Strategic Planning Analogy #433: Constructive Energy

THE STORY
Although construction and destruction are opposite results, they can often come from the same source. For example, a nuclear power plant uses the same basic principles of nuclear physics as a nuclear bomb. Yet, the output from a nuclear power plant is constructive while the output from a nuclear bomb is destructive. Same source, but radically different outcomes.

In the same way an axe provides radically different results, depending upon how it is used. In the hands of a lumberjack, an axe is very constructive. In the hands of an axe murderer, the results are very destructive.

So is the power of the axe or of nuclear reactions good or bad? Is it a force for construction or destruction? In reality, it is just a source of power; an input. The outcome depends on how the power is controlled.

THE ANALOGY
Another source of power, besides axes and nuclear reactions, is management. Over the years, I have seen examples of management doing things which are very positive and constructive to a business. I have also seen management do things which are very destructive to a business.

Sometimes, we are quick to place a value on the input based solely upon the outcome. We will say that all the managers who provided constructive outcomes were “good” managers and all of the managers who provided destructive outcomes were “bad” managers.

Now in some cases, this is true. There are some really good and really bad managers out there. But in general, I’d say that management tends to follow a bell-shaped curve, with most of the management in the middle rather than at the extremes of good or evil. I think this is particularly true at mid-management levels. Therefore, if we want good outcomes from the core of our business, we need to consider the lesson of the axe and nuclear reactions.

An axe is not inherently good or bad. The value of the axe is determined by the one using it (lumberjack or axe murderer). In the same way, most managers are not automatically always either extremely good or extremely bad. The outcome, good or bad, is highly influenced by how the company uses its management.

In a toxic business culture, it is difficult for any manager to be very constructive. Conversely, in a healthy culture, it is far more difficult for a manager to be destructive. So if you want good outcomes, it takes more than just finding good managers. You also need to place those managers in an environment where good outcomes are more likely to occur.

Just as the holder of the axe has to take some of the responsibility for the outcome of the axe, a business has to take some of the responsibility for the outcome of its management

Therefore, we should not automatically and hastily replace a manager just because the results were bad. Unless the environment changes, the next manager may be no more successful in his/her results than the last one. For example, I worked with a company division that went through about 4 presidents in a nine year period. Yet, despite frequent changes in management, the results continued on the essentially the same poor path. The bad corporate environment was more influential on results than the character of the leader.

So, before making a quick value judgment on a manager, consider the way in which the manager was used by the business. Perhaps the best way to improve results is not by replacing the manager, but by replacing the environment the manager is put in. And, as we will see in this blog, an increased emphasis on strategic planning can be an easy and effective way to improve that environment and allow your management to be more constructive in its outputs.

THE PRINCIPLE
One of the biggest problems facing the strategic planning profession is the growing image of Strategic Planning as being irrelevant. The logic of those who believe in the irrelevance of strategic planning usually goes something like this:

a) The world is moving too fast; constant change makes it impossible to effectively plan the future.

b) Those annual planning meetings produce documents that are ignored and go on the shelf, and have no relevance to everyday decisions.

c)If we adequately empower the people on the front lines, they can get the job done without needing the advice of strategists stuck in the ivory tower away from where the action is.

As the image of strategic planning declines, so does the number of strategic planning jobs inside businesses. Just go and look at all those job boards on the internet. Titles like “VP of Strategic Planning” are disappearing. If you click on one of the drop lists of job types on these sites, strategy usually isn’t even on the list.

If you, like me, still believe in the benefits of strategic planning, then this is not good news. In response, one can try to change these people’s minds by attacking those three points above (and I think good rebuttals can be made). However, that may not be the best approach.

My suggestion is to counterattack on a different front. One such counterattack is to say that strategic planning makes all of those empowered people more effective. In other words, a small investment in strategic planning can increase the quality of the output of management, leading to far better financial results. Like the axe and the nuclear reactions, you can turn management output to greater good because you place them in a better environment.

Most Managers Are Ineffective
This can be seen in a study by academics Heike Bruch and the late Sumantra Ghoshal as reported by CBS Moneywatch. Bruch and Ghoshal defined managerial success as “decisive, purposeful action.” For them, good managerial output is action which results in leading the company forward.

What they discovered was that only about 10 percent of the managers they studied created decisive, purposeful action. In other words, about 90% of managers are not effective.

The rest of the management was classified as follows:

a) Approximately 40% energetic, but not focused (effort wasted);
b) Approximately 30% had low energy, little focus and tended to procrastinate; and
c) Approximately 10% were focused, but not very energetic.

Businesses should not be happy when approximately 90% of their managers are ineffective. This should be a call for change.

Strategic Planning Can Create Effectiveness
The largest segment of ineffective managers was those who had the energy, but not the proper direction (no focus). These are like the people who have the nuclear energy but make destructive bombs rather than constructive electricity. They have the capacity and the desire to do good work, but the effort is dissipated due to lack of proper focus.

Well, guess what is the best way to give managers focus? It is through strategic planning. Strategic planning provides focus and direction. It tells people what the goal is—where the vision lies and how to get there. Strategic planners can not only help set that focus, but help communicate that focus to all the managers and show them how their role fits into that focus.

If a company makes a relatively small investment in strategic planning, they can turn that 40% who are energetic and not focused into productive, focused managers. Suddenly, a typical company goes from having only about 10% of their managers productive to having about half of their managers productive.

What other similar-sized investment could a company make that could have such a dramatic increase in management effectiveness? I can’t think of any. It’s a no-brainer. Invest in strategic planning because it turns unproductive managers into productive managers.

This is an outstanding return on investment. And for that alone you can justify having strategic planners in the organization.

SUMMARY
Success does not come from merely having powerful tools. Powerful tools can be both constructive or destructive, depending upon how they are used. In the same way, managers can be effective or ineffective, depending upon whether or not the company provides them the proper focus. Strategic planning can provide such a focus. Therefore, you can justify an investment in strategic planning merely by looking at its ability to turn ineffective management into effective management.

FINAL THOUGHTS
You can be the best strategist in the world, but if nobody wants it, then you cannot use your gift for good. Therefore, we need to continually defend the value of the discipline.

Analogy #232: Breaking the Ice

THE STORY
Growing up in Michigan, I heard stories every year of how ice was affecting the shipping of goods through the Great Lakes. Each winter, portions of the Great Lakes waterway would freeze, making it impossible for the cargo ships to operate.

The Great Lakes shipping industry is vital to the economies of communities throughout North America and beyond. During the winter months, about 17 million tons of cargo flow through this waterway. Key cargos include coal for electricity and heat, iron ore for manufacturing, salt to keep roads open in the winter, and grain for food.

To keep the cargo moving, the US Coast Guard uses icebreaking ships. These ships do not carry cargo. Instead, they are specifically designed to break down ice, in order to create shipping lanes for the cargo ships. Without these icebreaker ships, many weeks of shipping would be lost each year.

THE ANALOGY
Although both types of ships are different, both the icebreaker ships and the cargo ships are necessary to accomplish the task. In fact, it is their differences which make each one valuable. No cargo ships could get through without the icebreaker ship creating the shipping lanes. And those shipping lanes would be worthless if there weren’t cargo ships to use them. They functions are both vitally important.

Both of these ships are specifically designed for their purpose. If you tried to use a cargo ship to break the ice, you would destroy the ship. And the icebreaker ships are not designed to carry much and would be highly inefficient as a cargo carrier.

There is a similar situation in business between “Leadership” and “Management.” Both are vitally important to get business accomplished, but they are different and cannot be a substitute for each other.

Leadership is like the icebreaker ship. Leadership looks ahead and creates the path to the future, like building a shipping lane through ice. Leaders (the icebreakers) provide guidance to show the followers (the cargo ships) where to go. Leaders need to innovate—break through the rigid ice of conventional thinking to achieve the next “breakthrough” idea. Leadership is mostly externally focused, scanning the environment to find a proper path.

Management is like the cargo ships. Management makes sure the details of the business get done—the cargo is loaded, shipped and delivered on time and under budget. Management is mostly internally focused on the specific task at hand.

Focusing on management alone can lead to two problems. First, management skills are good at making sure the task gets done, but not well suited for determining which task to do. Without leadership, one can end up becoming very good at managing a task that is no longer relevant.

Second, management alone can become so internally focused on improving the process that they fail to see the changing external conditions which can make all that effort for naught. The ice comes in and freezes that cargo ship of management so that it cannot move. Leaders are needed to detect the coming ice and find the proper path through it.

I have seen too many companies get all wrapped up into managing the tasks at hand to the exclusion of any leadership looks into the larger picture. The company just focuses on trying to do everything “just a little bit better.” The idea is that if we keep doing the same thing (only a little better) everything will work out all right.

In times of economic turmoil, like the current situation, it can become even more intense of a focus on managing the execution. Unfortunately, the economic turmoil has changed the environment. The old ways may no longer be appropriate. The leadership role is needed to find the new path in the icy storm.

Of course, as important as leadership is, it alone is not enough, either. Many great ideas from visionary leaders fail because of insufficient follow through on managing the process to bring the idea to light.

In addition, leaders are only great if they have followers. Just as shipping lanes in the ice are only useful if there is someone who follows behind and uses the lane, leaders need followers to create any value from the vision.

THE PRINCIPLE
The principle is that strategic planners need to recognize the existence of two essential, but different functions here—leading and managing. Each aspect needs a different kind of strategic plan.

The strategic questions which need to be answered for “leading” are as something like this:

1) What does the environment look like?
2) Where is the ideal place in this environment for our business to go?
3) What should our position be in the marketplace?
4) What does winning look like?
5) How do we need to change in order to win?

This tends to look like conventional strategic planning.

But we shouldn’t stop here. We need to plan the management of the vision as well. This second type of planning is often referred to as Project Management. This is how one coordinates all the little things that have to happen to make the plan come to life. The questions for planning at the management level look something like this:

1) What are all the tasks which need to be accomplished?
2) How do the tasks interact? Do they have to be done in a particular order? Where do tasks need to coordinate together?
3) Who will be responsible for getting each task done? What are the incentives/punishments associated with getting it done?
4) What are the timetables (due dates) for when each task needs to be completed?
5) How are we going to monitor all of this activity, to make sure it gets done properly?

To a professional strategist, this may look more like a tactic than a strategy. However, to the one who has to get the job done, this is his/her strategy. And getting this planned out properly is just a critical as getting the big picture correct.

Now, just as you use two different kinds of ships at sea (cargo and icebreaker), you probably need two different types of people to do these tasks (leading and managing), because the skill sets tend to be very different. But just because they are different tasks done by different people doesn’t mean they can act independently of each other. Tight coordination is needed.

The tasks being managed need to be moving the company in the direction of where the leader is trying to lead it. And the leadership cannot properly lead if it does not keep the managers in the communications loop. They are really just two aspects of the same process.

Therefore, when setting up your strategic planning process, make sure time is given to planning the plan (leadership) and planning the execution of the plan (management). Although they may take place at different times with different people, they need to coordinated on your calendar and be working towards the same agreed upon goals.

SUMMARY
For a company to succeed, it needs two things: the proper path into the future (Leadership), and a process to get there (Management). Both are essential and need to be a part of the overall strategic planning process. Leadership alone is just a dream with no way to fulfill it. Management alone will get a job done, but it may be absolutely the wrong job to be doing, because it is out of touch with the evolving environment.

FINAL THOUGHTS
A common term thrown about these days is “visualization.” The idea is that if we can just visualize hard enough the goal we want, the goal will somehow be miraculously be obtained. I’m not willing to just rely on thinking hard (leadership alone). I want to work hard as well (management).

Going in Circles

THE STORY
There once was an important executive at an amusement park. He needed to get an urgent message to someone at the other end of the park, so he gave the letter to one of his subordinates and said, “Quick, get on this horse and hand deliver the message to the man at the other end of the amusement park.”

So the man got on the horse that the man pointed to, just as he was ordered to do. Unfortunately, this was a wooden horse on the park’s merry-go-round. The merry-go-round went around in circles a couple of times and dropped of the subordinate at the same location as where he started. This made the important executive furious. He yelled, “What’s the matter with you? I thought I told you to deliver this letter to the other end of the park. Give me back the letter.”

So then the executive gave the letter to another one of his subordinates and gave her the same message—get on a particular horse and hand deliver the message to the man at the other end of the amusement park. So the second subordinate got on the merry-go-round horse, went around in circles a couple of times and she ended up where she started, still holding the letter.

Again, the executive was furious, so he gave the letter to a third associate and gave him the same message. He got on the merry-go-round and had the same result. This lead the executive to give the same orders to a succession of other subordinates—all leading to the same disappointing result.

Finally, a thought occurred to the executive as to why he was having so many problems delivering the letter. “I finally know what’s wrong,” said the executive. “The problem is that nobody knows how to ride horses any more.”

THE ANALOGY
Over time, businesses will hit periods of difficulty. The old ways suddenly seem less effective. The business is no longer appears to be going anywhere, just like the merry-go-round horses don’t seem to be going anywhere. There is lots of activity, but no forward progress. All that activity just seems to make you go in unproductive circles, like the merry-go-round. Just as in the story, your difficulties prevent you from completing your business's mission.

In times of trouble, many executives resort to changing the person in charge of the mission. The thinking is that the reason the mission is failing is because the person in charge of the mission is incapable or unqualified for the task. Therefore, if you put someone new in charge, the problem will get fixed. This was the thought pattern of the man in the story. He kept thinking that if he could just put the right subordinate in charge of the mission, he or she would succeed.

Unfortunately, the problem was not the person in charge, but rather the business model chosen for the mission. No matter who was put in charge, no one was going to get to the other side of the park by using a merry-go-round horse. Rather than changing leaders, the executive should have been changing horses…finding a different kind of horse that is capable of getting to the other side of the park.

The same is true in business. Quite often the only path to success is not in changing leaders, but in changing the business model. That is where strategy comes in—to tell you when to change horses and which type of horse to change to. The sad part of the story was that the executive never caught on to this truth. He kept thinking that if he switched leaders long enough, he would eventually find one that could ride the merry-go-round horse to the other side of the park.

THE PRINCIPLE
The principle here revolves around degrees of control. Typically, the more control you have over your destiny, the more successful your future will be. Studies have shown that in most cases, strategic decisions impact your destiny than more than the person in currently in charge of the strategy. The leaders have less control of their destiny than most people think. They’re freedom to act is constrained by the strategy they inherit.

Years ago, I went to a retailing seminar where the professor said that the ultimate success of companies (and particularly retailers) can only be affected about 20 to 30% by the leader. The other 70 to 80% is determined by major strategic decisions made long ago. You can see this when you replace a bad store manager with a good store manager. Yes, the store will have better performance under the better store manager, but rarely will the results move by more than 20%. Earlier strategic decisions account for the rest of the performance:

• How you’ve managed the brand image.
  
• Your particular business model (price, product, service levels, etc.)
  
• How you’ve positioned yourself versus competition

If the brand reputation is terrible and your business model is uncompetitive, there is not much that a new leader can do in the near term to make a huge difference. He or she has inherited a wooden horse strategy that won’t make it to the other end of the park. Even a good manager can do only so much when given a mission based on an obsolete business model.

Often times you will see someone leave a successful company and go to lead a less successful company. The person frequently brings others from the more successful company to help him or her. Yet, despite their past success, they do not turn around the less successful company. The reason is because people alone are not enough. There is a reason why that company was less successful in the first place. Frequently, it is because it has an inferior strategy. Until the strategy is changed, there is only so much the new management can do. Making the merry-go-round go faster will not get you any closer to the other end of the park. Similarly, working harder at executing an obsolete or inferior strategy will not lead to great success.

Yes, sometimes current management has done such a poor job of executing a good strategy that new management can make a meaningful difference by just improving the execution. However, if you’ve changed the management two or three times and things are still looking bad, it may be time to concentrate on changing horses rather than changing riders.

February seems to be the time when you see a lot of changes in retail management. Financial results for the year are coming in, and if they are bad, there is often a change in management. Just yesterday I saw seven press releases announcing top level management changes at large retail companies.

The buzz in retail circles in recent months has been that the strategy of the Gap stores is so obsolete that it didn’t really matter who they chose to run the company. Some even speculated that the Gap would have a hard time finding qualified new executives, because no one would want it. In an article in the Wall Street Journal entitled “Gap Needs a CEO, and Many Qualify; Will Any Apply?” dated January 24th, 2007, it says:

“The job pays well and has plenty of perks. There's just one hitch: You have to be the next chief executive officer of Gap Inc. The successor to former Gap CEO Paul Pressler, who resigned Monday, must contend with unpopular products, falling sales and profits, anxious investors, problematic store leases, fleeing executives, and rivals gobbling market share. There's also an influential founding family that might balk at a restructuring the CEO might favor -- all or any of which might give a contender pause. No simple solutions are at hand.”

That sounds a bit like a wooden merry-go-round horse to me.

SUMMARY
New management can do only so much to change a troubled company if the trouble is due to having an obsolete or inferior strategy. Until the strategy is changed, the impact of having a succession of new management every year or two will do little to improve the circumstances. Management can only impact about 20-30% of performance. The rest comes from strategic decisions. Doesn’t it make sense to concentrate more on areas which impact 75% of performance than on areas that impact only 25% of performance?

FINAL THOUGHTS
There’s an old saying that the definition of an insane person is someone who keeps repeating the same bad behavior over and over again in hopes of getting a different result. Dare I say more?

This Candy Melts in Your Hand

THE STORY
Once there was a young boy who loved chocolate. He was very happy, because at this moment he had a fist full of chocolates. He was joyfully walking down the street until he walked past a chocolate shop. There, something caught his eye and caused him to stop.

In the display window of the shop was a gigantic glass jar of chocolates—more than enough to satisfy him and all his friends. Next to the jar was a sign which read: “Free Samples. Help Yourself.” That sign certainly got the boy’s attention.

There was a problem, however. The boy would need both of his hands to lift the lid off of the chocolate jar. Because one of his fists was full of chocolates, he could not lift the lid off the jar. The boy thought about setting down his chocolates so that he could lift the lid, but he was afraid to, for fear of losing the chocolates he already had. As a result, he just kept walking down the street, happy for still having those original chocolates in his hand.

Unfortunately, it was very hot that day. Soon, the boy’s chocolate began to melt. It oozed out from between his fingers and dripped to the ground. When he opened his hands, all he had left was a little bit of chocolate smeared on his fingers. This made the boy unhappy.

But then he remembered the gigantic jar at the chocolate shop. “I’ll just go back to the chocolate shop and get some from the jar,” he thought to himself. However, by the time he got back to the chocolate shop, all of the chocolate was already taken. There was nothing left. This made the boy exceedingly unhappy, because now he didn’t get any chocolate to eat that day.

THE ANALOGY
The business world is full of change. Change causes old products/business models to become obsolete and new products/business models to take their place. The trick of strategy is in knowing when it is time to abandon the old and when to embrace the new.

In the story, the boy did not make those decisions very well. He held onto his old chocolates far longer than he should have (until they melted away and he received no benefit). He also waited too long before embracing the new, larger prize of the giant jar of chocolates (he waited until everyone else got there first and took the prize). His dilemma was that he couldn’t figure out how he could have both at the same time. Therefore, he kept the smaller prize (which he already had) instead of letting go so that he could reach for the greater prize.

As odd as that decision sounds, it is the same conclusion that many businesses take. They hold on to the older, smaller business model (which they know & are comfortable with) and miss out on getting the bigger prize of taking claim of the next business model. Then, when the current business model melts away into obsolescence, they are left with nothing, because the competition has already staked a dominant position in the new space, leaving nothing but an empty jar.

THE PRINCIPLE
The principle we are talking about is fear of cannibalization. It is the fear that if I go after a new business opportunity, it will require letting go of a current business model that is quite profitable, because the new opportunity grows at the expense of the old opportunity. Not wanting to destroy the business model that is currently providing huge profits, the companies decide not to invest in the new model.

There have been numerous examples of this phenomenon throughout time:

1) Back in 1973, Ford Motor Company invented the Minivan, but they did not introduce it to the marketplace for fear that it would cannibalize the profitable sales of their station wagons. When some of the people who worked on the project moved to Chrysler, they introduced the minivan there. As a result, station wagons became obsolete and Ford has never become a major force in minivans.

2) In the late 1980s, supercenters were starting to evolve in the United States. K Mart wanted to be part of the movement, but it did not want to cannibalize its K Mart store sales. Therefore, when it built its American Fare supercenters, it did not put in the types of merchandise found in a K Mart. Instead it combined convenience driven food with high end apparel and durable hardlines like major appliances. The experiment failed and K Mart was never able to recover from it and compete in supercenters.

3) In the late 1990s, Kodak was slow and reluctant to make a big push into digital imaging because of fear of cannibalizing its powerful position in traditional photography. Kodak’s efforts did not save the core photography business and by dragging its feet, it never got a strong position in digital imaging. Now the company is struggling to find a reason for existing in today’s marketplace.

4) In the 2000s, the traditional record labels were reluctant to pursue digital music for fear of cannibalizing the traditional CD market. It took an outsider like Apple to take the market by storm. Until very recently, EMI continued to ignore the inevitability of the fact that digital music was making CDs and the traditional label business model obsolete. Now many bands are ignoring the labels completely and gaining success on their own through downloads made popular on sites like YouTube and MySpace.

5) The latest example I heard of was the recent complaint that the US mobile phone companies, such as T-Mobile, Verizon and AT&T, are resisting the movement into mobile voice over IP (MVoIP) for fear of cannibalizing their current voice business. My guess is that eventually people will flock to MVoIP and the winners will not be the traditional players in the space today.

In every case, the companies above clung on tightly to the chocolates they had and refused to reach boldly with two hands for the next prize. As a result, the chocolates they thought they had eventually oozed away into nearly nothing, while others got the next prize from the big jar before these companies were willing to go after it.

In the end, these companies did not prevent cannibalization of their products. All they did was help determine who would have the honor of doing the cannibalizing. And they decided to let someone else do it. As long as the business is being replaced anyway, one should at least try to benefit from the situation by cannibalizing one’s self. But alas, many companies do not do so.

Why does this fear of cannibalization cause poor decision-making? It is because a one has to significantly increase short-term risk in order to make the leap. Most business hierarchies have so many layers to go through in order to get approval, that conservatism wins out and the known, less risky cash flow (at least in the near-term) nearly always wins. Consider the obstacles facing someone promoting the leap to the new model:

1) The capital is already invested in the old model. It is a sunk cost. To transfer to the new business model, new capital is required. That’s riskier and in the short-run reduces return on investment.

2) The old model has a known cash flow. The new model is harder to predict, making it riskier and harder to defend.

3) Executives often think “I can reap the rewards of the old model today and get big bonuses. If I invest in the new model, it can lower today’s profits near-term (hurting my bonus) and not show profits until later (after I’ve moved on, so the successor to my position gets the bonus).”

4) The new business model may require new skills and processes which the current group has not mastered. That could result in lack of success in transferring to the new skills, and may put the current team out of work, to be replaced by people with different skills. Why risk a career over that?

As you can see, both personal goals and near-term corporate goals lead one to conclude that making the leap early is very risky and may not benefit my personal situation. Hence, the fear wins out and the company ends up losing out.

SUMMARY
Change is inevitable. Ignoring change and clinging to the past does not make change go away. The cash flows from the old business models cannot be saved by ignoring the future. In the end, new businesses cannibalize old businesses. Rather than resist, it is better to take advantage of the change and get in early, so that you can get the most out of what happens next.

This has been the pattern at Wal-Mart. In the beginning, Sam Walton was in the variety store business. When he saw that discount stores had the potential to make variety stores obsolete, he quickly jumped into the discount store business and created Wal-Mart stores. Then, when he noticed that supercenters had the potential to make discount stores obsolete, he quickly jumped in with Wal-Mart Supercenters. The others, who stayed in the variety store business, are all gone. Most of those who stayed in the discount store business are gone. Wal-Mart is still here and as big and as profitable as ever, because they did not fear cannibalization.

FINAL THOUGHTS
Often times, the winners with the new business model are outsiders who were not a part of the former business model (such as Apple was to the record labels). These outsiders do not fear cannibalization, because they had nothing to be cannibalized. Sometimes, the only way to remain an insider is to think like an outsider.