Strategic Planning Analogy #434: Want More, Get Zero

THE STORY
I was talking to an executive recruiter (also known as a “headhunter”) today. He says that he runs into a peculiar phenomenon when talking to many unemployed senior executives who are looking for a job.

The recruiter will ask these executives about what kind of financial compensation they want in their next position. Often, the answer goes something like this:

“At my last job, I made $250,000. I refuse to take anything less at my next job.”

Unfortunately, this unemployed executive is confronting some harsh realities. First, the great recession has changed how companies value certain skill-sets. His skill set isn’t valued as highly as it was prior to the great recession.

Second, the longer this executive remains unemployed, the larger is the perception that his skill-set is becoming outdated. By not being currently employed in this rapidly changing world, his skills may become obsolete.

Therefore, although he might see an offer of $200,000 for his skills, he will probably never see another offer of at least $250,000. So by refusing to take anything less than $250,000, he ends up with nothing. I don’t know about you, but even though $200,000 is less than $250,000, it is sure a lot more than nothing. In that situation, I’d take a $200,000 job if it were offered to me.

THE ANALOGY
It’s human nature to not want a reduction in our wages. We like to believe that our income should continue to rise each year until we retire. Unfortunately, harsh reality does not always make that possible. In fact, I read recently that it is normal in the US for a worker’s wages to peak when they are in their late 40s and plateau or decline thereafter (in real terms). If the worker refuses to take a pay cut, their only alternative may be no pay at all.

A similar situation can occur in business. The harsh reality of a new, disruptive technology can have the potential to render a company’s current business model obsolete. However, a company may stubbornly refuse to migrate to the new technology, because it provides less income than the prior technology. By refusing to accept the lower returns of the new technology, the company eventually ends up with no returns at all.

Take Kodak, for example. Back in 1975, Kodak claims to have invented the first digital camera. However, Kodak did not bring the product to market. Why? As it turns out, there is a lot less profitability in digital imaging than there is in film-based imaging. The profit loss from no longer selling film or developing equipment/services is far larger than the replacement profits from digital imaging. By refusing to accept a new business model because it was less profitable than the old one, Kodak ended up with neither and had to file for bankruptcy.

Or how about Ford? They invented the minivan, but did not bring it to market because they thought it would merely cannibalize their highly profitable station wagon business. Splitting the market between two vehicle types would be less profitable. Of course, Chrysler brought out the minivan because they did not have a large station wagon business. In the end, the station wagon business virtually disappeared, and Ford was never a major player in minivans. By refusing to accept less up front, Ford ended up with almost nothing (no station wagons and no meaningful share of minivans).

I personally experienced this problem at Best Buy. During the early days of the transformation of music from CDs to digital files, one of my jobs at Best Buy was to look for a way to exploit this transformation. I looked at the music and entertainment industry from all possible angles. I created countless scenarios and strategies. The problem was that every strategy I examined in the new music space was less profitable than what Best Buy was making in the old music CD world. This made Best Buy somewhat reluctant to make fast, bold moves into the new space.

Apple, however, was earning nothing in the old CD world. Therefore, everything in the new transformation would be additional profits for them. As a result, they were fast and bold with the iPod and iTunes. And Best Buy is becoming increasingly irrelevant in music.

The newspaper industry was hesitant to move fast and bold into digital news because it was so much less profitable than the analog newspapers. By not wanting to cannibalize the more profitable printed paper, the newspaper industry let others take the lead in the digital space. Now, most newspaper firms are struggling to stay afloat.

So businesses can fall into the same trap as that unemployed executive. By refusing to accept less, they can end up with practically nothing.

THE PRINCIPLE
So this is the strategic dilemma. What do you do if you realize that the next transformation in your industry will make your industry less profitable? How do you convince your stakeholders to make bold moves into the new space, when those bold moves appear to destroy more profits than they create? What is the right way to handle the transformation? How do you keep from being like the unemployed executive who refused to take less, which resulted in getting nothing?

Here are some principles to consider when confronted with this type of situation.

1) Make the Right Comparison
The unemployed executive in the story was making the wrong comparison. He was comparing new job offers to his prior job. Instead, he should have been comparing new job offers to his current unemployment. By comparing job offers to the old job, he was rejecting opportunities which were far better than the current unemployment.

The same is true in business. You cannot stop these business transformations. If nobody inside the industry wants to do it for fear of earning less, then someone from the outside will cause the transformation, because they have nothing from the old status quo to lose. Sony had no stake in film photography, so it rushed into digital photography. Apple had no stake in the CD business, so they rushed into iTunes. And so it goes.

Therefore, the real comparison is not today’s business model versus tomorrow’s. No, the real comparison is tomorrow’s business model versus nothing. That makes the need to adapt look more appealing.

2) Manage the Timing
Although the transformation may be unstoppable, you may be able to slow it down a bit. Kodak did not need to immediately abandon the film business back in 1975 and immediately plow every effort behind digital. They had room to wait a bit.

Delays can be good, because they help you build up a war chest of cash to use during the transformation. However, don’t wait too long. Eventually the race will get underway and if you wait too long, you will never catch up.

3) Keep Your Powder Dry
A delay is not an excuse to ignore the transformation. It is time to prepare for the transformation. Back when rifles were loaded with gunpowder, there was a saying to “keep your powder dry.” The idea was that you never knew when you would need to fire a shot, so you’d better prepare your gunpowder so that it could be used immediately (as a dry powder).

The same is true in business transformations. Eventually, you can delay no longer. Then you need to act quickly, strongly and boldly in order to remain relevant in the new world. You need your rifle to shoot immediately. Therefore, use the time of delay to “keep your powder dry” by working behind the scenes to prepare to win in the new space. Keep up the R&D. Develop prototypes. Invest in start-ups. Hire the proper talent. Do what it takes to get ready to win in the new space. That way, when it is time to move, you can move immediately, with great force.

4) Consider Creative Reorganization
To pull this off, you may find it beneficial to rethink your organizational structure. For example, you may want to place the old business model and the new business model into separate business entities. This can ease the resistance to self-cannibalism since you are different businesses with different leadership, different goals, and different compensation.

A separation also makes it easier to spin off either business. The old business can be sold while it still has some value (before it goes to zero). The new business can be spun out separately, so that all its growth is plus business rather than a decline from the past (since the past was not a part of its separate structure).

Separation also allows the new business to achieve a better (i.e., higher) valuation in the marketplace. These reasons help explain why so many businesses these days are splitting the growth part of the portfolio from the rest of the portfolio.

5) Switch
Another option is to consider switching industries. Fuji could see that the photographic film business was going away. It discovered that the chemical reactions with film are similar to the chemical reactions with skin. Therefore, Fuji redeployed its film knowledge to the cosmetic industry to create a significant new profit center to help replace some of what was being lost in film. So check to see if your core competencies provide opportunities to shift to better industries.

Firms like GE and Nokia have been successful for generations because they are willing to abandon core industries in decline and add on new initiatives in growing areas. In essence, GE made its core competency to be running business portfolios, which allows it to adapt to negative transformations by shifting the portfolio in a new direction.

6) Get Out Early
If the transformation looks bad and you can see no viable way forward, then sell out early, when others still see value in your business. The longer you wait, the worse it gets. Don’t wait so long (like Kodak) that nobody wants you anymore and the only option is bankruptcy. Those who sell out first usually get the highest price.

SUMMARY
Often times, business transformations can result in new business models which provide less profitability than the old model. If you are a leader in the old model, this reduction in profitability may create resistance to migrate to the new model. However, by resisting the lower profits, you can end up with nothing, because the old business model will cease to exist. Fight the resistance and come up with a plan for dealing with the transformation.

FINAL THOUGHTS
A lifeboat is a lot smaller and less glamorous than a large ship. However, if that large ship is sinking, the lifeboat is a better place to be. Stop clinging to the sinking ship and swim to the lifeboat.

Strategic Planning Analogy #410: Self Awareness

THE STORY
Imagine, if you will, a man who is trying to find the ideal woman to marry. We’ll call him Bob.

Bob does a great deal of research into determining the characteristics of a great wife. Then he does research into where to find women with these characteristics. Finally, Bob applies “proven” tools for approaching these women.

Unfortunately, Bob has absolutely no luck in convincing any of these women to become his wife. In frustration, Bob complains to one of his friends, “I don’t understand why I am not having success finding the ideal wife. I’ve done all the research and used all the accepted techniques. I found the great women, but none want to be my wife. What am I doing wrong?”

Bob’s friend answers, “Take a look at yourself. You are obesely overweight. You are unemployed. Your personality is rude and obnoxious. You are sloppy and ugly. Until you fix up your own act, no woman will be interested in you.”

“Hmmmm,” says Bob. “I’ve spent so much time looking for the right woman that I never spent any time looking at myself.”

THE ANALOGY
Looking for great business opportunities can be a lot like looking for that perfect spouse. You can do all the research (like Bob did) to determine what the characteristics of a great opportunity are (like high growth, large demand, good margins, low competition, etc.). Then you can do the research to find out where those types of opportunities exist (like emerging economies, or social networking businesses, or green technology). And then you can apply proven techniques to try to get into those great business opportunities (acquisitions, alliances, etc).

And you can still fail miserably, just like Bob.

And the failure may have nothing to do with all that research you did. The problem may be that instead of focusing entirely on looking for opportunities, one needs to occasionally focus on one’s self. Look in the mirror at your own business. Do you have the proper qualities to make the deal work? What are you bringing to the opportunity which adds value? Does your company look to others like Bob—totally undesirable?

It takes two to make a great marriage. Don’t forget your part in the deal.

THE PRINCIPLE
The principle here has to do with strategic fit. A supposedly great deal may actually be a terrible deal if there is no strategic fit. Even if the opportunity has all the characteristics typically associated with success, it can still be a miserable failure in the wrong hands (no strategic fit). Therefore, when making strategic assessments of potential opportunities, do not look at them in isolation, but in the context of their fit with your organization.

This point was driven home to me in a recent study issued by the Corporate Executive Board. Their report said:

“Despite strategists and senior managers having spent decades on emerging markets strategy, they still spend too much time trying to understand the market and not enough on understanding whether their firm is ready for that market. Our research on over 1,000 market entry examples shows that this mistake is made over 70% of the time.”

In other words, right now emerging markets are the pretty girls that the guys want to marry. But just because the woman looks attractive to you doesn’t mean that you look attractive to the woman. This may seem obvious. However, since businesses are making this mistake of going in ill-prepared over 70% of the time, the idea must not be as obvious as I think.

I’m not saying that these companies are failing because they are bad companies. They just aren’t ready for the opportunity because of a poor fit.

Jigsaw puzzle pieces aren’t inherently good or bad by themselves. What makes them good or bad is whether or not they properly connect with your puzzle piece. If the pieces fit together, everything is good. If not, then the piece is not useful to you—even if it is very useful to someone else.

So what can we learn from this?

1) First, Look In The Mirror
Before going on a strategic quest for the ideal new opportunity, take time to first look into a mirror. Research yourself before researching others. Until you know what you look like, you won’t know what opportunities will fit. Ask yourself questions like these:

a) How can I add value to an opportunity?

b) What is causing me to be successful in some of my current businesses? Is it a particular skill I bring to the marketplace or is it a particular type of characteristic of the marketplace itself?

c) What is causing me to have problems in some of my businesses? Is it the lack of a skill or is it the wrong type of marketplace?

d) Where can I succeed better than others? (Differentiated Skills, Competitive Advantage)

e) Where does my expertise lie? Am I better at a particular stage of a lifecycle (start-up vs. growth vs. maturity)? Am I better with particular value positions (low price vs. high service)?

f) What is the best cultural fit for me?

Based on the answers to these questions, you can now know what are the right criteria to look for in new business opportunities.

2) Don’t Get Seduced By the Hot Fad
At any point in time, there are hot fads in business investments. “Common Knowledge” tells everyone that these are the places to be, so businesses flock to them. As the Corporate Executive Board points out, a current hot fad is getting into emerging markets (like China or Brazil).

Yes, a lot of money will be made in these hot markets. It is also true that many companies will lose a lot of money going after these hot markets. In fact, most companies will fail. Only a few companies (like Amazon) succeeded in the first dotcom bubble. Most died a horrible death.

So just because a market is “hot” does not mean that success is a given. Hot markets can also burn the company that is not prepared or not a good fit.

Therefore, do not get seduced into thinking that you have to pursue particular opportunities just because they are the hot place to be. Don’t think that just because all of your peers are pursuing a particular strategic path that you have to do the same thing.

Instead, look for the opportunities which fit well with what you do. Perhaps your best opportunities lie far away from the current fad.

3) Make Yourself Presentable Before Diving In
Sometimes, an opportunity might have great potential for you, but you are not ready yet for that opportunity. If Bob was going to lure a great wife, he was first going to have to lose some weight, get a job and improve his personality. Your company may need to do something similar.

When McDonalds was beginning to grow internationally, they ran into a problem. They wanted their hamburgers and french fries to have the same quality and taste as in the USA. However, these other nations did not have access to the proper types of cattle and potatoes to make that happen. Therefore, before they could build their restaurants, McDonalds had to spend a great deal of time working with the local agricultural infrastructure. They had to convince the local farmers and ranchers to use McDonalds-style cows and potatoes and raise them in the proper manner.

Until McDonalds got the infrastructure in place, they were ill-prepared to build their restaurants globally. If they had just rushed in with the restaurants (before fixing the infrastructure), they may have failed.

If you find a great opportunity, determine what you need to be successful with it. Then look at what you have to offer. If you are missing something (as McDonalds was with infrastructure), then work on filling that gap before diving into the opportunity. Don’t be like the 70% in the study who fail to spend the time to become appropriately prepared.

SUMMARY
A key aspect of strategic planning is to find future growth opportunities. As important as this is, don’t become so focused on looking outward for opportunities that you fail to look inward at yourself. The best opportunities are the ones that fit with who you are (or who you can be). Preparing yourself to win can be more important than finding a so-called “winning” opportunity.

FINAL THOUGHTS
The more you strengthen your core competencies and skill sets, the more places there will be where you can find additional opportunities to succeed.

Proof That Strategic Planning Works

It is hard enough to do great strategic planning work when everyone is committed to the idea. Trying to do it in a place where the idea of strategic planning is not well respected is virtually impossible. Yes, we’ve talked in the past about stealth strategy, a way to get people talking about strategy in place where the concept of “strategy” is not well accepted (look here, here, here, and here). But the best results come from strong commitment to the strategic process.

If you want proof, look to Caterpillar. There was a great article about Caterpillar in the 2011 edition of the Fortune 500 issue of Fortune magazine. Please read the article, which can be found by clicking here.

Caterpillar has been one of the best performing companies in the entire world over the past couple of years. This article explains why. The reason for their success can be explained in three words: great strategic planning.

STEP #1: DEEP UNDERSTANDING
In October of 2009, Caterpillar announced that CEO Jim Owens would retire in April of the following year and that he would be replaced by Doug Oberhelman. In those six months between being announced as the replacement and taking over as CEO, Oberhelmen spent virtually 100% of that time on strategy. He even enlisted 16 others to help him on this six month strategic journey. They dug deep and fully dissected the company until they had a clear picture of who they were and what worked.

According to Oberhelman, “We put everything on the table—good, bad, and ugly. We've gone into a lot of different businesses over the last 20 years. We said, ‘What really is our business model, and how do we want to make money?’”

This clarity allowed Caterpillar to know what to focus on, where to invest, and how to operate.

How many CEOs do you know who have dedicated 6 consecutive months to strategy? How many CEOs have a deep, deep understanding of their business model and which triggers are most critical to success? If you don’t do the preparation homework in advance like Caterpillar, then you will not have the foundation to allow you to act quickly as opportunities and events arise.

This is similar to an example in the late 1950s when Harry Cunningham found out he was going to be running the S.S. Kresge variety store chain in about a year. He spent nearly all of that time prior to taking over thinking about strategy. His conclusion was that Kresge needed to abandon its old variety store business model and invent an entirely new one—the discount department store model. As a result, he converted Kresge into Kmart, which became one of the most successful companies of his era.

Before jumping into action, take the time to gain a deep understanding. This provides two benefits—a knowledge of what actions to take, and the ability to act quickly when opportunities arise, since you already know which action do and don’t fit with success.

STEP #2: PREPAREDNESS
Back in 2005, the economy was pretty strong and Caterpillar was doing fairly well. Although things were going pretty well, Caterpillar thought this to be the perfect time to prepare for the absolute worst. They called this the “trough strategy”—what do you do if suddenly 80% of your sales go away?

Every division needed to create a strategic plan to maintain cash flow and protect the balance sheet under such a dire scenario.

Guess what? At the end of 2008, such a crisis scenario came to pass. Because the hard work of developing a trough strategy had already been done, Caterpillar could quickly execute the strategy, which allowed them to come out of the great recession with strong cash flow and a strong balance sheet.

How prepared is your company for various scenarios? If an unexpected scenario came to pass, how long would it take your company to react and adjust? How much valuable time would be wasted because you were not prepared?

STEP #3: AWARENESS
Having a strategy for various scenarios is not of much use if you do not know when to use them. Therefore, Caterpillar searched for leading indicator triggers of change. They then monitored these leading indicators to make sure they had as much advance notice as necessary of impending change.

These leading indicators warned Caterpillar of the coming great recession as early as the fall of 2007. This early awareness made it easier to shift strategic gears when the crisis came a year later.

How aware is your company of impending change?

STEP #4: EXECUTION
Having plans is one thing. Executing them is another. Not only did Caterpillar devote the necessary time and energy to implementing the trough strategy well during the recession, they also executed well on the post-recession strategy. Because of what Oberhelman learned in his six months of strategic preparedness, he knew exactly what needed to be done after the recession. Coming out of the recession, Caterpillar quickly made a number of key acquisitions which just made their strengths even stronger.

They acted quickly and aggressively because they had the confidence which comes from a deep understanding of what needs to be done to succeed under their business model.

How confident is your team about knowing the types of actions which will improve your strategic position?

SUMMARY
If you want proof of the importance of Strategic Planning to corporate success, look to the example of Caterpillar. They are one of the most successful companies on the planet today because of their strong commitment to strategic planning. This commitment gave the company the understanding, preparation, awareness and execution necessary to produce this success. If you want a similar level of success, consider having a similar level of commitment to strategic planning.

Analogy #222: Square Pegs

THE STORY
There’s the old story of the square peg and the round hole. The problem is that the four points on the square peg stick out beyond the size of the round hole. As a result, no matter how hard and how long you hammer at that square peg, it will never go into that round hole.

Now the typically prescribed solution is to get rid of the square peg and find a round peg. The round peg easily fits into the round hole and can be hammered into place with just a few hits from the hammer.

Of course, this assumes that you only have three items at your disposal: a hammer, some pegs and a hole. But what if you had a fourth item—a saw.

With a saw, two more options are available. First, you can saw off the pointy sides of the square peg, so that it more closely resembles the shape of the hole. The second option would be to saw the round hole so that it more closely resembles the shape of the square peg.

THE ANALOGY
A good strategy creates a strong fit between what you are offering and what the environment needs. In classic strategic analysis, one starts by examining the environment. Based on what the environment looks like, you then create a strategy which fits that environment. For example, if the world is turning environmentally green, then it might make good sense to create a green strategy.

Relating this back to the story, if the environment looks like a round hole, then you should be creating a strategy which looks like a round peg. But what if your company is shaped more like a square peg?

A classic answer would be to replace your square peg with a round one. This sounds easy, but it is fraught with problems. First, “squareness” is what you are good at. It is your competitive advantage. Throwing it away and picking up a competency that is foreign to you (“roundness”) can be difficult. If you have to build the new competency from scratch, it can take a lot of precious time and there is no guarantee that you will succeed. Your “square” way of thinking may hurt you in your journey.

Second, if you try to get the round peg through acquisition, there can still be problems. As we’ve mentioned many times before, most acquisitions fail to provide a positive return on investment. One typically overpays for something which under-delivers relative to expectations. So you can still fail.

Third, there are others who already have wonderful round pegs. They will fill the round hole quickly before you are ready.

That’s where the saw comes in. Rather than accepting the environment as a given, we have the opportunity to alter the way the future evolves. Just as a master gardener can cause a bush to grow into a particular shape of his/her choosing, we can help shape the future. If you have a square peg, use your saw to create a square hole.

THE PRINCIPLE
The principle here has to do with preparation. Before planting a seed, the ground is prepared for it. The hard ground is broken down, the stones are removed, and the soil is fertilized. If you don’t prepare the soil, the seed won’t grow. Similarly, for your strategy to take root, the environment must be prepared for it in advance. Therefore, consider advance preparation as an integral part of your strategic plan. Improve your strategy’s potential for success by changing the environment.

This idea was made clear to me as I was reading a recent Business Week article about Cisco. Back in 2005, Cisco created the Emerging Markets Group, headed by Paul Mountford. The idea is for Mountford to spend time working with the leaders of emerging nations to help them envision the future. Part of that future includes the digital infrastructure.

Mountford tries to increase the importance of the digital infrastructure in the way these country leaders think about growing their nations and their economies. He tells them how building large digital hubs will help create jobs and make their cities more prosperous. Later, when the time comes for these leaders to put their visions into action, Cisco tries to win the business on those digital hubs.

Now Cisco doesn’t always win all the contracts. This preparation does, however, create more and better contracts to bid on. Better to get a smaller slice of a big, juicy pie than most of a meager crumb.

In other words, rather than waiting for the digital market to evolve on its own, Cisco pro-actively tries to redefine the market and chance the nature and the pace of the growth. It has taken its saw and cut a Cisco-sized hole into the future.

Another example years ago took place in the US soup business. Campbell’s had a near monopoly in soup and could have stayed content with that. However, Campbell’s realized that although it had most of the US soup business, it had only a small share of the US food business. If it could change the nation’s perception of soup, it could change the overall share for soup in the US diet.

As a result, Campbell’s embarked upon the “soup is good food” campaign. They changed the perception of soup to make it appear more wholesome and nutritious. This changed the demand profile for soup. And since Campbell’s sells most of the soup,
It gained most of the share of that increased demand. In other words Campbell’s took a saw to food demand and cut it into a shape that looked more like soup.

The beauty of this approach is that it not only makes the market more inviting for your strategy, it often makes it less inviting for competitors. The more you can shape the future to look like your peg’s particular shape, the harder it is for others to get their peg in the hole. In an extreme example, the battle between Blu-ray and HD DVD was a war to influence a preference for a standard technology. Once Blu-ray won, HD DVD had to disappear.

In addition, the more actively you control how a business ecosystem evolves, the less risk there is to your strategy. There’s a reason why some companies spend so much money lobbying governments. They want to help shape how the industry evolves and how it will be regulated. At times, it can be far more profitable to spend time and money on getting the world prepared for what you want to offer, than to try to offer what the world currently wants.

It takes time to proper influence a marketplace. Mountford often spends years working with government officials to dream and envision before any project comes out of it. It can take years to change one’s perception about soup. But the rewards can be great. That is why a long-term perspective can be so valuable. It gives you time to saw the hole that will reap the greatest rewards.

If all you do is react to what is in front of you, then you will never play to your strengths. Your fate will be determined by the world, which does not have your best interests at heard. However, if you take time to mold the future into what is best for you, good times are ahead.

SUMMARY
Strategy is about trying to create a fit between what the market wants and what you have to offer. In classic marketing, the emphasis is usually on creating internal adjustments in what you offer so that you are more in tune with the environment. However, it can often be more desirable to spend that effort on changing the environment to be more in tune with what you do best. How much time do you spend trying to influence the marketplace versus having the marketplace influence you?

FINAL THOUGHTS
If you don’t have a saw, make friends with someone who does. I worked with a furniture retailer that wanted to define high-end furniture shopping to be what they offered. It did not have enough influence on its own to do this. As a result, the retailer spent a lot of time wooing the local garden club. The garden club was very influential in helping define what cultured high-end people did in that market. By directly capturing the approval of the garden club, the retailer indirectly cut a hole in the high-end furniture space that was just their size.