Strategic Planning Analogy #553 Part 5: Investment Statement & Putting it All Together

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In this blog, we will look at the fourth and final one of the documents to use in their place—the Investment Statement.

THE INVESTMENT STATEMENT
The purpose of the Investment Statement is to provide a strategic framework for understanding corporate overhead. “Investment” consists of spending for items which provide benefits for multiple years Yes, the balance sheet and cash flow statements also have lines describing various costs related to investments. However, the income statement doesn’t tell you why these numbers were chosen, how they relate to strategies, or what benefits are expected from these benefits. That’s why I designed the Investment Statement.

Since there are so many different types of business models out there, the Investment Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Investment Statement is used to carry forward the investments already made.  This should be fairly easy to do, because these investments are already recorded in a company’s financials.

2) Strategic Investments

The next step is to outline all of the investments needed to complete each of the strategic initiatives. This would include the upfront costs, depreciation/amortization impact, and return on investment (typically based on a discounted cash flow analysis or other, similar type of measure).

3) Net Results

The third and final section looks at the net impact of the first two sections on investments, including the total level of investment and the total impact to depreciation/amortization.

BENEFITS

The benefits from using an Overhead Statement are as follows:

• It proactively links all of your strategies to specific investments.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.

PUTTING IT ALL TOGETHER
Now that we have looked as all the documents separately, we can put it all together into a single process. It is illustrated in the figure below. The process has four parts:

1. Baseline Assumptions: First we do internal and external research to determine two things:
1. Where the market is going; and
2. How we will play in that space if we do not change our status quo.

The result of this work will be our baseline assumptions.

2. Strategy Development: Next, we devise strategies and strategic initiatives/tactics to optimize our performance and position in the future. This is your basic core work of strategic planning. 
3. Quantification/Validation of Strategies: This third step is where we get specific on the expected costs and benefits associated with the strategies and tactics. To do this, we use the statements mentioned in this and the prior four blogs—the Revenue Statement, Operations Statement, Overhead Statement and Investment Statement. There is a sort of circular process between steps two and three. As we start quantifying the strategies, we may see a need to modify our strategies a bit to improve their impact. Also, as we look at the four statements (revenue, operations, overhead, investment), we may see some gaps that weren’t covered by our original list of strategies. This may require adding additional strategic initiatives. We keep up this circular approach until there is agreement on the final list of strategies and their quantifications.
4. Translating to Standard Statements: Once the strategies and their quantifications are approved, one takes the data and translates it into the standard financial statements (income statement, balance sheet, cash flow). Now, you have the documents you share with the rest of your stakeholders. 

SUMMARY
Future projections in income statements, balance sheets and cash flow statements are only as good as the assumptions behind the numbers within them. To make sure the assumptions are solid, a lot of prior work needs to be done to properly quantify not only the tasks associated with those figures, but also the specific financials attached to each task. To help quantify the tasks and financials associated with them, I have devised the Revenue Statement, the Operations Statement, the Overhead Statement and the Investment Statement. When used properly, they can provide the missing link between what needs to be done and what outcomes are expected.

FINAL THOUGHTS
These forms were left a little bit vague, because each industry has its own nuances which will impact how the forms should look. But that doesn’t mean you should leave them vague. Your role is to customize them to your industry.

Strategic Planning Analogy #553 Part 4: Overhead Statement

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In the past, we looked at the Revenue Statement and the Operations Statement. In this blog, we will look at another one of the documents to use in their place—the Overhead Statement.

THE OVERHEAD STATEMENT
The purpose of the Overhead Statement is to provide a strategic framework for understanding corporate overhead. “Overhead” consists of those activities NOT directly related to producing or marketing/selling what you sell. These are already covered in the operation and revenue statements (mentioned in earlier blogs).

Yes, the income statement also has lines describing various costs related to overhead. However, the income statement doesn’t tell you why these numbers were chosen and what the strategies are to reach these numbers. That’s why I designed the Overhead Statement.

Since there are so many different types of business models out there, the overhead statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Overhead Statement is used to determine the baseline. This is what overhead costs would be if nothing changed and there were no new strategic initiatives.

As a result, the baseline is more or less a continuation of what you have done in the past.

2) Strategic Changes to Overhead

Over time, one’s overhead structure can become outdated. This could be due to internal factors like a change in the company’s business portfolio. Or it could be due to external factors, like new technologies or new approaches to management. Either way, change is change, and if you don’t change, your overhead will not be as efficient or as effective as it could be.

Strategies will be needed to determine how best to change and adapt the overhead.  That is why the second part of the Overhead Statement looks at the impact of strategic goals on operations.

a) Cost Control (Becoming More Efficient): One of the simplest strategic goals is to reduce the cost of overhead. If that is a goal, then you would place here what the cost control strategy is and how much you expect it to lower overhead expenses (by individual overhead line). Some of these cost reductions may require up-front capital investments. This amount gets transferred to the Investment Statement (which we will talk about in a later blog). If you plan on using the cost reductions to support price reductions, then those price reductions would be reflected on the Revenue Statement.

b) Management Improvement (Becoming More Effective): There are lots of ways to improve the effectiveness of one’s overhead. This might include delayering (or adding layers). Or it could be a major reorganization. Or it could be technology and system improvements. Or maybe it includes outsourcing a function. Whatever the strategy to improve overhead effectiveness, it needs to be captured. In this section, one would explain what the strategy is and how it impacts the overhead. Then, the incremental overhead costs associated with each strategy would be calculated and listed by line item.

If there are any ripple effects from these changes to overhead that would impact sales or operations, those changes would be transferred to the revenue and operations statements. This is highly likely, since one would typically not change overhead unless it improved these other areas. Similarly, if the changes to overhead required major capital investments, you would want to transfer that cost to the investment statement.

c) Compliance: Sometimes, you just have to change the way you do things in order to remain compliant with the ever-changing regulatory environment. You would capture the overhead impacts from that here as well.

3) Net Results

The third and final section looks at the net impact of the first two sections on overhead expenses. Basically, you take the baseline overhead expenses (by line) and add to it changes from cost reductions, management improvement, and compliance. The end result is your estimated costs per overhead line item for baseline PLUS changes.

BENEFITS
The benefits from using an Overhead Statement are as follows:

• It proactively links all of your strategies to specific overhead activities.
• It quantifies how the implementation of each strategy will impact the costs of overhead.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.
• It separates overhead issues to its own document, making it easier for those in charge of overhead to see what they are being held responsible for.
• It forces one to consider issues beyond cost control when looking at changes to overhead.

SUMMARY
To more comprehensively understand the operations portion of a strategic plan, it is recommended that some form of an Overhead Statement be used. An Overhead Statement has three sections:

1. Calculation of Baseline Overhead
2. Calculating Impact of Strategic Initiatives on Overhead
3. Net Results

FINAL THOUGHTS
Overhead might not be the most exciting part of the business, but it is an important part of the business. A little bit of strategic effort in this 

Strategic Planning Analogy #553 Part 3: Operations Statement

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In the last blog, we looked at the Revenue Statement. In this blog, we will look at another one of the documents to use in their place—the Operations Statement.

THE OPERATIONS STATEMENT
The purpose of the Operations Statement is to provide a strategic framework for understanding operations. “Operations” consists of those activities directly related to producing what you sell. Yes, the income statement also has lines describing various costs related to operations. However, the income statement doesn’t tell you why these numbers were chosen and what the strategies are to reach these numbers. That’s why I designed the Revenue Statement.

Since there are so many different types of business models out there, the Operations Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Operations Statement is used to determine the baseline. This is what operating costs would be if nothing changed and there were no new strategic initiatives.

As a result, the baseline is more or less a continuation of what you have done in the past. It would be tweaked to correspond to the projected baseline sales volume created in the Revenue Statement (which we talked about in the last blog).

2) Strategic Changes to the Operational Business Model

Strategy is often about change, about adapting to the future. This adapting usually requires business model changes which impact the operations. Change is not just done for the sake of change, but in order to achieve strategic goals. Therefore, one must first understand the strategy goals before embarking on operational changes. Otherwise, you may end up making changes with move you further away from your strategic goals and objectives. That is why the second part of the Operations Statement looks at the impact of strategic goals on operations.

a) Cost Control: One of the simplest strategic goals is to reduce the cost of operations. If that is a goal, then you would place here what the cost control strategy is and how much you expect it to lower operations expenses (by individual operational line). Some of these cost reductions may require up-front capital investments. This amount gets transferred to the Investment Statement (which we will talk about in a later blog). If you plan on using the cost reductions to support price reductions, then those price reductions would be reflected on the Revenue Statement.

b) Quality Improvement: Perhaps a strategic goal is to do a better job of owning the “quality” position in the marketplace. Increasing quality may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of quality improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

c) Service Improvement: Perhaps a strategic goal is to do a better job of owning the “service” position in the marketplace. Increasing service may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of service improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

d) Speed Improvement: Perhaps a strategic goal is to do a better job of managing the speed to market (reducing cycle time and getting to market faster). Increasing speed may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of speed improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

There are many other strategic goals (besides the ones listed above) that could impact operations. They would be handled in a similar manner to those mentioned above. In all of these cases, the important parts to be included on this statement would be:

1. What is the strategic goal?
2. What changes will occur to operations to achieve that goal?
3. What are the incremental financial impacts from these changes:
1. Impact to Operations
2. Impact to Sales (Transferred to Revenue Statement)
3. Impact to Investments (Transferred to Investment Statement)

3) Net Results

The third and final section looks at the net impact of the first two sections on operations expenses. Basically, you take the baseline operational expenses (by line) and add to it changes from cost control, quality improvement, service improvement, speed improvement, or any other new strategic initiatives. The end result is your estimated costs per operational line item for baseline PLUS changes.

BENEFITS
The benefits from using an Operations Statement are as follows:

• It proactively links all of your strategies to specific operational activities.
• It quantifies how the implementation of each strategy will impact the costs of operations.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.
• It separates operational issues to its own document, making it easier for those in charge of operations to see what they are being held responsible for.
• It forces one to consider issues beyond cost control when looking at changes to operations.

SUMMARY
To more comprehensively understand the operations portion of a strategic plan, it is recommended that some form of an Operations Statement be used. An Operating Statement has three sections:

1. Calculation of Baseline Operations
2. Calculating Impact of Strategic Initiatives on Operations
3. Net Results

FINAL THOUGHTS
You wouldn’t undertake a new strategic initiative unless you believed there was some benefit to doing so. Usually that benefit is either some form of improved external marketplace positioning (which would improve sales), and/or some form of internal efficiency improvement (which would reduce costs). This form helps you incorporate these improvements into your financials. If you are having trouble finding sales or cost benefits from a strategy, you may want to ask yourself why you are bothering to do the strategy at all.

Strategic Planning Analogy #553 Part 2: Revenue Statement

BACKGROUND
In my last blog, I discussed why the traditional financial statements (income statement, balance sheet, cash flow) are inappropriate for planning. In this blog, we will look at one of the documents to use in their place—the Revenue Statement.

THE REVENUE STATEMENT
The purpose of the Revenue Statement is to provide a strategic framework for predicting sales. Yes, the income statement also has a line for sales. However, the income statement doesn’t tell you why that number was chosen and what the strategies are to reach that number. In addition, as mentioned in the last blog, the sales line in an income statement is disconnected from the other lines which directly influence it, like marketing. To remedy these weaknesses, I designed the Revenue Statement.

Since there are so many different types of business models out there, the Revenue Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Revenue Statement is used to determine the baseline. This is what sales would be if nothing changed and there were no new strategic initiatives.

To calculate the baseline, one needs to make two calculations. First you need to project a baseline for the overall industry. This number would be based on anticipated demand and competitive response to that demand. This number would come from insights from your industry research.

Second, you need to project what portion of that demand (market share) you will get if you stick with your current status quo approach.  In other words, if you do nothing new, what portion of the business should you expect to achieve. In the example, we see that the baseline sales is expected to decline over time. This is not unusual, since if you do nothing to the business there is a greater risk of becoming less relevant and losing share to astute competition.

That is one of the reasons why strategic planning is so important. It helps a company find initiatives that will increase sales beyond the baseline.

2) Pricing Decisions

One area where strategy can improve sales is with pricing decisions. How should you charge for your offering and how much should the charge be? Should you use a Freemium model, where most pay nothing and only the premium customers are charged (like Linkedin)? Should you have tiered pricing like the airlines? Should pricing be raised? lowered? Should pricing be bundled like fast food combo meals (or unbundled)? Who do you charge for services (in health care it can be patients, insurers, government, etc.)? Is my strategic position anchored on low prices or something else?

Remember, sales is based on how much money you get for what you offer. Pricing decisions have a huge impact on how much money comes in. This can be very strategic.

It is a good idea to review your pricing strategy when planning and this is the place to do that. So in the second section of the Revenue Statement, you would state any changes to your pricing strategy. Then you would calculate the impact on your sales.

The impact could be threefold. First, your pricing decisions could impact overall demand for the product. For example, back in the 1980s, it could cost close to $100 to buy a prerecorded video of a movie. As a result, most people rented movies rather than buy them. But in the 1990s, Warner Brothers decided to slash the price its videos to $20 or less. Suddenly, the demand for purchasing videos went up astronomically.

The second impact is what a pricing change could do to your market share. If your change makes you more or less competitive in the marketplace, it should impact your market share (although keep in mind that competition may retaliate on their own pricing and mitigate some of your impact).

Finally, your sales will change at a different rate from your units if you change prices. For example, if you used to sell something for $1 and now you sell it for $2, your sales per unit double.

All of this gets calculated in the second section.

3) Marketing Decisions

Your baseline sales assume a baseline marketing expense. Any changes to that level of marketing should have an impact on sales. After all, you probably wouldn’t increase marketing spending if you didn’t think it was going to improve sales.

So in this third section, you put in the baseline marketing expense and the anticipated change in marketing expense. Then you calculate how you expect the change in marketing expense to change sales.

4) Sales Force Decisions

Similar to marketing, changes in salesforce expenditures should have an impact on sales. Therefore, similar to section 3, this section looks at baseline sales force expenditures, changes to the baseline, and how the changes to sales force expenditures impact sales.

5) New Strategic Decisions

Almost every new strategic decision is made in order to improve the company’s long-term position. And most of the time, that improvement includes an impact on sales. So in this fifth section, one calculates the anticipated impact on sales from each strategic initiative (each covered separately in this section).

In a sense, while sections 2 and 3 looks at the changes in the QUANTITY spent to improve sales, section 4 looks at the changes in the QUALITY of what you do to improve sales.

In a simple example, if a strategic initiative is to add a new product line, the impact to sales is rather straightforward. You add in the sales of the new product and subtract out the cannibalization of the old product.

If the initiative is to improve the quality of a baseline product, then one must estimate how improved quality will impact sales.

Since strategic decisions are often made for long-term benefit, there may be a short-term decline to sales during the transition. That is why, in my example, I show a negative impact in year one from the strategic initiative (but larger improvements later).

6) Net Results

The sixth and final section looks at the net impact of the first four sections, both in terms of impact on sales and impact on sales-related expenses. Basically, you take the baseline and add to it changes from pricing, marketing, salesforce and other strategies. The end result is your estimated sales and the estimated sales-related costs to get there. When you subtract those costs from sales, you get your “Sales Contribution”: the money you have left to pay for everything else.

BENEFITS
The benefits from using a Revenue Statement are as follows:

• It proactively links all of your activities to their impact on sales. It makes sure that when you change your approach, the appropriate change to sales is also made.
• It separates all of the components of sales, so that you can critique each one for reasonableness.
• It provides the ability to look at the more indirect influencers of sales, like changes in product quality, product features, service levels, repositionings, etc.
• It makes sure that the benefits and costs of each strategic initiative are incorporated into the plan (at least the sales portion).
• It forces one to reconsider issues like pricing and the expenditures for marketing and sales forces.

SUMMARY
To more comprehensively understand the sales portion of a strategic plan, it is recommended that some form of a Revenue Statement be used. A Revenue Statement has six sections:

1. Calculation of Baseline Sales
2. Impact of Pricing Decisions
3. Impact of Marketing/Advertising Decisions
4. Impact of Sales Force Decisions
5. Impact of Other Strategic Decisions
6. Net Results

FINAL THOUGHTS
Sales is too important an element of strategy to be left as a single line on an income statement.

Strategic Planning Analogy #553 Part 1: Wrong Documents

THE STORY
I recently purchased a new smartphone. It came with a small booklet of instructions. The booklet gave me the information I needed to enjoy my phone.

However, as useful as that phone instruction booklet was to me, that doesn’t make it the ideal booklet for everyone. For example, what if that tiny instruction booklet was the only document given to the people who had to manufacture the phone? It would be a worthless document for the manufacturer, because it only talks about how to USE the phone, not how to MAKE it. They wouldn’t know what to do.

Because the manufacturer is a different audience, with different needs, it needs a different document.

THE ANALOGY
The key documents from a finance department tend to be the:

·       Income Statement;

·       Balance Sheet; and

·       Cash Flow Statement.

Because they are such important documents, finance departments like to use them as much as possible. They even like to use them as the primary documents for strategic planning.

But forcing planners to use the income statement, balance sheet and cash flow statement as their primary documents is like asking phone manufacturers to rely on the owner’s instruction booklet as their primary manufacturing document. It’s inappropriate.

The phone user booklet is designed for people who want to use the finished product after it is made. It is not designed for the people who have to design, create and manufacture the phone. For them, other documents would be more useful.

Similarly, the income statement, balance sheet and cash flow statements portray a company “after the fact.” They show the finished condition of the financials. Their primary audience is not the people who build the business, but the people who interact with the finished product, like investors and bankers and regulators.

If you want to design, create and “manufacture” (i.e., implement) the business model, then you need other documents. Over the next several blogs, I will be describing the types of planning financial documents which should be used INSTEAD of the income statement, balance sheet and cash flow statement as your primary strategy financials.

THE PRINCIPLE
The principle here is that strategic planning is more effective if you use planning documents instead of user documents. In this blog, we will look at some of the shortcomings of applying “user documents” for planning. In subsequent blogs, we will look at superior planning documents for planning.

1) Only Numbers From Ledger

The first flaw is that the income statement, balance sheet and cash flow statements are primarily numbers from the general ledger. They don’t mention strategy anywhere (in words or numbers). There is absolutely no way of knowing what part of any number is connected to what strategic initiative or mandate.

For example, you may have a number of strategic initiatives which impact sales, but with a single sales line on the income statement, there is no way of knowing:

• What are the expected baseline sales?
• What sales impacts are specifically expected to come from each strategic initiative?

How can you test the reasonableness of your sales line if you don’t know what actions are connected to it and what is expected from each action?

Another problem with only numbers is that, as we all know, there is more than one way to hit a number. For example, I can drop manufacturing costs by eliminating manufacturing and only sell out of inventory. That will work only until inventory runs out, and then you are in big trouble. The overall strategy is ruined, but you will look great on your manufacturing expense number. Without a documented link between strategic actions and numeric outcomes, one can “game the system” and hit the numbers for all the wrong reasons.

So without words about strategy and specific numbers connected to each initiative (even if the numbers do not have a label in the general ledger), the document is fairly worthless as a strategic tool.

2) Bias to Cost Cutting

Standard financial documents are mostly full of expenses. Therefore, if you want to make a quick impact to these documents, there is a bias towards focusing on lowering expenses/cutting costs. Unfortunately, cost cutting is not the only strategic option, and there are often many far superior options. Perhaps instead of focusing primarily on cost cutting, you company would be better off with a strategy focusing on one of the following:

• Improving Quality
• Improving Speed to Market
• Changing Distribution Channels
• Expanding into New Geographies or Customer Segments
• Broadening the Product Line
• etc.

Even though these may be superior strategies, many of these initiatives would probably increase expenses in the short run. But, by using documents with a bias towards cost cutting, I may be hurting my chances of approving or executing on these superior options. I would be better off if I was using documents that have quality, speed, etc., as prominent in them as costs.

3) Linear

Most of the standard financial documents are linear in design: you start at the top and work your way down to the bottom. Unfortunately, strategic planning is more circular.

Take for example, the relationship between marketing and sales. One time, I was in charge of the advertising budget for a company. The budget person, in a desire to cut costs, asked me to cut the advertising budget by around 20%. I asked him if they were going to cut the sales line as a result of my cut in advertising. He said no. Therefore, I suggested to him that they cut the advertising to zero, since it was apparent they saw no connection between marketing levels and sales levels. If you don’t think sales will fall as advertising falls, you may as well eliminate the advertising completely.

The point I was trying to make was that there are strategic implications which ripple throughout a financial statement when you alter a key component (like marketing). You cannot change one line at a time in isolation and expect everything else to stay the same. At the same time, you have to change all the ripple effects, too. Therefore, you need planning documents which make it easier to see the strategic links to other financials.

4) Mixed Responsibilities

Most standard financial statements tend to be all inclusive—selling, operating, and overhead are all jumbled up into the same document. This makes it hard to create a sense of ownership and accountability for any standard financial document. And if something goes wrong, there is all sorts of finger-pointing to the other people included in the document.

A better approach would be separate planning documents more segregated towards one main area, with the links to the other areas spelled out.

SUMMARY
Just as the manufacturer of a phone needs different documents than the user of that phone, the “manufacturer” of a business strategy (planners and the ones the planners work with) needs different documents than those who interact with the finished product (bankers, investors, regulators). Right now, the primary documents from finance are pointed towards those who interact with the finished product. That’s fine for them, but not for the strategists. The strategists are the manufacturers of the strategy, so they need a different kind of document. In subsequent blogs, we will be discussing how those documents should look and work.

FINAL THOUGHTS
I also recently got a new washer and dryer. I’m glad they sent me the right type of documents. I hope you get the right types of documents to the participants building your strategy.

Strategic Planning Analogy #454: Strategy Cut-Outs

THE STORY
A couple of years ago, I was at a tourist location while on vacation.  There was a section of the area devoted to souvenir shops.  These shops had quite a variety of souvenirs to offer—everything from T-shirts to antiques.  Most of the items had something printed on them referring to the phenomenon which drew tourists to the location in the first place.

But there was one store which stood out.  It was selling life-sized photographs of famous celebrities, cut and mounted on wood so that you could have them stand next to you.  In particular, the store was pushing life-size cut-outs of Justin Bieber, the hottest celebrity of that moment.

I thought it might be interesting to have one of these in my home (until I saw how expensive they were). 

But it got me thinking.  What if I had one of these Justin Bieber cut-outs in my house and suddenly the real Justin Bieber showed up?  The natural reaction would be to ignore the cut-out and pay attention to the real person.  All that money paid for the cut-out would have been a waste, because it has very little value when you have access to the real thing.

And if you saw someone ignore the real Justin Bieber to spend time with the cut-out photograph, you’d think they were a little bit crazy.

THE ANALOGY
Sometimes, I think strategic planners can get a little crazy, like someone who would rather hang out with a photograph of Justin Bieber than the real person.

Strategic plans are an attempt to represent what is going on in the environment and how we would like to change it for our company’s benefit.  They are not reality themselves, but merely a representation of that reality (and the future reality we desire).  They are a “cut-out” rather than the real thing. 

But, as strategist, we tend to love those planning documents.  There can be great joy in getting such a document completed.  And sometimes strategists can get all caught up with all their other documents, and data, and graphs, and spreadsheets.  There’s just so much of it to occupy our time that there is no need to ever leave the office.

But reality takes place outside the office out in the marketplace.  We can go out there and see our real Justin Bieber (the world we compete in) any time we want.  But instead, we seem content to embrace our hand-made cut-out version of Justin Bieber and never leave the office.

Yeah, the cut-out is nice, but isn’t visiting the real thing occasionally even nicer?

 

THE PRINCIPLE
The principle here is that great strategic planning goes beyond dreaming up great theories in offices or in printing up thick strategy books.  The best strategies are most in tune with the marketplace.  Therefore, it is helpful if the planning process spends time interacting with the marketplace where the strategy gets played out.

1) Get Out in the Field

When was the last time your strategists went on a sales call with your sales team, or spent time listening in at the call center, or visited (or worked at) the factory, or spent time in direct contact with your customers?  These are the types of places where your strategy either succeeds or fails.  The better you understand them, the better you can prepare to win there.

At most of the retail companies where I have worked, I have insisted that whenever my team traveled on business, they should carve out extra time to get out and experience the local marketplace.  I told them to visit our stores, the stores of competition and even stores that had nothing to do with us.  After all, you never know where you will learn something new that will be useful in strategy.

I was appalled one time when a retailer I worked for opened up the first prototype for a new retail concept.  The top executives got on the corporate jet and then drove directly to the store.  They cut the ribbon for the grand opening and then went directly back home.  No time was spent observing or talking to customers.  No time was spent visiting the competition.  What a missed opportunity to learn.

When H. Ross Perot was placed on the board of directors for General Motors, one of the first things he did was go to a GM dealership to buy a car.  He wanted to experience what consumers experienced when buying a car.  He also wanted to own and drive a GM car to better understand the product.  Later, Perot was shocked to find out that many of the other board members no longer bought cars—they were given to them by the company.  And most of them no longer drove cars—they had drivers.  And at least one no longer even had a valid driver’s license.  How do you build strategies for the marketplace when you are so out of touch with the marketplace?

Granted, you cannot go everywhere and see everything.  But you should at least spend some time experiencing the world of the line employees and your customers.  This gives you some “real life” context for evaluating strategic options.  And just as you can learn more spending time with the real Justin Bieber than you can with a photo cut-out of Justin Bieber, you can learn things out in the field that would never show up just looking at numbers and documents in your office.

And to supplement personal experience, include more input from those who live out in the field.  Invite input from line employees, customers, suppliers and distributors.  With all the social media tools out there, it has never been easier to include all the voices of the marketplace in your planning process.  Not only will this allow you to learn more for strategy design, but it will create greater buy-in and cooperation from the field during strategy execution (because they were part of the design process).

2) We’re Not in the Publishing Business

A lot of strategists get upset when all of their strategy documents and presentations get ignored.  After the strategy meetings, everything given to the leaders gets put on their shelf, never to be touched again.

Why does this happen?  To a lot of the leaders, all that material is like the photo cut-out of Justin Bieber—not quite fully real to their regular day job.   After the planning meeting, they have to go back to living life out in the field with the real Justin Bieber.  And given the choice of spending time with the cut-out or the real thing, they naturally opt for the real thing. 

Remember, a company’s strategy is not what is put in a book, but is the result of all the daily decisions made throughout the organization.  If the written strategy is not made real at the point where all the decisions are made, then it is not the real strategy.

Strategists are not publishers.  Our end products are not books, Powerpoint decks, budgets and so on.  Our end product is a transformed company which is moving in the direction of the vision.  Therefore, to succeed, we need to make our strategy relevant in the minds of the people making the daily decisions.  To do that, the strategy needs to get translated into the context of the reality of where decisions are made.

To do that, strategists need to spend time at the beginning out in the field so as to understand that

context.  In addition, strategists need to spend time out in the field after the strategy is crafted, helping the decision-makers see how to relate the strategy to their daily decisions.  And that cannot be done by just hanging around your office.

SUMMARY
Successful strategies are the ones which impact what happens out in the marketplace.  That impact is increased when a) the strategy is built upon the knowledge of the realities of the marketplace; and b) those who are making the daily decisions out in the marketplace understand how the strategy is relevant to the choices they make.  This requires that strategist do more than just produce books, spreadsheets and Powerpoint decks.  They need to spend time out in the reality of the marketplace.

FINAL THOUGHTS
All of this is not to imply that analytics, budgets, spreadsheets, presentations, strategy books and vision statements are a waste of time.  No, they help to quantify and communicate the core strategy.  They also help to flesh out strategic insights and concepts.  But unless one has a deeper, more intimate knowledge of the reality of the marketplace—something that cannot be found just studying sterile numbers—you will not fully comprehend the context and relevancy of that information.

It is like designing a house without understanding the terrain the house is to be built on.  It may look great on the blueprint, but it cannot become a reality because it is inappropriate for the terrain.  First, go out to the site and learn the terrain, so that the house you design on the blueprint can actually be built and be the right structure for that location.

Strategic Planning Analogy #341: Trophy or Pet?

THE STORY
The Roy Rogers and Dale Evans Museum in Branson, Missouri closed back in 2009. The Museum honored the life of cowboy singer/actor Roy Rogers (and his wife Dale), who made movies and had a popular television show back in the middle of the 20th century.

With the museum closed, the contents of the museum were auctioned off on July 16th of this year. Two of the more interesting items auctioned off were Trigger and Bullet. Trigger was the palomino horse Roy used to ride on the show. The horse died back in 1965. Bullet was the German Sheppard that appeared on the show, and was also Roy’s family pet. When Trigger and Bullet died, Roy Rogers had them stuffed by a taxidermist, so that they could be remembered and put on display.

Rural cable television station RFD-TV purchased the stuffed horse Trigger and the stuffed dog Bullet at the auction. They paid $266,500 for Trigger and $35,000 for Bullet. Bullet and Trigger will now be proudly displayed at the new Omaha headquarters of RFD-TV.

THE ANALOGY
I don’t know about you, but I find the idea of stuffing one’s pet after it dies to be a little bit disturbing. Putting one’s dead pet on display like a trophy seems a bit unnatural and creepy to me.

Although this may seem like an odd thing to do to pets, it is not that uncommon for companies to do something similar with their strategies. Instead of caring for the strategy as a living document, they put it on display, like a dead, stuffed animal. Fancy strategy books are placed on the shelf like a trophy. They may even be commemorated with coffee cups, plaques, or T-shirts, with the company logo and the strategy theme emblazoned on them. The coffee cups and plaques also get displayed on the shelf like a trophy.

And there they sit…on display. They may be looked at and admired every once in awhile, but for all intents and purposes, the strategy is treated as if it were dead…a representation of a frozen moment in time past. To me, this is just as disturbing as a stuffed pet.

THE PRINCIPLE
The principle here is that strategies should be viewed as and cared for more like a living, breathing pet than as a lifeless trophy. In particular, there are three ways in which a pet approach is more appropriate than a trophy approach to strategy.

Principle #1: Trophies Come at the End; Getting a Pet is Just the Beginning
Trophies usually come at the end of an activity, to reward the conclusion of some endeavor. For example, after an athletic competition is over, the winner gets a trophy in honor of having won. It is a reminder of the success of prior event—a celebration of a job well done.

Getting a pet is just the opposite. The day you receive the pet is just the beginning of the activity. Now you have to start the work of feeding and caring for the animal. Rather than a celebration of a conclusion, getting a pet involves the promise of much work in the future. One time I got a pet from the humane shelter and they would not let me take home the pet until I promised I would spend appropriate time and money to properly care for it (I even had to sign a document attesting to that).

Getting a strategy should feel more like receiving a pet than receiving a trophy. True strategies are not end-points, but starting points. The primary purpose of a strategy is to help a company achieve a better future state. It is a roadmap to future actions, not a celebration of past activities.

Does your company treat strategy formulation more as an end (like a trophy) or as a beginning (like a pet)? Here are some clues. If people act as if creating a strategy is just a task be done—something to check off on a “to do” list—then they have a trophy attitude. If people say, “Boy, I’m really glad we finally got that done” when the strategy formulation is over, then they have a trophy attitude. If they see the strategy document as proof of task completion, then they have a trophy attitude.

By contrast, if people see the strategy as the first step on a long journey of future activity, then they have a pet attitude. If they see the strategy as a formal commitment and promise to take particular future actions, then they have a pet attitude.

Principle #2: Trophies Sit on a Shelf; Pets are a Part of Your Daily Life
There’s not a lot one can do with a trophy once you receive it. It just sits there like a dead, stuffed animal. You can put it on display and dust it off every so often, but that’s about it.

Living pets are totally different. They require daily care and attention. They need to be fed and exercised on a regular basis. If you have a dog, you soon find that feeding them, walking them, and letting them out to do their thing quickly becomes a regular part of your daily routine. But that’s not all. Pets also need to be checked to make sure they do not get sick. And if they do get sick, you have to provide medicine to cure them. And if you do not take care of your pets on a regular basis, the police can have you arrested for animal neglect and cruelty.

Strategies also need to become incorporated into your daily routine, just like a pet. If strategies do not impact how you act on a daily basis, then why do them? A strategy is like a roadmap. Just knowing where I want to go is not enough. I need to take actions on a daily basis which get me closer to my desired destination. Otherwise, I will never reach my destination.

If you do not regularly care for a pet, it will die. Similarly, if you neglect a strategy, it’s relevance will die. I’d love to see the police arrest executives for cruelty and neglect towards their strategy, just as they do for neglect and cruelty towards animals.

How often is the strategy considered when decisions are being made and actions are being taken at your company? Daily? Monthly? Quarterly? Never? Is consideration of the strategy integrated into the daily routine? Do people even see any relevance or connection between what they do and what the strategy implies? Is the strategy just left on the shelf to be admired like a trophy? Could your employees be arrested for strategy cruelty and neglect?

Principle #3: Trophies Don’t Change; Pets Do
Trophies are typically made out of strong, durable materials. You can put them on a shelf and they will stay there, unchanging, for a long, long time.

Pets, however, change over time. They grow up. They get sick. You need to detect these changes and then adapt to them in your actions. For example, as you see your pets getting older, you may need to change what you feed them. You may need to change the exercise routine.

Strategies are living documents which are to be acted out in a dynamic, changing environment. One needs to become aware of the changes that are taking place and adapt the strategy to the changes, just as you would adapt your actions with a living pet. Otherwise, your actions will be out of sync with your environment and the strategy will sub-optimize.

The original strategy document should not be viewed like a trophy, which always stays the same. It is a work in process. Rather than being like a hard, unchanging metal/wood/plastic trophy, think of your strategy as being more like soft clay. It has a definitive shape, but it can still be modified a bit as conditions change.

This is not to say that you should be changing your strategy as often as you change the sheets on your bed. We’re not talking about strategy abandonment, but strategy modification. Just as we keep the same pet for years and work with it through the changes, we keep the same strategy for years, and work with it through the changes.

Once a strategy formulation process is completed, how often does your company:

a) Scan the environment for changes; and
b) Adapt the strategies/actions to optimize in this changing environment.

Is your strategy etched in unalterable stone, or is it written with a pencil? Is it seen as a living document? Do you ever go back and modify it?

SUMMARY
Strategies should be viewed as being more like living pets than like dead trophies. Trophies celebrate an end, whereas strategies should be seen as a beginning. Trophies sit on a shelf, whereas strategies need to be integrated into your daily routine. Trophies do not change, whereas strategies need to adapt to change.

FINAL THOUGHTS
My wife and I recently went back to visit the college she and her brothers attended many decades ago. We went to the athletic building to look at the trophy case. There were trophies from back in the years when my wife and her brothers attended. There were photos next to the trophies showing the players on those teams, including a couple of photos of one of her brothers. The problem was that the photos were so old and faded that you could barely recognize the players.

That’s the problem with trophies. Over time, the source of that trophy fades away from memory. Time marches on, and if you stop planning for the future, you’ll stop getting new trophies.