Failures #2: Leaping the Right Distance

INTRODUCTION

In the last blog, we looked at an article in USA Today article entitled “The 18 worst product flops of all time.” These flops included:

1. Edsel by Ford Motor Co.

2. Touch of Yogurt Shampoo by Bristol-Myers Squibb

3. Apple Lisa by Apple

4. New Coke by Coca-Cola

5. Premier smokeless cigarettes by RJ Reynolds

6. Maxwell House Brewed Coffee by Philip Morris Companies

7. Harley Davidson perfume by Harley Davidson Motor Co.

8. Coors Rocky Mountain Sparkling Water by Adolph Coors Co.

9. Crystal Pepsi by Pepsico

10. The Newton MessagePad by Apple

11. Persil Power by Unilever

12. Arch Deluxe by McDonald’s

13. Breakfast Mates by the Kellogg Co.

14. WOW! Chips by Pepsico

15. Hot Wheels and Barbie computers by Mattel

16. EZ Squirt (colored) Ketchup by Heinz

17. TouchPad by HP

18. Google Glass by Google

We looked at three lessons to be learned from these flops. In this blog, we will look at another lesson to learn: The need to leap the right distance.

LEAPING THE RIGHT DISTANCE

Innovation is a lot like taking a leap into the future. But, as the USA Today article shows, not all leaps are successful. Think of it as being like leaping over a deep canyon. If you can leap from land to land, you succeed. But if you miss, you fall down into the canyon and fail.

Here’s the problem. The canyon of innovation is too wide to cross in one leap. Therefore, to successfully get across the canyon, you need to leap onto a small mesa in the middle of the canyon. Miss on either side of the mesa (too short or too long) and you fail. This is illustrated in the picture below. As we will see, many of the 18 flops failed in part by not leaping the proper distance.

1) Leap Too Short

The first reason for an innovation flop is to leap too short. This happens when your innovation improvements are incrementally too small to matter. Sure, it might be a little nicer or newer or better, but not enough to justify switching, particularly if you are charging an innovation premium price.

The Edsel (flop #1) was a nice car, but the innovations were minor compared to the hype, and the innovations were not enough to justify the premium price. The leap was too short.

Kellogg’s Breakfast Mates (#13) combined cereal, milk and a spoon into one “convenient” package. However, a test showed that the Breakfast Mate was only about a second faster to prepare than regular boxes of cereal with a normal carton of milk. In addition, convenience to the customer meant eating on the go, and you could not prepare and eat Breakfast Mate on the go. Finally, it cost a lot more per serving than the old way. In other words, Breakfast Mates leaped too short. It was not enough of a convenience innovation. The right leap would have been to go to breakfast bars—more convenient to prepare (just unwrap), more convenient to eat (on the go), and not as big a premium.

McDonald’s Arch Deluxe (#12) was a better burger than the regular one, but not enough better to justify the price or to get people to switch from better-burger restaurants. They did not leap enough and build really better burgers worth going out of your way for, like Five Guys.

Apple’s Lisa Computer (#3) was a fine computer for its time, designed for the business market. The problem was that it was not superior enough to justify a $10,000 price. Also, it was not superior enough to grab the attention of software developers to make programs for it. The switching costs for businesses was high and the leap was not big enough to justify the switch.

2) Leap Too Far

Just as bad a mistake as leaping too short is to leap too far. If you innovate beyond the ability of consumers to embrace or beyond the capabilities of technology, then you will fail as well.

The Apple Newton (#10) personal hand-held computing device came out in 1993, before the pervasiveness of the internet. Thanks to that, and the limits of technology at the time, the Newton was not a very powerful device. It tried to be the equivalent of the smartphone before technology, applications, and consumers were ready. It was a leap too far, by almost 20 years.

Premier Smokeless Cigarettes (#5), back in 1988, was also a leap too far. The market had not yet banned traditional smoking as much as today and the technology wasn’t good enough to make Premier Smokeless Cigarettes a pleasurable smoking experience. It took about 25 years before the technology and consumer sentiments caught up to make electronic smoking successful.

One might argue that Google Glass (#18) was also a leap too far. Concerns over privacy and functionality made it perhaps ahead of its time.

3) Leap Too Late

The problem when timing an innovation leap is that if you wait until the innovation is fully accepted, you are no longer imitating…you are following. True innovation has some risks, because you are trying to establish a market that doesn’t quite yet exist. If you wait for the innovation to get a firmly established by someone else, it is typically that someone else who reaps the benefit. They become the brand know for the innovation and get the first mover advantage.

This was the main problem for Hewlett Packard’s Touch Pad (#17). HP waited until Apple made tablets their own with the iPad. HP’s Touch Pad was not meaningfully enough better hardware to unseat Apple. In addition, Apple owned the apps, content business and digital store, where everything was designed to work on the iPad.

Hence, HP failed due to waiting to late.

SUMMARY

Innovation is a leap into the future. If you make your leap too short, you will not create enough differentiation for success. If you make your leap too long, you will get ahead of the customer and technology, which are not ready for success. If you make your leap too late, you become a lesser also-ran rather than a leader. Therefore, when on the path of innovation, plan you leap carefully (length and timing).

FINAL THOUGHTS

Jumping is not the same as leaping, because you end up in the same place as you started when you jump. So, just because you are furiously doing something doesn’t mean you are leaping to innovation. You may only be jumping in place.

Strategic Planning Analogy #503: Unbundled Subsidies

THE STORY

When I used to eat at a fast food restaurant, I’d order a burger and fries. But then I realized that the low price menu would have burgers for about the same price as those french fries. After that, I skipped the fries and ordered a second burger.

My logic went like this: Fries are merely grease sponges—just empty calories filled with fat and covered with too much sodium. By contrast, at least with the cheap burger I was getting some protein. They cost about the same and filled me up about the same and were equally tasty. Therefore, instead of getting a burger and fries, I started getting two burgers.

That was all fine by me. But I don’t think the fast food restaurants enjoyed my new decision. After all, they made a good profit on the fries but were losing money on that low-cost second burger.

THE ANALOGY

No matter what business you are in, your customer has choices. Even in a monopoly situation, the customer has choices. They can choose a substitute from another industry or choose not to purchase at all.

Many of the decisions businesses make affect those choices, such as product assortment and pricing. When the fast food industry added low-price value items to their menu, they changed the way I made choices about how I eat.

Unfortunately, my change was to the detriment of the fast food restaurants. I switched from high-margin fries to a negative margin value burger. And it was THEIR decision which caused my changed behavior to work against them. Their actions made me a less profitable customer.

So don’t limit your discussions about what is strategic only to big issues like positioning and productivity. Even smaller issues, like the pricing of a burger, can have a huge impact on performance for years to come.

Think of it like making a small decision about whether or not to bring a woodpecker on board your boat. It’s just a little bird. But one day the woodpecker pecks a hole in the boat. Even then, one little hole is not a big deal—it can be repaired. Over time, however, the woodpecker pecks a great many holes in the boat and it sinks. It is the accumulation of many small, bad consequences from that one little decision about birds which sank the boat.

This is also true for business. It is usually not the big decisions which bring a company down. After all, executives spend a lot of time making sure they get the big decisions right—that’s why they’re called “Big Decisions.” No, it’s the accumulation of many small daily decisions (decided poorly) which sink a company.

Little decisions start chain reactions in how customers make choices. Any one of them may not hurt you, but in total they can create a disaster. If those daily decisions are not made within a strategic context or are not thought through thoroughly, they can destroy the grand design or your larger strategy. After all, your strategy is not what you say, but what you do. And what you do is determined every day with those small decisions. So strategy needs to “sweat the small stuff.”

THE PRINCIPLE

The underlying principle behind the fast food mess is “unbundled subsidies.” And if you are not careful, unbundled subsidies can ruin business models for a lot more industries than just fast food.

1) The Origin Of Subsidies

Many industries are highly competitive. This creates severe downward pressure on prices (competition won’t let you raise prices). And to top it off, we’ve trained consumers to not have to pay full price for anything. Just ask the customers of JCPenney. When JCPenney eliminated sales, they lost over one quarter of their business. It turns out that people expect deals and won’t willingly pay full price.

Therefore, highly desired items are often sold at little to no margin (or even a negative margin). So how do you make money when your key items are sold at or near a loss? The answer is subsidies. You get customers to buy additional items that have a high enough margin to offset the loss on the core.

In fast food, the high margin drinks and fries subsidize the low margin burgers. On big-ticket electronic items, high margin extended warranties traditionally subsidized the low margin device. The base sticker price on a car is kept low, but they get you with high margin upgrades, accessories, financing and repair work. Low margin industrial goods are often subsidized with service contracts. Low margin printers are subsidized with high margin ink.

It has become the way of the world. In order to compete on price versus competitors and satisfy customers who want a deal, core items are becoming like loss leaders, forcing businesses to surround them with subsidies in order to survive.

2) Unbundling of Loss Leaders and Subsidies

Originally, the idea was to try to bundle the loss leaders and subsidies as tightly as possible. That way, every purchase could still remain profitable because the loss leaders and subsidies were sold together. In the fast food world, they were called “Combo Meals”—you had to buy the whole bundle of food to get the deal.

Other industries followed with their own version of the bundle. Cable and telecom companies bundled phone/internet/TV. HP used patents so that you could only use their high margin ink on their printers.

But the hypercompetitive world started causing the bundle to fall apart. Between 2000 and 2002, McDonald’s rolled out the Dollar Menu in the US. Now you could buy the cheap items without also buying the subsidies.

In the telecommunications industry, companies started turning subsidies into additional loss leaders. For example, charges for texting used to be the subsidy for voice calls. Then texting became free and had to be subsidized by data downloads. I was talking to someone in the industry who said it is a constant race to find the next subsidy, because someone in the industry is always trying to turn the current subsidy into a loss to get an edge.

And then the dotcom world came up with the “Freemium” model. In this model, most people pay absolutely nothing for the service (it’s free) while a small minority pay for a premium version. This is how linkedin works. I pay nothing for the basic service because it is subsidized by a totally different customer, usually a recruiter, who buys a premium version. Or Zynga had most people playing Farmville for free while a small minority subsidized the whole system by purchasing virtual farm equipment.

This all starts to become dangerous territory when loss leaders and subsidies are unbundled. In fast food, you get people like me who now load up on the loss leaders and avoid the subsidies. In telecommunications, there is the risk of running out of new sources for subsidies to support the ever expanding list of loss leaders.

The price of loss leader consumer electronics got so low that it became “disposable pricing.” If something went wrong, you could afford to just replace it, erasing the need to buy the extended warranty subsidy.

The freemium model runs the risk of the two audiences getting out of balance, with not enough payers to subsidize the freeloaders. Zynga just announced huge layoffs because they are having trouble with their business model.

And it is hard to go backwards on these trends. The telecommunication folks want to dial back the unlimited data plans but are meeting strong resistance. When the fast food people try to dial back the value menus, the customers revolt. Newspapers have been trying to get people to pay for the online version (which used to be free) with only varying levels of success.

Once you set up a subsidy system, you redefine the expected cost for the loss leader. “Regular” price becomes the loss leader price. Consumers see anything higher as outrageously high pricing. This makes it very difficult to reverse the pricing once the loss leader position has been made.

But now that the subsidies are becoming ever more unbundled from the loss leader, it is more difficult to ensure that enough subsidies are sold to offset the loss leader prices. Profits become more elusive. Risk of failure is increased.

3. Lessons Learned

What can we learn from this? First, small actions today have consequences well into the future. And it may not be initially obvious today what those consequences may be. Therefore, before making some of these small actions, we need to take time to consider their impact on the larger picture. Otherwise, we may unintentionally be dismantling our grand strategy one brick at a time.

Second, if strategists (or strategic thoughts) are only limited to an annual offsite meeting, they will be unable to adequately impact all those little day to day decisions. We need to get strategic context around a larger proportion of our decision making.

SUMMARY

Strategy should be more than just big thoughts around big decisions. It needs to permeate the organization more regularly and further down the organization, where many of the more mundane decisions are made. After all, these more “mundane” decisions can accumulate to the point to where they threaten the entire strategy.

FINAL THOUGHTS

How many decisions are made in your business without asking the question “How can this decision impact the long-term viability of our strategy or company?”

Strategic Planning Analogy #490: The Indirect Route

THE STORY

One time, I was in Chicago on a business trip with some of my co-workers. It was a nice day and we had some time on our hands, so we decided to walk to the convention center, which was only a couple of miles away.

We looked at a map and found a simple, direct street to walk down. It looked easy. What the map didn’t show was the types of neighborhoods we’d be walking through. As it turns out, that direct route took us through a pretty dangerous section of Chicago. As we kept walking, the neighborhood kept getting worse.

My co-workers were starting to fear for their lives. Having grown up in the Detroit area, I was used to bad neighborhoods, but eventually even I was getting fearful.

We saw a taxi drive by and quickly got it to stop for us. Little did we know that we had almost completed our journey by then and the taxi only took us a few blocks to get to our destination.

THE ANALOGY

Had we been more aware of our environment, we would not have chosen that route to walk. Yes, it may have been the most direct, the most efficient, and the fastest route. But it was not the safest route. We needlessly put our lives in danger. It would have been better off choosing a slower, more indirect path that was far safer.

Strategic planning is also about choosing a path—a path into the future. On first glance, it may appear that the best strategic path is the direct route. After all, the shortest distance between two points is a straight line, so the strategic path is drawn as a straight line between where we are now and where we want to be. That type of thinking sounds practical, efficient, and speedy.

Unfortunately, it can also be wrong. The most direct route is not always the safest route. It may lead you into a mine field of difficulties.  The danger could be so great that it destroys the ability for the strategy to succeed.  It does no good to be faster and more efficient if you end up dying before reaching the destination.

No, sometimes the best path is longer and less direct. These paths can be safer and increase the likelihood of ultimate success. 

THE PRINCIPLE

Although we live in an era which emphasizes speed, we need to remember that speed is not the ultimate goal.  The real goal is success. And sometimes the fastest path is not the best path for ensuring success. Therefore, when choosing a strategic path, do not automatically choose the fastest, most direct approach.

The Disadvantage of Bold Moves

There are several reasons why the direct approach can be less effective. First, it tends to loudly notify to the world (and to your competitors) what your intentions are. That can cause those opposing your strategy to wake up and fight you hard to prevent that path. Remember, almost every winning strategy causes someone else to lose. If those who are about to lose find out your intentions, they will try to keep you from winning. 

However, if you act more slowly and less directly, the opposition may not detect the threat as being as imminent or as devastating as it is. Therefore, they may put up less of a fuss in trying to stop you. By the time they figure it out, it may be too late for them to stop you.

Take, for example, Wal-Mart’s desire to be a significant player in banking. Wal-Mart first tried a very direct and fast approach to this strategic intent. Back in 1999, they applied for the right to buy a bank in Oklahoma.

This bold action quickly awakened the status quo banking industry to the threat posed by Wal-Mart. The banking industry immediately did everything in its power to influence the government to stop Wal-Mart from getting that bank. Congress was inundated by whatever forces the banking industry could bring to bear to stop Wal-Mart from ever buying a bank. And it worked. Wal-Mart could not buy a bank.

A few years later, in 2002, Wal-Mart tried again by attempting to buy an ILC (Industrial Loan Company), which is a step lower than a full-fledged bank. That also failed.

At this point, Wal-Mart tried a different tactic—the indirect route. Slowly, Wal-Mart started forming alliances with companies performing banking services. Since Wal-Mart did not own these businesses and since the partners were already allowed to be in these businesses, they would be difficult to stop. Also, because Wal-Mart added these pieces slowly in small chunks, no single act was large enough to get the industry in an uproar.

For example, Wal-Mart did deals with Moneygram and Sun Trust Bank for services like wire transfers, money orders and check cashing. It did a deal with Green Dot to create the Walmart Money Card, a reloadable prepaid card. And most recently, Wal-Mart worked with American Express to develop the Bluebird Card, a more aggressive move into the prepaid card business. 

Slowly, Wal-Mart is putting together a powerful financial offering, branded together in the store as Walmart Financial Services. It is to the point now where Walmart’s website has claimed them to be “a trusted name in financial services.” The slower, indirect path is working far better for Walmart than their earlier, more direct approach.

   

The Disadvantage of Out-Pacing Your Stakeholders

Another problem with moving too quickly is that you can move faster than your stakeholders are willing to go. No strategy works in isolation. Success depends on getting alignment with all sorts of other stakeholders, like your customers, your regulators, your suppliers, etc. If you get to far ahead of your partners, the strategy can fail.

For example, when McDonald’s wants to enter a new geographic area with restaurants, it does not just get some real estate and put up restaurants. That could be too fast for its suppliers. McDonald’s wants to guarantee that the burgers worldwide come from similar beef and the french fries come from similar potatoes. Therefore, it takes the slower, more indirect route of first working with farmers and distributors to make sure the right kinds of cows and potatoes in the right quantity are in the pipeline so that the stores have the right stuff to sell.

And in the Walmart example above, if Walmart had advanced directly from nothing into full-service banking in one step, it might have been too much for customers to accept. By moving slowly, Walmart has been able to move consumer perceptions along to allow them to accept getting financial services from a discount store.

One of the more interesting examples, however, is in the online poker business. Online poker sites can be extremely profitable for the companies who run them. However, the US government was banning the sites because on-line gambling is illegal in the US. The on-line sites could have directly tried to fight this, but they knew they would fail. So they took an indirect route.

A few years back, I remember all of the sudden seeing poker championship games being broadcast all over the place on cable TV in the US. Why the sudden surge in broadcasting Poker Tournaments, I wondered.

Well, here’s the story. The online poker people wanted to change the perception of poker from being a form of gambling to being a game of skill. That is because on-line gambling is defined as being a game of luck, which is illegal in the US. But games of skill are not considered gambling. 

What better way to convince people that Poker is a game of skill than to broadcast it like a sporting event on sports cable networks? The shows created poker winners who were becoming famous like athletes for their skilled plays. They had announcers on the show talking about the skilled plays being used by these skilled players.  

Slowly, but surely, perceptions were being changed. Poker was no longer just viewed as distasteful gambling hidden away in dark places. Now it was a skilled sporting event out in the wide open lights. Over time, this approach should be far more successful than the direct approach for the on-line poker companies.

SUMMARY

A key part of strategic planning is developing the proper path to get from where a company is today to where it wants to be. Due to the desire to move quickly, many firms try to build direct paths to the desired future. However, direct paths can be fraught with dangers large enough to prevent success. As a result, it is often the slower, less direct approach which has the greater likelihood of success.

FINAL THOUGHTS

If you go online to choose a path to drive your car to your destination, the software often asks you which type of path you want: the most direct, the fastest, the one using the most highway, the one using the least highway, etc.  In other words, the software recognizes that the fastest path is not always the path you desire. If software can recognize that, then so should strategists. Check out other options which may lead increasing your chance of success.

Strategic Planning Analogy #452: “X” marks the Spot?

THE STORY
How much would you pay to get a treasure map showing the exact location where one million dollars is buried?

There’s a big “X” on the map where the exact location of the treasure is—guaranteed! Sounds like that map would be worth a lot of money, doesn’t it?

Oh, there’s one more bit of detail about the map I should tell you about.  The only detail on the map is that “X” for the treasure.  The rest of the sheet of paper is completely blank.

Without any other details or reference points on the map, it is impossible to know how to reach that “X”.  Now how much do you think that map is worth?  Is it even worth anything at all?

THE ANALOGY
A key part of strategic planning is determining a desirable future position—a place where the company can win and succeed at a high level.  That desirable future state is a lot like a hidden treasure.  It is desirable and valuable once you get to it and make it a reality.

The problem is that just knowing what you want that desirable future position to be is not enough.  You have to achieve it in order to gain its value. 

In the story, we know of a treasure, but the map does not provide any detail on how to get to it.  That makes the map worthless.  In the same way, having a strategic goal, but no specifics on how to reach it, is worthless. 

Strategic planning needs to be more than just writing down an idealized vision on a piece of paper.  Like that X on a map, you need to flesh out the plan by showing a path on how to get to the X.  Discovering and managing the path is just as important a part of strategic planning as setting the goal (if not more so).  That is what adds value to the goal, because it creates a way to make the goal a reality.

THE PRINCIPLE

The principle here is that strategic planning does not end when the goals are set and the pro formas are saved in an Excel spreadsheet.  In many ways, that is just the beginning of the journey.  You still have all the work of taking and completing the journey.

It is like planning a vacation.  You may decide to vacation in Paris.  But just choosing the location is not enough.  You need to pick a date, arrange to get time off from work, determine how you are going to get to Paris, and how you are going to pay for it.  Otherwise the idea of vacationing in Paris is just that—only an idea. 

Just holding a business meeting to announce a strategic goal is like just announcing you are going to Paris.  There is absolutely no assurance that a large and diverse organization will automatically reach that goal.  There are too many forces at work to get in the way. 

In particular, the journey typically requires parts of the organization to abandon the familiar and work together in coordinated ways which they are not used to.  That will not happen by accident or natural consequence.  It has to be proactively managed.  It has to be planned.

For the rest of this blog, we will briefly look at some of the areas to consider when building that path.

1.  Commitment

Getting people to change and work in new ways is difficult enough when there is high desire to get it done.  It is virtually impossible if significant factions in the organization are resistant to the change.  Therefore a key part of the planning path needs to be concerned about finding ways to get people fully committed to the plan. 

Don’t just assume people will drop everything to bring the plan to life.  The change may hurt their power base or career plans.  The plan may interfere with maximizing a bonus.  The plan might require working with people they don’t like.  Or they may just think the ideas behind the plan are silly. 

They may not be very vocal in their opposition.  Instead they may just quietly and subtly sabotage the efforts during implementation.

Therefore, part of the strategic plan needs to find ways to gain commitment and deal with people who resist.  A little planning around this up front can eliminate a lot of grief later on.

2.  Competency

Once you have everyone emotionally committed to the task, one needs to determine if they have all the skill-sets and tools necessary to succeed.  After all, even the most committed individuals will fail to achieve the goal if they lack the competencies needed to get there.

Technologies and processes can quickly become obsolete.  Being the best at an obsolete skill does not guarantee that you will automatically succeed in the transformed environment.

Is training a part of your strategic plan?  Is acquiring new people with new skills embedded in your plan?  Does the plan have a methodology for dealing with people falling behind on competencies?  Do you have the tools in place to apply those competencies in the best way possible?

An even more basic question:  Do you even know which competencies are critical to success with the plan?  Do you have an internal assessment of where you stand today on those competencies?  Do you know where to get what is missing in your assessment (acquisitions, joint ventures, key hires, etc.)?

3. Capacity

Good intentions with smart people can still fail if you have not built an infrastructure capable of supporting those efforts.  There’s an old saying that an Army is only as strong as its supply chain.  If you cannot get sufficient food and ammunition to the troops, they cannot succeed.

Your infrastructure must have sufficient capacity to support your business to the magnitude of its vision.  For example, if your vision includes a major push into selling to China but you have only one-tenth of the selling capacity in China to meet those goals, then those goals will not be met.   You need to add more selling capacity.

Capacity can be critical in many areas, such as manufacturing capacity, supply chain capacity, sources of critical supply elements, and information technology.  If you cannot find a way to achieve the necessary capacity, then the strategy is severely flawed. 

I remember hearing stories of how capacity issues creates major changes at McDonalds.  For example, they had a great strategy for Shrimp McCocktails, but they determined that there were not enough shrimp available on the planet to supply projected demand, so the plan was scrapped.  When McDonald’s enters new regions, it often has to plan many years in advance to ensure there are enough of the proper cows and potatoes in the area to support the expansion.  Capacity has to be built before that expansion can occur.

 Does your plan calculate the necessary capacity in key areas?  Does it have a plan to achieve the necessary capacity?  Is the timing of the steps in the plan coordinated so that capacity comes on-line at the proper time?

4. Connections

Usually a plan’s success depends on the actions of others outside your direct control.  This can include suppliers, distributors, governments and customers, among others.  You need to find a way to make sure they have the proper commitment, competencies and capacities to achieve your plan as well.

Think about health care.  For a plan to work, you often need to get the cooperation of government to approve your approach, doctors to prescribe your approach, insurers (or governments) to pay for the approach, and patients to accept the approach.  Lose cooperation in any area and the strategy fails.

In a competitive world, it is often necessary to create stronger connections within your network of partners than the connections in competing networks.  You need to prevent defections.

 How strong is your network?  Are the strengths of your network connections specifically addressed within your plan?  Do you have a plan to make them capable of supporting your plan?  Do you need to add or change partners?  Do you need to acquire them?

SUMMARY

A plan does not magically come into being just because the leaders want it to.  To ensure that a strategic vision is more than just a wild dream, you need to proactively determine and control all the steps necessary to get there.  Otherwise the forces of inertia and self-interest will keep the vision from becoming a reality.  Areas to consider in this plan include commitment, competency, capacity and connections.  Without these considerations, all you have is a treasure marked with an X on an otherwise blank piece of paper—a goal without a means to attain it.
 

FINAL THOUGHTS
One of the biggest criticisms of strategic planning is that all those fancy plans never become reality.  Maybe if we spent more time proactively trying to manage the path, we’d have a lot more success in achieving the goal.  That will quiet the critics and increase our value.

Analogy #168: Blind Confidence

THE STORY
Let’s assume, for a moment, that Simon has a cancerous tumor that needs to be removed from inside his body.

As he is walking down the hallway at work, Simon runs into someone he knows named Bob. Simon strikes up a conversation with Bob which goes something like this:

“Hey Bob, I’ve got this cancerous tumor in my body and I’d like you to take it out.”

Bob answers, “But Simon, I’m not a doctor. I know nothing about surgery. I’ve never done anything like this before.”

“That’s okay,” Simon replies. “You can do it, Bob. I have complete confidence in you.”

“But I don’t have any training, or any proper tools,” protests Bob.

“Let’s not get bogged down in details,” says Simon. “You know the goal. Now just go and get it done. Look! Here’s an empty office. I’ll just lie on the desk right now and you take out the tumor.”

THE ANALOGY
Confidence can be a good thing. Without confidence, difficult tasks would never be undertaken. Inspired confidence from leaders provides the motivation for a firm to tackle a new strategy.

However, there is a difference between realistic confidence and blind confidence. Realistic confidence is rooted in knowledge about the task at hand and the capabilities necessary to accomplish it. There is a reason to feel confident, because you know what needs to be done and are assured that you have what is needed to do it.

Blind confidence, by contrast, is not rooted in anything. You really do not have a clue as to what needs to get done or whether you have what it takes to get it done. Just through blind faith, you hope that it can be done.

In the story above, there is no rational reason why Simon should have any confidence that Bob could take out that tumor. Bob has no training or skills in medicine. He has no tools or assistants to help him in the task. Yet, Simon says he has complete confidence in Bob’s ability to take out that tumor. This is blind confidence.

I suspect that if Bob went into that empty office and started to take out that tumor with whatever he could find in that office, Simon would end up dying from the attempt. This was not well-placed confidence.

Sound silly? Well, I’ve been around businesses who have acted almost as silly. The leaders of these companies come out of their strategy meetings with extremely aggressive goals, but not a clue as to what it will take to accomplish them. Then, they go and tell everyone in the organization how confident they are in the people’s ability to make the aggressive goal a reality.

The leaders do not provide any direction, tools, or training to get the job done. All they supply is the goal and the rhetoric: “I know you can do it. I have great confidence in you!”

The company tries to hit the goal, but without the necessary skills, training, direction or tools, they fail. The company (like the patient) dies from the attempt.

THE PRINCIPLE
The principle here is that blind confidence can be dangerous. Our confidence needs to be rooted in something more. The following four points need to be kept in mind to prevent the perils of blind confidence.

1) Goals cannot be made so aggressive that they do not stand a chance of being accomplished.
Aggressive stretch goals can be very useful in moving a company forward. Jim Collins and Jerry Porras, in their book “Built to Last,” praise the benefits of Big, Hairy Audacious Goals (BHAGs). However, there is a difference between an aggressive goal and a completely unattainable goal.

When goals are left as mere numbers, they can give the appearance of attainability. Saying things like “20% annual profit growth,” “Sales of $10 Billion,” or “40% market share” can sound very impressive. But is it realistic? The only way to tell is to boil down what it would take to achieve these numbers to see if this is realistic.

For example, McDonalds one time tested a McShrimp Cocktail. Customers in the test loved it. An ambitious goal of how many McShrimp Cocktails could be sold was created. But was it realistic?

Upon further analysis, it was determined that even if McDonald’s captured every shrimp on the planet, it would not be enough to satisfy the goal. And even if they could capture nearly all of the shrimp on the planet, the implications on costs would be such that they could no longer get the shrimp at a price at which they could make a profit. And then there would not be any shrimp left for future years. As a result of this analysis, they rejected the goal and did not proceed with the project.

It did not matter how confident McDonald’s management would have been. They could have shouted all day that “I have confidence in your ability to meet these goals,” but they still would not have been met. It was unrealistic.

2) Goals need to be anchored in actions.
It’s one thing to set a numerical target. It is quite another to know how to achieve it. As in the story, Simon had a goal to remove a tumor, but gave the task to someone with no knowledge of how to do it. If you want to achieve a goal, first develop a realistic action plan to get it done.

Remember, if a goal is ambitious, then it cannot be accomplished by doing the same things you did in the past (otherwise the goal would have already been achieved). New results require new actions. If you do not plan the new actions, how can you reasonably expect new results?

Strategic planning should be more than just setting goals. It must provide the key activities necessary to make the goals a reality. This does not mean that you have to understand every detail in advance before starting. But you should at least understand the key milestones necessary to get the job done.

If a goal is not anchored in actions:

a) You could end up trying to achieve an unrealistic goal.
b) You could end up hitting the goal by doing the wrong actions (like achieving a sales goal by destroying profitability).
c) You could end up with chaos, as the company moves in random directions since there is no consensus on what the proper action should be.

Don’t just measure numbers…measure activity.

3) Even a skilled doctor cannot succeed without the proper tools.
Actions require resources, such as people, equipment, training, and so on. Even if Bob in the story had been a skilled surgeon, it would have been nearly impossible to successfully remove a tumor in an unsterile office, without any surgical tools/equipment, anesthesiologist, nurse, or other necessity.

Similarly, if your strategic goal requires certain resources, then the strategy needs to include a path for obtaining those resources. Perhaps you will need to acquire new talent. Perhaps a skillset can only come through acquisition. Perhaps money needs to be invested in R&D or new distribution capabilities.

Offering blind confidence is not enough. You have to offer the proper resources as well. And if you cannot find or afford the proper resources, then your goal is probably unrealistic.

4) What you may think is inspirational leadership may actually come across as clueless leadership.
Finally, if you ignore the first three points and still go on stage to give your speech of confidence, keep in mind that your audience may not interpret the speech as you wish. They may realize that the goal is unrealistic, that you have no clue about which actions to take, and that you have not provided the proper resources to get the job done.

While you’re saying “I know you can do it…I have confidence in you,” the audience may be thinking:

“This is an impossible task. Our leaders are clueless idiots. My future is doomed. I need to start getting my resume out there.”

Hence, instead of providing inspiration and confidence, you have done just the opposite.

SUMMARY
Confidence and inspiration are necessary to tackle new strategies. However, unless that confidence is rooted in realism, associated with specific actions, and supported with the proper resources, that confidence is worthless. The only thing it will inspire is employee defection.

FINAL THOUGHTS
There was a Dilbert cartoon where the pointy-haired boss gives a speech to the employees. He says, “Sales are dropping like a rock. Our plan is to invent some sort of doohickey that everyone wants to buy.”

After the speech is over, he goes over to Dilbert’s cube and says, “The visionary leadership work is done. How long will your part take?”

Analogy #163: Challenge Your Assumptions

THE STORY
What is it with Americans and breakfast foods? We seem to segregate food into two categories—food appropriate for breakfast and food appropriate for the rest of the day. And heaven forbid that we would confuse the two and eat one of these foods at the wrong time of the day.

Take, for example, oats. Oats are a common breakfast food found in oatmeal, oat bran muffins, and Cheerios cereal. However one almost never eats oats at any other time of the day.

And what about bread? For some reason, if it is eaten in the morning it has to be toasted. The rest of the day tends to be toast-free.

At McDonalds, I can get all kinds of beef patty combinations the rest of the day, but no pork. For breakfast, I can get all kinds of pork combinations, but no beef.

And then there are these silly substitutions:

1) I can only eat potato chips the rest of the day. For breakfast, they must be crispy hash browns.

2) I cannot eat chocolate cake for breakfast, but I can eat a gooey chocolate muffin.

3) I cannot eat a fruit pie for breakfast, but I can eat a fruit Danish.

4) Corn chips the rest of the day, corn flakes in the morning.

And then, of course, there is the magic egg. You can put almost any combination of any type of food on a plate, and as long as it is inside or next to an egg, it magically becomes a breakfast food. Take away the egg and it might be no longer appropriate for breakfast (think steak and eggs versus just steak).

As an act of defiance, for dinner today I made Ham and Eggs.

THE ANALOGY
Our actions are based on assumptions. Some things are assumed to be right and other things assumed to be wrong. We are much more likely to do the things that fit into our assumptions about what is the right thing to do.

In the case of food, we tend to have assumptions about what is appropriate to eat for breakfast and what is appropriate to eat the rest of the day. Therefore, we eat different foods for breakfast versus the rest of the day.

Is there some medical reason for this? Do oats only have nutritional value in the morning? Is there something about the roundness of a muffin verses the triangular shape of a cake that makes round things better in the morning? Of course not. But the assumptions of what to eat at what times persist never-the-less.

Business decisions are also based on assumptions. We may not even consciously know what the assumptions are behind those decisions, just like we may not know why breakfast potatoes need to be in the form of hash browns.

Strategic planning is often about finding new opportunities. Many times these new opportunities can defy the prevailing assumptions of the day. If we do not challenge the root assumptions of society in our strategic planning process, we may become blind to all of the great opportunities which come from re-writing those assumptions.

THE PRINCIPLE
The principle here is that behavior is an outcome of assumptions. Unless we challenge those assumptions, we may never get to the optimal behavior.

Take, for example the idea of re-engineering. We may have a ten-step process for getting something done. As part of a productivity strategy, we may want to make that ten-step process more efficient. One way to do that would be to examine each of the ten steps separately to find ways to make each step more efficient.

However, this is based on the assumption that all ten steps are really necessary. If we look at the process holistically, we may find that assumption to be invalid. Perhaps we can get that process done in only 5 steps if we re-engineer the whole thing. Eliminating half the steps could be a far greater productivity gain than just making each of the original ten steps marginally better. However, if the assumptions are never challenged, that 5 step process would not be discovered.

Great new business opportunities often fly in the face of old assumptions. There used to be an assumption that people expected drinking water to be essentially free. Nobody in their right mind would pay for a drink of water. Now the bottled water business is huge—one of the greatest new businesses to hit the food industry in a long time. People think nothing of paying more than a dollar for a drink of bottled water. If the old assumption had never been challenged, this great opportunity might never have occurred.

In an earlier blog, I talked about all the different business models that can be found in the pizza business (see “There’s More Than One Way to Slice Pizza”). If the old business models had not been challenged, then the new business models for pizza would not have been discovered.

Let’s go back to the breakfast foods. There really is a reason behind the segregation of food into these two categories. What one has to realize is that at one time, making dinner was a very time consuming chore. A little more than a half-century ago, the typical time for dinner preparation was around an hour and a half. If you go back more than a century, dinner preparation could take two hours or more. In addition, every day you had to find the time to bake your own fresh bread.

So here was the deal. Nobody had the time or inclination to spend two hours making a meal in the morning. You wanted to eat sooner than that. Back in the 1800s, there were only a limited number of foods you could prepare quickly. They were things like eggs, oatmeal and pancakes. That’s how they got assigned to the morning. The other foods took too much time to prepare, so they were relegated to later in the day.

The toast? Well, fresh baked bread at home did not have preservatives, and back in the 1800s, they didn’t have those nice plastic bags to keep the bread moist. As a result, the morning bread left over from yesterday’s baking was a little dried out. Toasting made the dry bread taste better.

Of course, those assumptions about time seem silly today. The average prep time for dinner these days is close to 15 minutes. Thanks to modern packaging and microwave ovens we can have just about any kind of food we want in about seven minutes or less. So all of the assumptions about what is appropriate for breakfast no longer apply. Yet the habits remain because not enough people are challenging the assumptions.

Yes, some restaurants are serving breakfast all day long. But why don’t they serve dinner all day long?

There is some movement in this direction by the fast food chains. McDonald’s attempted to position its McGriddles breakfast food as an end of the day meal for people who stayed up all night enjoying themselves at nightclubs. McDonald’s is also considering serving breakfast all day long. After all, it is among the highest margin meals they make. Taco Bell invented a new meal, which they call the fourth meal. It is eaten sometime between dinner and bed time. And of course, they plant the assumption that Taco Bell food is most appropriate for that fourth meal.

Therefore, sometime during the strategic planning process, it is wise to bring up the topic of assumptions.

First, we need to bring those hidden assumptions to the surface. If we are unaware of them, we cannot deal with them. They is a “why” for every action and if we know the assumptions, we will know the whys.

Second, we need to challenge those assumptions. Are they still valid, or have they become obsolete, like the assumptions around breakfast foods.

Third, if the assumptions are weak or obsolete, is there an opportunity to replace those assumptions? Great business opportunities to cut costs or create new industries may be possible under a different set of assumptions.

Fourth, we must assess how ingrained current habits are to determine how difficult it will be to change those habits and thought patterns. Some are harder to change than others. For example, clear beer was too far of a stretch for people to accept. The assumption that full-bodied beer must have full-bodied color was too hard to break.

SUMMARY
Assumptions drive activities. If you want to optimize the activities of yourself and your customers, it is wise to challenge those assumptions.

FINAL THOUGHTS
This past week, the comic strip Mutts captured this idea of challenging assumptions well. The comic showed two birds sitting on a branch next to a warm, tropical beach. The first bird said to the second bird, “Bob, it’s about time we started to fly north.” The second bird looked at the current surroundings, thought a moment, and then replied, “Why?”

This bird was challenging the assumption that one has to fly north for the summer. Why not just hang out at the tropical beach?

Strategic Planning Analogy #130: Strategy Gifts

THE STORY
There is a story told about boxer Mike Tyson. Mike grew up under less than ideal conditions. He was born into poverty in a bad section of Brooklyn. His father left when Mike was only two years old, leaving his mother to try to find the means to raise the family.

Mike was expelled from junior high school for fighting and spent a number of years in juvenile detention centers. To raise money, Mike got involved in petty crime. By the age of 13, he had been arrested 38 times. Eventually, Mike Tyson ended up being placed in the Tryon School for boys in Catskill, New York.

It was here that his boxing skills were discovered and he was put on a path that would eventually lead him to becoming the world heavyweight boxing champion in 1986. With the fame came money. For the first time, Mike Tyson was not in financial need.

Companies wanted their products associated with a successful boxer like Mike Tyson, so they started showering him with cash or free products to try to get his endorsement. All of this amazed Mike.

He is claimed to have remarked on this strange phenomenon by saying something like the following: “When I was poor, I begged people to help me and nobody would pay attention to me. Now that I am rich and can afford to buy things on my own, people give me stuff for free...even a new free car. Where were all you people when I needed the help?”

THE ANALOGY
There’s an old saying that “The rich get richer and the poor get poorer.” This seemed to be the case for Mike Tyson. When Mike Tyson was poor, there didn’t seem to be any way out of the poverty cycle. Things just seemed to continue to get worse. However, when he got his lucky break of being discovered at the Tryon School, it put him on a path to boxing wealth. That wealth lead to a great number of opportunities to get even wealthier.

Mike Tyson really didn’t have any strategy to get all of those extra sources of income. He just knew how to do one thing well (boxing), and that success created its own opportunities for other successes, all initiated by others.

Similarly, there are businesses that do only one thing well, which place them in a powerful position. Others, who want to take advantage of that success start throwing great business opportunities at them. This creates greater success for the firm. It didn’t come by any pre-planned strategy. The ideas just came unsolicited by people who wanted to use the company for mutual gain.

Sometimes, the only strategy one needs is to create a point of power in the marketplace. Once the power is created, others will supply you with preferential access to all of the future opportunities one needs. Your only strategic responsibility at that point is to determine which of the many opportunities are best for your company.

THE PRINCIPLE
The principle here is “the power of the gatekeeper.” Gatekeepers provide access to something you cannot reach on your own. That could be access to distribution channels, access to customers, access to money or whatever. Mike Tyson was a gatekeeper providing access to a certain type of demographic (his fans) who tend to be difficult to reach with traditional media. As a result, firms were willing to offer a large number of great deals to Mike in the attempt to access that demographic.

If you can create a strategy where you become a powerful gatekeeper, then others will shower you with opportunities as they did for Mike. Look at Oprah Winfrey. She is such a powerful gatekeeper that everyone wants to jump on her bandwagon. If you are an author, Oprah can be a great gatekeeper to readers. Huge numbers of firms want to pay large sums to advertise on her show or in her magazines. The opportunities are unlimited, creating great wealth and making Oprah a billionaire.

The Chicken McNugget was not invented by McDonalds. It was invented by Tyson Foods (not related to Mike Tyson). Tyson Foods believed they had a potential hit on their hands, but they needed a gatekeeper to give them access to the fast food channel. Since McDonald’s was the strongest gatekeeper in the channel, they started there. At first McDonald’s was reluctant to take on the product. It took a lot of time and a lot of coaxing by Tyson Foods to get McDonald’s to try the idea. It eventually became one of their greatest product launches.

There was no strategy here. McDonalds had no desire to get into the chicken business. They had no creativity to invent something like a McNugget. At first they even rejected the idea. It was only through the creativity and persistence of an outsider that they got into the business.

I had a conversation with a former strategy executive at McDonalds. He told me that when he first came to McDonald’s, he expected to find great masterminds at marketing. Instead, he found very little marketing expertise. Either they bought it from an ad agency, or the ideas came to them from outsiders who wanted to tap into their power. He said the only thing they were really great at was running a highly efficient restaurant process. That high level of efficiency, combined with rapid expansion, created the market presence that lead to gatekeeper power with fast food and for families with small children. The rest of the success just sort of fell into their laps.

Whenever a new technology opportunity comes up, there are competing forces trying to determine how it will evolve. The question is which of the competing technology standard will win. For example, which high definition TV technology will win? Which high definition video disk technology will win? And so on. Anyone who wants to set the standards for new technology in their favor knows that their potential for success is much greater if they can get powerful gatekeepers on their side. Best Buy has tremendous gatekeeper power in accessing people interested in leading edge technology. Therefore, firms with new technology do whatever they can to become the preferred technology standard at Best Buy.

Best Buy understands the power it has and has created a strategy around exploiting this gatekeeper power. They often essentially pit one standard against the other and see which one will offer Best Buy the biggest prize. Then they back the one that offers the best results for Best Buy.

The point here is that in some cases, one does not need to fully flesh out all of the strategic detail. All you need is a strategy to create gatekeeper power and a strategy to exploit it. If done properly, this will put your firm in position so powerful that you do not need to be geniuses in creating opportunities. Other firms will do all that for you and shove more opportunities into your face than you can absorb. You just need to be wise in picking amongst all the ripe opportunities put in front of you (and wise in properly negotiating the deals with these people).

Now becoming a strong gatekeeper is not easy. If it were easy, there would be more of them and they would command less power. This alone can be serious, time consuming strategic work. The trick is to pick something that other businesses desire, yet find difficult to access. Then you specialize in finding ways to gain that access and then let others start throwing money at you.

This is a common ploy in the dot com world, where if you can create great access to a desirable group of people, then advertisers will be all over you. For example, Google used technology to allow firms access to people interested in a particular search word. This type of gatekeeper power has proven to be very successful for google.

Go out there and find your gatekeeper opportunity.

SUMMARY
One approach to strategic success is to own the best access to a desirable resource, such as a particular type of customer, technology, distribution channel, raw materials, a particular type of labor force (highly skilled or highly inexpensive), or some other item. Once you have locked up the access to that resource, the firms who want to access that resource will provide you with all kinds of business opportunities. These opportunity “gifts” will supply more than enough ways to increase your wealth.

FINAL THOUGHTS
Of course, if you manage that gatekeeping poorly, it can lead to ruin. Mike Tyson did not continue to perfect his one point of expertise which lead to his gatekeeping power (boxing). This quickly lead to others becoming the heavyweight champion. In addition, he did not do a good job of proactively exploiting the gatekeeper power at the time when he had it. As a result, in 2003 Mike Tyson had to declare bankruptcy.

Management by Growing

THE STORY
Once upon a time, the there was a small little boy who hated being so small. “Nobody pays any attention to me or gives me any respect because I am so small,” he lamented to himself.

One day, a fairy godmother came to visit the little boy and offered to grant him any one wish. Well, that was an easy choice for this boy. “I want to grow and grow and become BIG!” he replied.

The next day, the boy woke up and was big and tall, like an adult. The boy was ecstatic! People, finally paid attention to him and gave him respect. It felt great.

Unfortunately, his growth did not stop there. Every day he grew a little bigger. At first, it wasn’t such a big deal. But eventually he was so big that he was taller than large buildings. Everywhere he stepped, he ended up crushing something with his gigantic feet. The respect he used to get from others turned to fear, as people were afraid to be near him for fear of being crushed. It made him feel like the monster Godzilla.

“I guess it’s possible to grow a little too much,” the boy finally admitted.

THE ANALOGY
One of the most popular phases in a business life cycle is the growth phase. It can be a lot of fun. Your position is relatively well set and desired by a lot of consumers. Your only problem is growing the company fast enough to take advantage of all the great potential you have. It feels like you can do no wrong.

Shareholders seem to love growth companies as well. They give the stocks high multiples. Suddenly, the company is worth a whole lot of money, and everyone is smiling.

It’s like the boy in the story. When he was small, he was ignored and not given any respect. However, once he started growing, everything started to change for the better. He started receiving the love and respect of others.

It feels so good that you want it to continue forever. However, as we saw in the story, sometimes too much emphasis on growth for too long can backfire on you. Continuing the push for growth long after you’ve reached your optimal size can cause all of your friends to turn on you.

In the business world, maturity will eventually come, causing additional rapid growth to no longer be appropriate. Too much growth for too long can result in investments which are no longer needed in the marketplace, causing returns below your cost of capital. You may be merely spreading your relatively constant sales over a larger, more costly infrastructure, which reduces overall profitability.

Growth is good, but other factors also need to be considered in your strategic planning, so that your company does not turn into a hideous monster like Godzilla.

THE PRINCIPLE
In the last three blogs, we talked about how different companies require a different approach to strategic planning depending on where they are in their lifecycle and how many barriers there are to entry/exit in their industry. In the blog “Same Title, Different Jobs”, we said that there are three major steps in strategic planning:

1) Positioning: Determining what you will stand for (own) in the marketplace—the solution you are providing, the place where you can win.

2. Pursuit: Determining the path to achieve (or improve) your desired position. This usually involves acts which allow you to gobble up market share so that you can build a strong claim to your position.

3. Productivity: Discovering ways to leverage your position so that you can optimize the return on your investment.

During the rapid growth phase of an industry, most of the attention is on growing the business (I guess that’s why it’s called the growth phase). The key area of strategic focus in this period is on pursuit. The idea is to grab as much of the market potential as fast as you can, so that nobody else can gain a stronger foothold at that position.

The success of your position is what is making the growth possible, so there is not much need to reassess the position. Regarding productivity, you greatest contribution at this point is the productivity which is a natural outcome of rapid growth—economies of scale. Hence, if you focus on the growth, productivity will be a natural byproduct at this stage of the lifecycle.

That being said, one still needs some balance. Positioning and productivity cannot be ignored. Success usually causes imitators to crop up. These imitators may create a need to tweak your positioning strategy in order to stay one step ahead of them.

In addition, the growth phase usually leads eventually to a consolidation of the industry, as a greater percentage of a company’s growth comes from acquiring competitors. If you are not an efficient, productive operator, it is likely that you will be the one being acquired rather than being the one doing the acquiring. Efficiency helps give you the edge when the intra-industry warfare begins, to see who will survive and make it to the mature stage. When the sporting goods retail industry recently went though its consolidation phase, it was the blander, but more efficient Dick’s Sporting Goods which acquired the flashier, but less productive Galyan’s.

Thus, although pursuit is the most important concern at this stage, the other factors should not be ignored.

The pleasure which comes in the growth phase causes pressure to want to continue the growth phase, long after that phase in the industry is over. It seems like everyone wants to be a growth stock forever.

If you want to be a growth stock forever, one probably needs to abandon industries as they mature and move on to new evolving industries. This is pretty much what GE has done over the decades. The growth comes from shifting one’s position, rather than continuing growth in an industry that no longer requires it. At that point, it is an emphasis on positioning, rather than pursuit which continues the growth (We’ll talk more about that in a blog at a later date).

Last month, Wal-Mart finally started coming around to seeing this conclusion. They announced that they were cutting back on new store growth, because it was no longer as productive as in the past. The sales for the new stores were coming largely from other Wal-Marts, so the net increases were shrinking.

Here is what the Wall Street Journal had to say about it on June 2nd:

“Wal-Mart Stores Inc. plans to sharply curtail future U.S. store openings, amid disappointing results for the world's largest retailer and growing investor pressure to curb its aggressive domestic expansion. Friday, it promised to cut more than a third of this year's planned store additions, delay some openings and restrict future U.S. store expansion.

“The move will cut the retailer's capital expenditures by $1.5 billion in 2007 to $15.5 billion for the year and help fund a large share buyback that investors also have been urging the company to pursue. Wal-Mart has been under pressure on Wall Street to slow its U.S. expansion and use the savings to prop up its stock price.

“Wal-Mart, based in Bentonville, Ark., isn't the only retailer to retreat on its store-building boom. AutoZone Inc., Home Depot Inc. and McDonald's Corp. have pulled back on expansion in recent years to improve store operations and boost shareholder returns. 'This is what everyone's been clamoring for,' said Goldman Sachs retailing analyst Adrianne Shapira.

“News of the capital-spending cutback and share repurchase cheered investors, who sent Wal-Mart shares up 3.9%, or $1.87, to $49.47 in 4 p.m. composite trading on the New York Stock Exchange Friday.”

So as you can see, sometimes it is wise get out of a single-minded approach to planning focused only on growth and move to a balance which includes productivity (such as stock buybacks or reinvestments in making current assets more productive, as McDonald’s has done).

SUMMARY
Growth is good, but too much of the same kind of growth for too long is often not one’s wisest move. One needs to have a balanced approach which also looks at potential repositionings or focuses on productivity in order to keep the profit wheels moving.

FINAL THOUGHTS
For some people, the thought of no longer being a growth stock is like a fate worse than death. Trust me, there is life after rapid growth. By no longer pumping all that money into pursuit, those years can be some of your most profitable. Yes, the stock might initially fall when growth-minded shareholders leave, but keep this in mind. Those same people will also leave if they see your rapid growth as no longer productive. And in that case you have nothing.

At least if you stop the unnecessary investments and start doing things like buying back stock or raising dividends or improving efficiencies, you can attract other shareholders who will still reward you. All of the retailers mentioned in that Wall Street Journal article saw their stock rebound when then quit the unnecessary growth. And finally, keep in mind that Warren Buffett did pretty well refraining from the lure of rapid growth, and instead focusing his investments in a lot of more stable businesses.