much, you have many advantages:

1. The old strategy is stronger and producing more cash flow to fund the landing.
2. The company’s image and clout are stronger which makes it easier to introduce your change to the marketplace.
3. The ultimate demise of the status quo is further away, so you have more time.

Kodak essentially invented the world digital imaging.  They had plenty of time, clout and money to implement the change.  The problem was they waited too long to do anything about it.  If they had scheduled the landing of the digital transformation much earlier, the odds are good that it would have succeeded. 

The problem is that companies worry about cannibalization.  After all, the sooner you start the transformation, the quicker you cannibalize the old core.  What you need to realize is that someone is going to eat your core.  Your only real option is to decide whether you are going to do the eating or someone else is going to do the eating.  And if you wait, like Kodak did, and let the competition eat your core, you have no runway to get to the replacement.  All you are is eaten.

 

SUMMARY
Strategic initiatives usually require change.  Change requires time and money (and usually more than you initially realize).  Therefore, if you want to land your strategy, you’d better make sure there is enough time and money to get the change implemented.  If there isn’t, you will need to adjust your approach to that change by either:

1. Finding more time and money;
2. Starting with smaller change initiative bundles; or
3. Starting the whole process sooner.

 
FINAL THOUGHTS
I worked with a company that was running out of runway.  They did not have enough time or money to finish their transition.  The solution they picked was to sell the business to someone with deeper pockets and more time.  In other words, they sold the plane to a company which owned a better airport with a longer runway.  So, before you panic, look for creative ways to get a longer runway.  Creative solutions are out there.

Strategic Planning Analogy #474: Weighing Money

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

  

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

The Folly of Putting Efficiency Ahead of Effectiveness

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

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

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

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

The problem with this approach is that:

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

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

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

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

The Benefits of Putting Effectiveness First  

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

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

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

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

 

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

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

2)      You end up perfecting the obsolete.

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

 

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