Strategic Planning Analogy #493: The Blame Game

THE STORY

Recently, I was at a technology conference. One of the presenters wanted to demonstrate their technology on a large screen. Unfortunately, they could not get the technology up on the screen to demonstrate it.

At first, the presenters were panicking. Then they came to the conclusion that the problem was not with their technology, but with the technology used to get it up on the screen. So they told everyone that their inability to do the demonstration was the fault of someone else’s technology. Then they merrily continued their presentation without showing us the demonstration of their product.

My first reaction was “why are these presenters so happy?” Their ultimate goal was to try to sell me on the merits of their product. Yet, that attempt was seriously destroyed by the inability to demonstrate the product to me. 

Apparently, they had lost sight of that bigger picture. They were fixated on the smaller picture: As long as they or their product was not to blame, then the presenters were okay. And if they were okay, then everything was okay.

But everything was not okay. The audience was denied the most important part of the presentation and the technology company was denied the opportunity to fully sell their product.

THE ANALOGY

Very few companies are fully self-sufficient. Instead, companies rely on many other partners to get their work done.  It could be depending on suppliers for parts. It could be depending on distributors for getting the product sold. And in today’s economy, it could also be outsourcing almost everything in-between, from payroll to call centers to manufacturing to key pieces of design and technology.

Look at how much of the Apple ecosystem is outsourced. Apple does not manufacture the hardware. Apple does not create most of the apps.  Apple does not create the music. Apple does not operate the cell towers which allow everything on the iPhone to actually work. The portion of the ecosystem actually produced by employees of Apple is quite small.

Everything from all the partners needs to work in order to accomplish the strategy. If one of the partners really messes up on their part of the grand design then the whole grand design is at risk.  Just ask the folks at Boeing about how their grand design for the Dreamliner is faring as a result of the problems with an outsourced battery.  All the planes are grounded.

In the story, the presenters were happy because they could blame their problems on someone else.  Since they did not feel “at fault” then they felt satisfied.  However, I don’t think that the audience or the technology company was happy.  The purpose of the presentation had failed.

What if the executives at Boeing had been like those presenters and said, “Nothing Boeing did in-house on the Dreamliner is at fault.  Therefore, we should all be happy and just move on.” Nobody would have accepted that behavior. Boeing is being held accountable and the planes were not allowed to fly.

You should not accept that behavior, either.  In the big picture, if the grand design doesn’t work, then you have failed. And blaming a strategic partner doesn’t make the failure go away.

 

THE PRINCIPLE

The principle here is that just because you can blame someone else for a problem does not make the problem go away. Your customers really don’t care all that much which of your strategic partners is at fault. All they know is that something is wrong. They are angry and they want YOU to fix the problem.

There is no room for smugness is the fact that none of your own people were directly at fault.  Everyone is in this thing together. As the old saying goes, a chain is only as strong as its weakest link.  It doesn’t matter if your link is strong when the link of your partner is weak. The whole chain will fail.

Since modern business models seem to be adding ever more outside links to the strategic chain, the potential for outsiders to mess up the chain for everyone increases. And to compound the situation, consumers are being ever more demanding about the social consciousness of the companies they do business with. So even if your outside partner produces its link in the chain well, it could still create a failure if the WAY they produce their link violates the societal and ethical demands of your customers.

And thirdly, the social network exposes more disappointments, more quickly, to more people than ever before. This make mistakes harder to hide and more damaging when discovered.

As a result, the potential for strategic disaster in this area is increasing exponentially. Partnership management can no longer be tangential to strategy. It needs to be integral to strategy.

So what can one do to minimize partner problems? Here are some suggestions.

1. Choose Your Partners Well

The best way to fix a problem is usually by preventing the problem from occurring in the first place.  And one way to prevent partner problems is by choosing the right partner. And what makes a partner “right” has to be more than just “can they get the job done cheaply.” 

Remember the thoughts of astronaut Alan Shepard as he was flying through space: “It's a very sobering feeling to be up in space and realize that one's safety factor was determined by the lowest bidder on a government contract.”  Cost is important, but it isn’t the whole story.  Here are just a few of the other issues to consider:

a)      Will their practices upset the ethical and societal expectations of your customers?

b)      Are their practices consistent with the strategic intent of your business model?

c)      Can they scale at the rate needed for the grand design?

d)     If they are to achieve their strategic intent, will it make it difficult for them to provide what you are looking for?

e)      Will they protect company secrets?

f)       Which of you has more power/clout in the negotiation process?

g)      Will they have concerns or issues about being tied in with your other partners?

h)      How will working with this partner impact your competition?

When you tie up with a partner, you get more than just their output (if they are the provider) or their money (if they are the client). You get the personality, practices and principles of the partner. Is that something you or your customers want you to be associated with?

2. Set Up the Partnership With The Grand Design In Mind

If you want a partnership to work well, it needs to be structured in a way which increases the likelihood of that occurring.  Set up expectations in advance and get a sign-off.  Create incentives (positive and negative) which encourage strategic compliance. Think about the big picture (the grand design) when creating the small picture (individual partner arrangement) so that compliance with the small supports improving the big.

3. Monitor Your Partners

Don’t assume everything is fine once the deal is signed.  If you are going to be held responsible in the customer’s eyes for something the partner does, then make sure the partner does the right thing.  Have the right to monitor progress and principles.  Have systems in place to detect problems early, so they can be fixed with the minimal amount of down-side implications. Test output to see if it meets requirements.

In many ways, treat the partner as if they were your own employees that you were responsible for. After all, if they disappoint, they can hurt your reputation and business as much as if they were your own employees.  Don’t blindly assume compliance with a “hands off” approach. 

This is not to say you don’t trust your partner.  Rather, to quote Ronald Reagan, “Trust, but verify.”

4. Put Solving Ahead of Blaming

Finally, when problems do occur, put the main focus on finding the solution rather than finding the blame.  Yes, a problem cannot be solved until they source of the problem is discovered. And yes, the process of finding the source of the problem will touch a little on finding who and what is to blame.  So blame cannot be ignored. 

But the main focus cannot be put on assigning blame.  The main focus initially needs to be in solving the problem.  Full assessment of blame can come later, once the problem is solved.  The problem with too much focus initially on blame is that:

1) Those that work hard to “prove” they have no blame will be more reluctant to pitch in and help solve the problem.  Because they feel no obligation to the problem, they feel no obligation to the solution.  Unfortunately, the problem hurts everyone in the chain, regardless of blame, so everyone should be incented to help solve it. 

2) In addition, a lot of the problems do not clearly fall in one camp or another.  For example, problems can occur at the point when one partner hands off to another. Interpretations and assumptions can vary among partners.  So it is often not immediately clear where the blame lies.  Time spent sorting all of that out at the beginning is time spent not solving the problem.  And the longer the problem goes unfixed, the worse it can become.  How time was wasted, and how much oil leaked out into the Gulf of Mexico while BP argued with its partners over who was to blame for their massive oil leak? 

3) The blame game tends to increase the friction among partners rather than the goodwill needed to create stronger, more effective partnerships.  When trust is broken, the entire chain suffers.

Yes, I know people worry about the eventual lawsuits and that is why they are so concerned about blame. But if potential lawsuits are your primary worry, then get some of the ground rules written into the original partnership agreement.  That way, the general resolution is already in place before the problem happens.  And it gives you a chance to get a resolution which works best for everyone in the chain at getting problems resolved quickly.

SUMMARY

In today’s economy, ever more of a company’s fate is in the hands of its partners, including its customers.  Therefore, the way those partnerships are formed and are operated increasingly impacts our strategic success.  And just because my firm is not directly at fault when problems occur does not mean that I do not suffer from the problem.  Therefore our strategies need to take these partnerships seriously and look for ways to a) prevent problems in the first place; and b) when problems occur, focus more on solving the problem than in assessing blame.

FINAL THOUGHTS

There’s an old saying that “Success has many fathers, but a failure is an orphan.”  This means that if you focus on finding who is the father of the problem, you may end up finding no one.  It is far more productive to focus more on just fixing the problem.

Strategic Planning Analogy #482: Owning Vs. Driving

 

THE STORY
In automobile racing, the drivers get all the glory.  They are the heroes; the ones who get in all the photos and are adored by the race car fans.

Yet are the drivers really all that special?  Most are mere employees of large race car companies.  They don’t own the car they drive in the races.  Heck, they don’t even own the clothes they wear while driving.  Both the clothing and the cars are covered with decals and logos of the company sponsors who invest in these large racing enterprises.

Winning in car races requires more than just drivers.  There are the car designers, the pit crew, and a whole host of others.  Yet the glory goes to the one driving the car.

In an episode of The Simpsons, there was a child’s race of coasting “soapbox derby” cars down a hill.  While all the boys were clamoring to be the drivers, one of the coaster car designers lamented, “It’s all in the design.  The drivers are basically ballast in these cars.”  Yet the drivers get the glory.

 

THE ANALOGY
The drivers don’t own anything but they get all the glory.  That’s because, to most fans, it’s not who owns the car that is important, but who drives it. 

A similar idea applies to all businesses.  Many business leaders seem possessed with the idea that their company has to own a lot of things.  They are constantly involved in a wide variety of acquisitions and other M&A activity.  They focus on building a portfolio of owned businesses.

Yet is ownership really all that important?  In auto racing, the glory goes to the one who drives the car, not the one who owns it.  Similarly, as long as your company is driving the way an industry works, does it really need to own that many pieces of the industry?

The key is not ownership, but control.  And as long as you are in control (behind the steering wheel), you can have as many people putting their logos and decals on the venture as they want.  Because it is the driver who gets the biggest prize.

 

THE PRINCIPLE
The principle here has to do with control.  Those who control how an industry or business ecosystem works control how the money flows.  So a business with more control can make more of the money flow to themselves.  

Increasing ownership does not necessarily lead to increasing control and increasing profitability.  In fact, as we will see later, increased ownership can actually reduce control and profitability.

There are many alternatives to ownership, including alliances, joint ventures, partnering, outsourcing, buying on the open market, and a host of contractual arrangements.  These can often lead to greater control and greater profitability than ownership.  If you do these types of arrangements properly, you can be in the driver’s seat for the industry—and get the glory (and the biggest prize).

Problems With Transfer Pricing

Ownership can destroy control and profitability in many ways.  First, there is the problem of transfer pricing.  As an item moves through the pipeline—from raw material to the hands of the ultimate consumer—there are numerous places to transfer ownership, from the extractor to the part supplier to the assembler/manufacturer to the distributor to the retailer to the consumer. 

At each point along this chain a transfer price is negotiated.  Those with power control who benefits the most from how the transfer price is negotiated.  For example, Walmart is a very powerful part of many pipelines. When manufacturers sell to Walmart, I’m sure the Walmart does much better on the transfer price than do the manufacturers or other retailers negotiating with those same manufacturers.

A problem can frequently occur, however, if a company owns too many parts of that pipeline.  If they forward and backward integrate significantly through acquisition, they can end up owning most of the transfer points.  In essence, the company ends up negotiating with itself.  Therefore, the fully integrated company cannot use control, power and leverage to extract above average returns through transfer pricing.  After all, if you own both sides of the negotiating table, if one side wins and the other loses, you are no further ahead in total, because you own the winner and  the loser in the negotiation.  In other words, the extra ownership reduces your control over how the money flows in transfer pricing.

Problems With Alienation

The mere fact that you own an additional piece of the supply chain can destroy the value of what you have purchased due to the reaction of others.  For example, let’s assume you buy one of your suppliers—someone who was a supplier to you as well as some of your competitors.  Those competitors, who were happy to purchase from that supplier before you owned it, may no longer want to use the supplier after you own it, because they don’t want to give business to their competition.

For example, when Walmart purchased McLane Distribution, it thought it would gain knowledge of fast moving consumer good distribution in groceries.  What they failed to consider was how many convenience store customers would drop McLane as their supplier because they didn’t want to help Walmart.  Walmart had to sell McLane in order for McLane to keep its customers.  So, by owning McLane, Walmart destroyed McLane’s power to control its other customers.

Problems With Focus

The more diversified your ownership, the less focused one tends to be.  It takes considerable effort to be state-of-the-art at everything all the time.  There are more opportunities to slip up.  However, if you keep your sphere of ownership smaller, you can specialize at being the very best in a narrow focus.

There are reasons why people outsource things like payroll and IT and other back-office functions to specialists.  That way, they know that there is someone whose whole livelihood is based on being the very best in that area doing the work for them.  Specialization makes those outsourcing firms more powerful and it allows their customers to focus on the areas more critical to their success.  It is a win win.

Nike and Apple

Nike and Apple are two firms which avoid a preoccupation with ownership and instead preoccupy themselves with control.  In both cases, Nike and Apple focus on only two areas—design (business model and product design) and consumer image.  Pretty much everything else is outsourced (including the making of the products).  Nike and Apple own the key drivers for their whole ecosystems.  It puts them in a powerful position to drive how the rest of the entire ecosystem operates, even though they don’t own it.  And both are doing well.

Apple is able to focus in on what matters and leave the rest to the other experts.  And because it is the driver, it negotiates tough deals.  Just ask anyone in media who has had to deal with Apple.  By contrast, Sony tried to own everything—from design to manufacturing to even trying to own the media.  The added ownership worked against Sony.  They lost focus and could not win the battle on transfer pricing.  Worse yet, even though it owned most of the parts, Sony did not build as integrated a business model as Apple.  So Apple—owning fewer of the parts—created a superior integrated model.  Apple was like the race car driver—they didn’t own the car, but they made it go in the right direction because it was their hands on the wheel.  And now, Apple is very profitable and Sony is struggling.

Implications

The key implication of all this is that ownership should not be the automatic default option when looking at how to gain an element for one’s strategy.  In fact, there are so many reasons why other alternatives may be superior that acquisition may need to be the option of last resort.  Ownership may need to become the exception, not the rule.

Before jumping to the conclusion of ownership, check to see if there are ways to gain control without the need to own.  Find a way to drive someone else’s car and steal the glory.

And finally, instead of focusing on how to do M&A deals, focus on how to do non-ownership deals in such a way they you get to be the driver.

 

SUMMARY
When developing strategies, one often finds a need to add certain elements in order to succeed.  But just because you need them does not mean that you have to own them.  It only means that you have to control them.  And in many cases, you gain more control and more profitability if you do not own them.  Therefore, do not automatically default to acquisition as the way to get what you need.

 

FINAL THOUGHTS
A read a study recently which looked at businesses and their level of successes with acquisition, partnerships and building from scratch.  Their conclusion was that acquisition tended to produce the least amount of success when compared to building or partnering.  Their conclusion was to only acquire when building or partnering didn’t make sense.  That sounds logical to me.

Strategic Planning Analogy #381: Strategy Backstop

THE STORY
Back when my son was young, we lived next door to a city park. Many times we would walk over to that park to play a little “two-man baseball.”

In two-man baseball, you only have two positions—a pitcher and a batter. The problem occurred when the batter would hit the ball out into the outfield. Since there was nobody in the outfield to catch the ball, the pitcher would have to run out there and try to find the ball in the tall grass. And since there was nobody in the infield to throw the ball to, the pitcher would have to run the ball back to the infield.

Unfortunately, running out to the outfield and back was usually longer than the distance to run the bases. Therefore, any ball hit into the outfield usually scored a home run.

Fortunately, neither of us was all that good at hitting the ball, so that problem wasn’t as bad as it could have been. Instead, we had a different problem. We would swing the bat and usually miss. Since we didn’t have a catcher, the ball would continue to zoom past the batter.

Fortunately, there was a backstop fence behind home plate. Any ball that went past the batter would hit the backstop fence and stop, making it easy to retrieve.

What we really needed was another backstop fence behind the pitcher. The way, any ball hit towards the outfield would be intercepted by the fence and drop down by the pitcher.

THE ANALOGY
The purpose of the backstop fence in baseball is to stop bad pitches and bad hits from flying away into a space where they do not belong, protecting spectators from injury. In the business world, bad things can happen as well. Therefore, businesses look for their own form of backstops—ways to minimize any negative implications when things go wrong.

A lot of research has been done lately into the science of risk. What these studies have found out is that humans tend to put a lot more weight on the negative consequences of a decision and a lot less weight on the positive upside of a decision. In other words, humans tend to make decisions more around the principle of minimizing loss than in trying to maximize gain. It takes an awful lot of positive upside to get us to accept a little bit of downside.

The mathematicians and statisticians will tell us that this is “irrational” behavior. They would say that as long as the upside is only slightly higher than the downside, a “rational” person should move forward.

But consider how risk can impact the career of a business decision maker. If the person makes a decision which turns out badly, they could lose their job. If they make a decision which turns out well, often nothing happens, since that is what was expected. Only when an outcome is outstandingly positive well beyond earlier optimistic expectations does a career get rewarded. Why take on the risk of getting fired unless there is enough upside to provide the chance for personal reward?

I think this explains why scientists find us fearful of a little loss and desiring a huge gain in order to offset the risk. But regardless of whether or not this behavior is “rational,” it is reality, so we need to work with it.

Therefore, if we want a company to embrace a strategy, we need to make sure the leaders feel comfortable about the risk. And that means that the potential downside needs to appear a lot smaller than the potential upside. And one of the key ways to do this is by putting a lot of “backstops” into your strategic plan.

THE PRINCIPLE
The principle here is that strategy is not just about trying to move a company forward. It is also about trying to prevent a company from moving backward. If you ignore the fears of moving backward, you will never get the company to embrace your plan to move forward.

Strategies usually involve change. And with change comes the risk of something going wrong. And when something goes wrong, the negative consequences can be huge. Not only can the company move backwards, but so can people’s careers. This creates fear about adopting the strategy.

Just as backstops in baseball stop balls from taking a dangerous trajectory, strategy backstops try to stop the negative consequences when something goes wrong.while implementing strategic change. By helping to minimize negative consequences, the strategy becomes more desirable to management.

Strategy backstops tend to fall into two categories: Control (Ownership) and Controls (Exit Ramps).

1) Control (Ownership)
For a strategy to succeed, a number of things have to happen to the company’s advantage—a lot of decisions have to go your way. The more other people control those decisions, the more likely they will decide in a manner which is not in your favor. Their strategic agendas may not be the same as yours; in fact, their aims may be the opposite of yours. Therefore, if you want to minimize the risk of decisions going against you, it helps to control as many points where decision-making takes place as possible.

For example, think about access to critical supplies for your business model. If you want to ensure timely access to a sufficient amount of those supplies, you may want to exert more control over your suppliers. Perhaps you need to acquire your supplier in order to ensure that your strategic concerns are their top priority. Perhaps you need to renegotiate your supply agreement.

It appears that Apple is switching suppliers for its memory chips from Samsung to TSMC. Although there are many reasons for doing so, one reason appears to be because Samsung makes devices which directly compete with Apple devices. As a result, Samsung’s strategic goals with their chip supply may diverge at times from Apple’s. By switching to TSMC, Apple should have more control over its chip supplier.

This principle not only works upstream with suppliers but also downstream with distribution channels. Coke and Pepsi have been acquiring their bottlers. The reason is because Coke and Pepsi see the value in increasing the control over how their products are distributed. This is particularly true for the faster-growing non-traditional beverages, where Pepsi and Coke had less contractual control over the bottlers. The ownership created a backstop for strategies around these newer beverages.

Of course, the more of the process you own, the greater are your share of the losses if the process goes badly. Therefore, sometimes a good backstop is to give up some of the ownership. By not having 100% of the ownership, you do not have 100% of the losses.

This is common in Hollywood, where movie ventures are funded by multiple motion picture companies. The risk is shared amongst them. There are lots of ways to structure joint ventures and strategic alliances so that the burden of potential loss is shared, creating a backstop.

Franchising is another example. Franchisees put up the investment capital and take on the risk of the franchisee failing. Ironically, even though the franchisor is giving up ownership to the franchisee, the franchisor is in some ways actually gaining more control. Because the franchisee has a greater vested interest in making the venture a success, they are more likely to help the strategy succeed than a mere employee. So with franchising, you lower your share of any loss while simultaneously increasing the motivation of the operator to make the venture a success. Now that’s a good backstop.

2) Controls (Exit Ramps)
One big bet can look a lot riskier than a many small bets. Therefore, one way to reduce perceived risk is by dicing up one big decision into a lot of small decisions. The more opportunities you have to make decisions, the more opportunities you have to opt out or modify the approach early, before the losses get too large.

Think of it as being like two different expressways. One has exits every fifty miles; the other has exits every mile. If you accidentally find yourself going in the wrong direction on the first expressway, you have to go fifty miles before you can make a correction. On the second expressway, you are never more than a mile from being able to make a course correction. The more exit ramps you put into your strategy, the sooner you can correct course (before the losses become huge).

There are many processes to do this, such as stage gating or real options. The general principles work something like this. First, you develop key success indicators—metrics which help you tell whether or not you are on the right course. These are your controls, like a GPS on the dashboard on your car. Second, you develop a process where there are many opportunities to assess your progress. These are like building lots of exit ramps.

Then you monitor your controls. If the controls say you are off course, you make a correction at your next exit ramp.

What are examples of exit ramps? If you are a retailer, instead of signing up for a twenty year lease, you can sign up for a five year lease with three five year renewal options. That gives you more opportunities to walk away if the store is not performing. If you are in the oil drilling business, instead of buying a property where you think there may be oil, do a short lease to test for oil, with an option to buy later. Design contracts with lots of clauses for opting out if key measures are not met.

Sure, all of these exit ramps may cost you a little bit more, reducing upside potential a little. On the other hand, they reduce the downside risk by a lot. And, in the end, minimizing the downside seems to be more desirable than maximizing the upside.

SUMMARY
If you want people to embrace your strategy, then you had better understand the psychology behind risk. In general, downside potential is weighed far more than upside potential. Therefore, people are more likely to embrace your strategy if there are lots of backstops embedded in the plan to minimize risk. Common backstops include increasing control of key decision points and increasing the number of opportunities to opt out or modify the decision (like stage gating or real options programs).

FINAL THOUGHTS
Since most decision makers want a high upside to compensate for any downside, if you cannot reduce the downside through backstops, then look for ways to increase the upside. For example, Disney tries to leverage its investments into as many selling opportunities as possible. A successful Disney movie can be leveraged into lots of toy sales, amusement park rides, Broadway plays, TV shows, licensing agreements and so on. All of these add-ons make the downside risk on that movie venture appear less threatening.

Strategic Planning Analogy #352: Tug o’ War

THE STORY
Tug o’ War is a simple game. All you need are two teams and a large rope. The two teams each grab onto the opposite ends of a rope and pull as hard as they can. The team which out-pulls the other, causing the other team to cross into their territory, wins.

Having played the game a few times, I know it can be a very difficult and strenuous game if both teams are of equal strength. When the teams have equal strength, the game seemingly goes on forever and you get extremely exhausted. It’s more fun if your team is a lot stronger than the opposition. Then, you don’t have to work as hard and you win more quickly and more often.

THE ANALOGY
In Tug o’ War, winning comes from amassing more power at the point of struggle than your competition. The one with the relatively larger strength wins. The same is true in the business world. The one with the larger relative strength usually wins.

Think of the rope in Tug o’ War as being like your supply chain. The person on the other side of the rope is someone else in your supply chain, either upstream (supplier) or downstream (distributor, customer). Within a supply chain, there is a certain amount of revenue and a certain amount of costs. These revenues and costs need to be allocated amongst all the players within the supply chain. If you are a good negotiator, you can get a disproportionately higher percentage of the supply chain revenues while absorbing a disproportionately lower percentage of the costs. Your gains come from the losses of others within your supply chain.

Of course, while you are trying to get a disproportionate advantage against others in the supply chain, others in the supply chain are trying to do the same to you. Hence, the big struggle, like a game of Tug o’ War. And, like in the game, the one with the most power typically wins the struggle.

As mentioned earlier, Tug o’ War is more fun if you are stronger than the team on the other side of the rope. The same is true in business supply chains. I’ve worked with retailers who were very strong relative to their suppliers and I’ve worked with retailers who were weak relative to their suppliers. Let me tell you, those experiences are very different.

When with the weak retailer, we were forever going to the suppliers begging for access to sell their product. We were willing to promise almost anything to get them to cooperate and sell to us. Needless to say, even if we did successfully get access, we didn’t make much money on the deal because the negotiation favored the supplier, who was much stronger.

Conversely, when the retailer was relatively much stronger, the roles were reversed. The vendors came knocking at the doors of the retailer, begging us to sell their wares. To gain access to our stores, they would offer almost anything—even including some equity ownership in their company. In this case, retailer got the most favorable end of the negotiation.

The more power you bring to the supply chain, the better your negotiation of who gets the revenues and who pays the costs. Getting such power rarely comes by accident. It takes strategic effort.

Therefore, when strategizing about the battles ahead, don’t just build your strategy around the struggles against your competition. Remember, you also have this tug o’ war with your supply chain as well. In fact, your ultimate profitability may have more to do with how your supply chain tug o’ war turns out than how your competitive battle turns out. This is because a winning tug o’ war strategy in the supply chain not only makes your individual transactions more profitable, but it can also give you an edge in your fight against the competition (particularly if their tug o’ war within the supply chain was less successful).

How much of your strategic effort is focused on your supply chain tug o’ war?

THE PRINCIPLE
The principle here has to do with accumulating the right amount of power within the supply chain. The key here is determining what the right amount of power is and what it takes to get it. This is not just about getting the most power you can. Remember, it is not absolute power which is important, but relative power. It does little good to focus on building your power if you still end up significantly less powerful than your supply chain partner on the other end of the rope. Also, as we will see later, there can be risks if you gain too much power. The goal is not to obtain all of the power, but only enough to gain advantage.

So what can we learn from the game of Tug o’ War to help us with this supply chain strategy?

1) Don’t Let the Other Side Get Too Strong
In Tug o’ War, you can still win if you are weak. All you need to do is ensure that the opposition is even weaker. There are steps you can take in your strategy to proactively try to keep other players in your supply chain weaker than you. Take, for example, the relationship between franchisors and franchisees. If you are a franchisor, you have a choice in whom you franchise to. Are you making those early front-end choices strategically for the long-term Tug o’ War between franchisor-franchisee?

At first, it may seem easier to franchise your concept to a small number of large franchisees. After all, this eliminates the hassles of dealing with a lot of small operations. Through only a few deals, you can quickly get huge geographic penetration for your concept. In addition, these large franchisees tend to be successful and well financed, reducing the risk of failure.

Unfortunately, when you take such a move, you have made the franchisee relatively stronger in the franchisor-franchisee tug o’ war. A large franchisee has more leverage in the negotiations and can gain more advantage. Your one-time decision has created decades of tougher Tug o’ War battles than there needed to be.

Take, for example, NPC International. They own about 1,200 Pizza Hut franchises. Just their volume alone would make NPC a top ten fast food retailer in the United States. Worse yet for Pizza Hut, NPC now controls about 20% of Pizza Hut’s volume in the United States. That gives NPC a lot of power in negotiating with Pizza Hut. For example, instead of accepting the typical supply distribution arrangement Pizza Hut offers its franchisees, NPC in August negotiated a separate deal to get their supplies from McLane Foodservice. I’m sure that this deal between NPC and McLane Foodservice puts disproportionately less of the total supply chain profits in the hands of Pizza Hut.

And it is Pizza Hut’s fault, because they allowed this franchisee to get too powerful. NPC International got large by buying up other franchisees. Strategically, it might have been in more beneficial if Pizza Hut had outbid NPC and then placed those units in the hands of others where the power of the franchisees would have been more dispersed. Then Pizza Hut would have had more power when distribution decisions by the franchisees were being made.

2) Build Your Own Strength With the Help of Others
Even if your team is small and weak you can still win Tug o’ War if you can partner with others who will pull along with you on the same side. In other words, if your negotiating clout is weak, then don’t negotiate alone. Form alliances with others.

The internet has shown that if individual consumers work together en mass, they gain a lot more clout and get better deals (think firms like Groupon). Cooperative buying organizations have been around a long time, where groups of people or companies negotiate together in order to get a better deal. Technology is making such buying even easier. Take advantage of these opportunities increase your relative strength at the point when Tug o’ War negotiating occurs.

3) Keep the Game Fun for Both Sides
If you build up too much power, nobody will want to play Tug O’ War with you because they won’t have any fun. The same is true in business. If you gain too much power, and exploit that power too strongly, nobody will want to play with you. And if nobody in the supply chain wants to play with you anymore, you cannot run your business anymore.

Think of the U.S. automobile industry. The manufacturers had used their power so aggressively to squeeze concessions out of their suppliers that the suppliers could no longer make a profit serving the automobile industry. Many suppliers started diversifying away from the automobile industry and started to no longer bid on projects in the automobile industry. Those suppliers which remained started going bankrupt, causing all sorts of problems for the automobile companies purchasing from them. The result was that the automobile companies now had fewer supply options and the remaining options were shakier. This is all because they had taken the power principle too far.

Remember, the goal is to win with your supply chain, not to obliterate it. Although they may be on the opposite side of the rope, they are still your partners. You cannot survive without them. Getting a disproportionately better deal does not mean taking it all and leaving them with nothing.

Besides, the cost to get that much power may be more than what you can get in concessions (diseconomies of scale). And if you exploit your power too much, you can have government agencies coming after you.

4) Be Careful When Pulling on Both Sides of the Rope.
Some people argue that the best way to avoid problems in the supply chain is to diversify into the rest of the supply chain. In other words, become your own supplier and/or distributor. Now there can be some benefits to this approach, because you cut out some middleman expenses. However, this approach can often be a disaster.

The problem is this—if you own both sides of the negotiating table, then you cannot get a disproportionate advantage. Although you get to absorb all of the revenue, you also have to absorb all of the costs and all of the risks.

It is like trying to play Tug o’ War while holding both ends of the rope at the same time. There is no way to win an advantage.

In addition, if you own a supplier or distributor, that often means that your competition will no longer want to use that same supplier/distributor for fear that it will put more profits in the hands of their competition. As a result, your ownership could weaken the power of that supplier/distributor in its own Tug o’ War battles.

SUMMARY
A large part of a company’s success may be due to how well they play Tug o’ War with their supply chain partners. Therefore, supply chain power management should be a key part of any strategic planning exercise.

FINAL THOUGHTS
Negotiations with supply partners do not always have to be adversarial. Sometimes you can find some win-win alternatives where you can make your whole supply chain more competitive against competing supply chain alternatives. But don’t be naïve when negotiating and assume your partners always have your best interests at heart. I remember one wholesaler saying that his suppliers all told him that he was their favorite customer. At first he was happy because he thought that was a compliment. Then he realized that he was their favorite customer because they got their best differential advantage when negotiating with him. He stopped being happy and started negotiating harder.

Strategic Planning Analogy #277: Strategy is Like Dancing

THE STORY
This summer, I did something I have never done before—dance. I did not dance at my own wedding. I did not dance at my daughter’s wedding. But this summer, I danced at my niece’s wedding.

Okay, it was for less than one song, and it was more a kind of swaying on the dance floor than a real dance, but I did it (and it made my wife happy).

Don’t expect to see me on any time soon on any of those dance competition shows on TV.

THE ANALOGY
Dancing well requires a lot of effort and preparation. It takes many hours (even months or years) of preparation beforehand in order to look good for just a few minutes on the dance floor.

On the TV show “Dancing With the Stars,” they show some of the grueling practices in order to prepare for the short performance. If you just get on the dance floor like I did, with no preparation, you are going to look awful.

In the business world, sometimes you have only a brief moment in which to convince consumers to vote for your brand. If they don’t like what they see, they will send you away. If you want your performance to shine, you need to prepare—just like in dancing.

This is the essence of strategy—to properly prepare your business to perform well when it’s show time.

THE PRINCIPLE
The idea here is that strategic planning is a lot like dancing. Great dancing occurs when there is great coordination—coordination with the music and coordination with the dance partner. Strategic planning is a process to create that coordination.

1. Coordination With The Music
Music creates the environment in which you are dancing. If your dancing is out of step with the music, you will look bad, even if your athletic ability is sound. Dancing a fast cha-cha to slow, romantic music will appear inappropriate and will not get you the votes you want from your audience.

The same is true in business. Businesses do not operate in a vacuum. They operate within a business environment. This is the music of the business world. If you want to succeed in your business dance, you’d better be in sync with that business environment. Don’t have a cha-cha strategy when the world is playing a slow waltz.

Take Abercrombie and Finch, for example. During the recent economic collapse, they refused to alter their strategy of charging a top price for their top brand. Abercrombie and Finch were not listening to the music of their environment. The mood had shifted. Due to the economic environment, people were more willing to trade away certain brands in order to get a better price/value. Abercrombie and Fitch lost a ton of market share to firms like Aeropostale, whose pricing strategy was more in tune with the music of the day.

As another example, in many sectors today the music of the business environment now has a “green” rhythm to it. If you are not into environmental sustainability, you are out of step with the beat.

For strategy, this implies that an important function is to always have your ears listening to the music of your environment. Listen for when the song changes, and be ready to dance the appropriate dance that the new song requires. No environment lasts forever. Moods change and tempos change. Therefore, you must change.

a) Environmental Analysis Should Be an Ongoing Process
Therefore, I recommend that your strategy function do two things. First, do not treat environmental analysis as an infrequent event. Instead, treat it as an ongoing process. Never stop listening to the music of your world (or you may miss it when the song changes). Never stop trying to understand your environment better.

Even if the music does not change, one can benefit from getting more intimate with the music of your environment. When I was a teen, I spent a summer working at a public swimming pool. Every morning, all summer long, there was a group of synchronized swimmers practicing for a competition at the end of the summer. Every morning, I had to listen to that same song they were practicing to—over and over again.

The music drove me crazy, but the repetition made the synchronized swimmers better. The better you know the music, the easier it is to stay in sync. Dive deep in your environmental analysis so that you better understand what is going on. And make sure you “play the music” in the office everyday, so your employees do not forget the world in which business transactions are taking place out in the field.

b. Have a Repertoire of Dances
If you only know one way to dance, then you will be unprepared when the music changes. This is where scenario planning fits in. In scenario planning, you look at the environment and how it would play out under different scenarios. This is like looking at how the world could end up playing different songs. Then the job is to prepare a dance/strategy for each song/scenario. That way, you are ready when the song changes.

Procter and Gamble was performing a dance similar to Abercrombie and Finch—premium prices for premium brands. It took them a long time to adjust their dance to the new song, created by the harsher economic environment. They are finally taking some steps to appeal to the new tempo by introducing Tide Basic to the US and converting Cheer to a value brand.

However, the song changed a long time ago and many already abandoned P&G for those brands which were dancing more in step with the times. In fact, with a potential recovery coming, P&G may be getting in tune with this song just when the song may be about to change again. Without more flexibility in their repertoire, P&G could perpetually fall one song behind.

So you not only need a repertoire of dances, but flexibility in your strategic process, so that you can adapt quickly.

This is not to imply that core strategies should be continually changing. No, the core of one’s business should not change very often. However, the way you express that core business should adapt to the rhythm of the times.

For example, Wal-Mart’s core strategy is about being a low cost operator, so that it can offer lower prices. As the music shifted to a “greener” beat, they incorporated environmentalism into the strategy. But they did it in a way that reinforced the core. They used the elimination of environmental waste as a way to eliminate spending waste and thereby save even more money that can be passed on in lower prices.

2. Coordination With Your Partners
Dancing well also requires dancing well with your dance partner. If you are not in sync with each other, the dance will fail. You will step on each others’ feet and fall down. In business, you can have many dance partners—suppliers, distributors, venture partners, outsourcers, and so on. Your successful dancing requires that both of you are on the same page of the strategic dance.

a) Choose Partners Well
Strategy is about more than just choosing the right dance. Strategy has to include a path to performing the dance well. Part of the path involves choosing the right partners. Poor choices lead to poor dancing.

Before choosing a partner, ask yourself these questions: Does this partner have a similar philosophy/approach to business (are the trying to dance the same dance)? Are they an appropriate match in terms of size and capabilities (dancing rarely works if the partners are mismatched in size)? Will you be an important partner to them? How committed are they to making the dance a success?

b) Spend Time Together
It’s difficult to dance well with a partner if you don’t spend time with them. Coordinated dancing requires spending time together. How much time to you spend with your partners? How well do you know them?

Do you ever talk to your partners about strategic issues? Do you invite them to any of your strategy sessions? How can you expect them to dance in sync with you if you keep them in the dark about the type of dance you are trying to perform?

Many successful businesses have developed strong, long-term relationships with their partners, like the partnership between Intel and Microsoft. Frequent shifting of partners rarely leads to good dancing.

SUMMARY
Business performance is a lot like dancing performance. If you want to perform well, you need the preparation of strategic planning to:

a) Get in tune with the music of the environment; and
b) Get in sync with the steps of your partners.

FINAL THOUGHTS
Great dancing is more than just coordinating motor skills and getting the mechanics right. People do not want to watch robots get the steps right, but in a cold and heartless manner. They want emotion, flair, élan—an artistic performance. Never forget the emotional elements in devising and executing a strategy.

Analogy #209: Draw A Bigger Circle

THE STORY
Once upon a time, there was a politician who wanted to clean up water pollution in the local rivers. He decided that he would have greater success if he started small. Therefore he took a map of a large river in his district and drew a circle over a portion of that river.

“There,” he said. “I will start by making all the river water within this circle pollution-free. Once that is done, I’ll move to another circle until the whole river is clean.”

The politician passed all sorts of laws making it impossible for anyone to do any sort of polluting within the boundaries of that circle. Proud of himself, he later went to check on the quality of the water within that circle. To his dismay, the politician discovered that the water was more polluted than before.

“How can this be?” the politician cried out. “I banned all polluting activity within that circle.”

Upon further investigation, he discovered that:

1) There were factories on the shore of the river just outside his circle that were pouring tons of pollutants in the river.

2) There were tributaries to this river that were bringing polluted water into the river. These tributaries were also outside the area in the drawn circle.

3) There were polluting activities upstream from the circle that flowed into the area inside the circle.

At this point, the politician realized that he could not solve the problems of the water inside his circle without also tackling issues occurring outside the circle.

“I guess I drew my circle too small,” sighed the politician.

THE ANALOGY
The strategic planning process is a tool to help improve the performance of our business. This is similar to the politician’s goal of trying to improve the quality performance of that river.

The politician’s mistake was that he tried to fix the problem by only looking at the area inside the circle. He failed to realize that his little portion of the river is connected to a lot of other areas. These other areas had a significant impact on the quality of that river’s water. By ignoring the outside influences, he was unable to control the internal results.

The same is true in business planning. Our goal may be to improve our firm (or brand or division or product’s) performance. However, not all of the factors which influence that success fall within the direct control of the firm (or brand or product). Outside influences are important.

Therefore, as we develop our strategic planning, it is important that we do not draw our circle of planning too small. The process needs to be inclusive enough to cover not only our own internal team, but the major influencers as well.

THE PRINCIPLE
The principle here is that interconnected solutions work best if all the interconnected pieces are a part of the planning process. So the question we must ask ourselves is this: How big is the circle of people involved in our planning process? Is our circle large enough?

In this blog, we will look at four groups you may want to consider adding to the list.

1) Employees
There are two reasons why it is important to get employee feedback into the planning process. First, employees are your eyes and ears out in the areas where your products/services are produced and sold. They see things that may never make it to the secluded offices at corporate headquarters. They know things you do not know. This knowledge and insight can be very valuable in creating a strategy most appropriate for the “real” world (which may look different from the “perceived” world in the minds of the leaders at the top). Take advantage of that resource.

Second, the employees are the ones who have to do a lot of the work to make the plan a reality. If they are not solidly behind the strategy, they may not be as effective at implementing it. By contrast, if they had a stake in creating a strategy, they are more emotionally attached and motivated to making it come to life.

2) Partners
Today’s business activities are far more interconnected. Larger pieces of the business are outsourced to various outside partners. In addition, financial partners have a desire to become more active and involved in how the business is run. More and more of your success is dependent upon these partners over which you do not have full control.

If you do not invite your partners to the planning table, they may not be able to fulfill their role in making your strategy a reality. For years, Microsoft and Intel worked closely to ensure optimal performance for their own individual business. Microsoft knew that if Intel did not supply sophisticated enough chips, there would not be the ability for computers to run the next generation Microsoft software. Similarly, Intel knew that if Microsoft did not invent more complex software, there would not be demand for their more sophisticated chips.

Since each company’s success was dependent upon the actions of the other firm, there were benefits to working this out together.

The new Boeing Dreamliner airplane is being built with cooperation of an extraordinarily large number of outside partners. Significant delays are occurring due to the difficulties of coordinating the activities of all of these outside partners. The better you can jointly plan these activities, the smoother the cooperation.

3) Suppliers
The same principle applies to suppliers. In this just-in-time world, it is difficult for a supplier to meet the demands of your plans if they are not aware of what the plan is. Even more important, if you let the suppliers in on the planning process up-front, they may have suggestions on how to do it better, based on their unique perspective and superior knowledge in their own field. This point may be even truer with partners.

The Japanese auto industry shows some of the advantages of working more closely with suppliers.

4) Customers
In today’s environment, customers are demanding a greater say in the operations of the businesses they patronize. Digital technology is making it easier to create interaction between customers and companies. For example, Dell has used web 2.0 consumer conversations to help them understand what the customer really wants. Dell’s latest product introductions are a direct result, offering some of the most wanted features.

There are many ways to include the customers in your planning process. The good news is that the more the consumers are involved in the brand, the greater the emotional attachment to the brand. This should improve customer loyalty. In addition, it’s no small benefit if the interactions create a strategy more in tune with the marketplace where the money is made.

This is not to imply that all of these people (employees, partners, suppliers and customers) need to be a part of the entire planning process. Yet, it amazes me how often these players are not a part of any of the planning process.

Who do you invite into your planning circle? What is the list of people invited to sit at the planning table? Is it big enough?

SUMMARY
Individual company/brand/product success depends not only on the internal actions of your business, but also upon the actions of numerous parties on the outside. Your chances of success in having a successful strategy improve if these outsiders are invited to the planning table. First, they bring knowledge and insight from their unique perspective. This knowledge can improve the quality of the plan design. Second, by being a part of the plan, they should be better able to execute their portion of the plan.

FINAL THOUGHTS
Some problems are so large that it may be necessary to even work together with your competitors. For example, it may be beneficial to get the government to change its stance on issues related to your industry. Therefore, industry associations and lobbying groups may also be people to include in your planning circle.

Strategic Planning Analogy #150: Where’s the Groom?

THE STORY
About 6 months ago, my daughter got married, so I know a bit about all of the time and effort that goes into preparing a wedding. Imagine for a moment that you are the bride-to-be and are preparing your wedding.

A lot of time and effort and money go into preparing a wedding. There’s arranging the ceremony, the reception, the flowers, the videography, choosing the wedding gown, preparation for the honeymoon, and so on. It’s not something thrown together in a day. It can often take 18 months to prepare for.

So let’s say you went through all of this preparation for your special wedding day. Finally, the day you have been preparing for is here. You arrive at the church. Everything looks just right.

You walk down the aisle in your beautiful wedding dress. Then, as you are standing at the altar, it suddenly occurs to you…there is no groom. You were so busy preparing the wedding that you did not take time to seek out a marriage partner.

THE ANALOGY
It seems foolhardy to think that someone would go to all the trouble of planning a wedding without spending time to find a marriage partner. However, businesses do something similar all the time.

In the business world, there are all sorts of partnerships. Some are strategic alliances, some are outsourcing arrangements, and others are joint ventures. To a large extent, your success is dependent upon the success of your partners.

Businesses can spend a lot of time in strategic planning, similar to the time and effort which goes into wedding planning. Yet, while it seems unconscionable to plan a wedding without the marriage partner, businesses often go through their entire strategic planning cycle without inviting their business partners to the discussion.

How can you optimize your performance if your planning is not in sync with your partners?

THE PRINCIPLE
The principle here is that strategic planning needs to incorporate its partners into the process. This is even more important now than in the past. We have moved into the networked economy, where ever fewer companies internally control all the aspects of their business. Instead, many aspects of the business are farmed out to others.

For example, a US company in the networked economy may:

1) Outsource manufacturing to a company in China
2) Outsource its call center to India
3) Pay a licensing fee for the cartoon characters which appear on the box
4) Have distribution outsourced to a 3rd party distribution company
5) Use a strategic partnership to obtain a European sales force
6) Form a joint venture with a local firm in Japan in order to penetrate that market

As more of one’s business falls into the hand of these various partners, the less direct control one has over his/her future. Three major areas where less control can create problems if not planned for properly revolve around capacity, conflict, and contribution.

A. Capacity
You may have a desire to grow at a particular pace. However, your partners may not have the capacity to grow with you at that same rate. Taking the US company mentioned above, it may have a strategy for very rapid growth. However, what if:

a) Its partner in China cannot grow its manufacturing capacity at that rate, or
b) Its distribution partner does not have capacity to grow distribution at that pace, or
c) The European partner does not have a large enough sales force to handle your planned growth there.

If your partners cannot grow at that pace, then perhaps you cannot, either. Your strategy may be flawed in its expectations, because your partners cannot support it.

Perhaps these partners could have geared up to support your growth if you had given them more of an advanced notice of your intentions. That is why you need to not only consider the capacity of your partners in your planning, but also get them involved in your early planning discussions so that they can have time to mesh your capacity needs into their own planning process. And if you cannot resolve the capacity issues, there is time to seek alternative sources of capacity.

B. Conflict
Now let’s assume that your long range plan calls for you to expand into new adjacent product categories. However, what if:

a) The manufacturing partner in China already manufactures this new type of product for someone else and is restricted from manufacturing it for anyone else.

b) The call center in India already has a US partner in this new space, and is prohibited from doing business with anyone who also competes in this space. Hence, not only can’t they help you on the new business, but they would no longer be able to work with you on the former business.

c) Your partners in Japan already have a position of their own in this new business, so they are unwilling to also support your effort in this area.

d) Your new product appeals to customers which your European partner’s sale force do not call on, nor have any desire to call on because of non-compete arrangements they have with other European sales forces.

e) The company which owns cartoon characters you license does not want their characters associated with your new product for fear it will damage the image of these characters.

As you can see, the diversification may make perfectly good strategic sense for your particular business, but it may not make any sense for your partners. They have strategic interests which are in conflict with yours. It is important to understand potential conflicts early in the planning process in order to either:

1) See if you can iron out the conflicts with your partners;
2) Seek out alternative partners for the diversification; or
3) Alter your diversification strategy.

C. Contribution
Just as there can be problems if you keep your partners out of your planning process, there can be missed opportunities if your partners exclude you from their planning processes. Going back to our US business example, what if:

a) The Chinese manufacturing partner had developed new technological capabilities which would be useful in your plans, but were not included because you did not know about them.

b) The distribution partner has just expanded into Mexico, which could have had an impact on the timing of your planned entry into Mexico had you known about it in advance.

c) Your Japanese partner is looking for distribution of one of its products in the US. This is the same product that you wanted to diversify into. Had you known about this in advance, perhaps you would have sold the Japanese product under your name in the US rather than separately develop a competing product.

d) Your cartoon licensing partner is releasing a new movie. Had you worked more with your partner when the movie in its development stage, perhaps you could have gotten involved in movie tie-ins which would have been superior to the marketing plan you had devised.

e) Perhaps there are things you are doing in-house which can be done less expensively if they are outsourced. By not examining new outsourcing opportunities in the planning process, one plans cost cuts in another area which otherwise would not have been needed.

The more you know about what your current (and potential new) partners are up to in their planning, the greater you can take advantage of that information in your own planning. There may be many more contributions available from your partners which you had not dreamed of, but would have come to light if you had been a greater part of your partner’s planning.

SUMMARY
In today’s networked economy, planning can no longer be done in isolation. The planning process needs to include your partners. This way, you can avoid some of the problems of a partner’s lack of capacity or strategic conflict. Not only that, one can benefit from additional partner contributions which come from knowing more about how a partner can help you. Just as weddings are rather meaningless if only one of the partners shows up, planning sessions can lose a lot of their power if your key partners are excluded.

Sure, the greater inclusion of partners into the planning process may require more trust, openness, and transparency. However, is it not true that marriages tend to be more successful if there is more trust, openness and transparency?

FINAL THOUGHTS
The pace of change in business seems to be getting faster. Time lost creates ever increasing opportunity lost. By incorporating your partners into your planning process sooner, one can resolve issues sooner. Less time is lost. If you wait until your planning is over to bring in your partners, you may find a need to plan all over again. More time is lost.

Howdy Partner!

THE STORY
Once upon a time, there were two nearly identical companies in the same industry, called Alpha Company and Beta Company. Both companies wanted to grow, and both realized that if they increased their power throughout the entire supply chain, it would help their growth. However, both companies took a different strategic approach to reach this goal.

Alpha Company decided to reach its goal primarily through acquisitions. It started to use its resources to buy up companies in other parts of the supply chain. The logic was simple: the more companies they owned throughout the supply chain, supposedly the more power they would have within the entire supply chain.

Beta Company decided to reach its goal primarily through strategic alliances and partnerships. Beta used its resources to create superiority within the one area of the supply chain where it already operated. It then used that superiority as a bargaining chip to convince others in the rest of the supply chain to form preferential partnerships.

The results for Alpha Company were as follows:

1) Alpha could only acquire companies which were willing to sell to them. Usually, the companies who were the very best in their sector were strong enough that they did not see the need to sell their company to Alpha. Either that, or they asked for so much money that Alpha could not afford them.

2) Alpha ran out of resources before completing the acquisition of an entire supply chain network. They had more of the pieces of the puzzle than before, but the network still had many holes in it.

3) Rather than spending time improving their core business, their time was spent trying to integrate the acquisitions. This always seems to be more difficult, more time consuming and more expensive than originally anticipated. And while they were doing this, other companies—like Beta—were improving their core business. This was reducing the competitiveness of Alpha’s core business.

4) Because Alpha always demanded that its divisions work exclusively with each other, they were not always able to use the best partner in every situation. This weakened their position in the marketplace and lowered the sales in the acquired companies.

5) Many of the rest of the businesses in the supply chain no longer saw Alpha’s core business as an ideal partner, because Alpha had acquired one of their direct competitors. Therefore, the business they used to give to Alpha went to others who did not own businesses in their sector. This lowered Alpha’s sales in the core business.

6) With the lowered sales in the core as well as the new businesses, Alpha was forced to cut some costs in an attempt to save profitability. However this only served to weaken the quality of their offerings, making them even weaker in the marketplace.


The results for Beta Company were a bit different:

1) Because they had invested in making their core business superior to competition, Beta became a sought-after partner. Beta was able to use this clout to create preferential partnership deals with the best players in the rest of the supply chain. It had deals with great players throughout the entire supply chain network.

2) The preferential partnerships became more profitable than the former way of conducting business. Much of the added profitability from the preferential partnerships was plowed into the core business to make it an even stronger competitor/partner.

3) Even though Beta had preferential partnerships, it refrained from creating very many “exclusive” partnerships. Therefore, it could still work with others in the network if it made more sense for its customers.

4) Although the companies which had not formed partnerships with Beta were a little angry with them, most were pragmatic enough to understand that Beta had become so superior in its field that it still made sense to deal with them, in spite of their own anger. In addition, they felt that at least Beta had not become a traitor by buying one of their direct competitors, so they liked dealing with Beta more than Alpha.

In the end, Beta kept getting stronger within the entire supply chain, while Alpha kept getting weaker. Eventually, Alpha filed for bankruptcy while Beta became the darling of Wall Street.

THE ANALOGY
One of the key issues addressed in strategic planning is the concept of growth. Nearly all of a company’s stakeholders want to increase the growth of the company. Acquisitions are often seen as a “sexy” way to achieve that growth. Just spend a little money and—BAM!—you are instantly larger than before. It’s a lot faster than trying to diversify as a start-up. In addition, you eliminate some diversification risks versus start-ups, because you are purchasing known competencies (that you do not currently have) which are already established in the marketplace.

The problem is that although acquisitions may at first seem to be the best way to diversify and grow, they are fraught with problems of their own. As we saw in the story above, Alpha was worse off than before due to its acquisition strategy.

In today’s rapidly changing economy, it is often better to grow via partnerships, alliances and preferential agreements rather than through acquisition. This was the successful approach of Beta in the story above.

Therefore, when developing growth strategies, always make sure you consider the partnership approach.

THE PRINCIPLE
The principle here is that “control” is not the same thing as “ownership.” Often, we rush to the conclusion that the more we own, the more we control. Therefore, we try to own a lot of things.

In reality, ownership can often weaken one’s control. In the story above, Alpha’s power in controlling the supply chain was less after their acquisitions than before. It lost power as follows:

1) It lost the power of dealing with the best people in the industry. Part of this was internal because they were now limiting themselves to using the companies they acquired, which were not always the best choice for every situation. Part of this was external, because now others were less willing to work with them because they did not want to work with a firm which owned one of their direct competitors.

2) It lost power in their core business. This was due to multiple factors, including having less time and money to invest in the core, as well as a loss in productivity due to the loss in customers who did not want to deal with them any longer because of the baggage of having to deal with their other divisions.

Often times, more power can be gained through partnerships than through acquisitions. Partnerships can give you a great deal of control over how the entire ecosystem works without tying up all of your capital. Think of the medical profession, which thrives on referrals. Partnerships are a way to get a disproportional amount of “referrals” at a preferred rate.

In the story above, Beta gained power in several ways:

1) It became more powerful in its core business, because it was able to concentrate more resources on improving its performance. This made it a more desirable partner.

2) It became more powerful in determining how the profits in the entire ecosystem were divvied up. Through its negotiations, Beta obtained a preferred status, which allowed it to negotiate more favorable terms for itself. As a result, Beta tapped into a larger share of the entire ecosystem’s profit pool without having to invest in more of the ecosystem. This makes for a great return on investment. By contrast, when Alpha acquired other companies in the ecosystem, it had to pay a premium to get the deal done. Hence, the company who sold the business to Alpha extracted a great deal of the profitability through the premium price, leaving less for Alpha.

Now some of you may be saying that acquisitions are better because they bring more synergies. Perhaps this is true, but acquisitions also bring more dis-synergies from people who no longer want to work with a company who bought a direct competitor. Often times, the net synergistic benefit is higher with the partnership, because you are more likely working with a better mix of partners.

SUMMARY
Although growth is often a very good thing, not all attempts at creating growth are equally beneficial. In many cases, partnering is a better way to grow than acquisitions. Ironically, partnering usually creates greater control than ownership. And in the end, control is what typically leads to greater profitability.

FINAL THOUGHTS
People who volunteer to do a job usually do a better job than those who are forced into it. In a sense, acquisitions are like forced labor, whereas partnerships are more voluntary.