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.

Strategic Planning Analogy #297: Plaything of Management

THE STORY
Having spent time in college as a radio DJ, it is no surprise that one of my favorite TV shows of the past was “WKRP in Cincinnati,” a show about the radio business.

The station manager on the TV show was Mr. Carlson. Mr. Carlson didn’t like managing the radio station (owned by his mother). Since he didn’t like dealing with the radio business, he spent a large part of his day playing with toy trains.

Mr. Carlson was afraid that spending the day playing with trains would make him look unprofessional. The staff would cheer him up by saying something like, “You aren’t playing with trains. You’re a ‘Train Hobbyist.’ All the great business executives have hobbies. You are a connoisseur of trains and a collector of train replicas.”

That pep talk would make Mr. Carlson feel better, and he would go back to playing with his trains.

THE ANALOGY
There are only so many hours in the day. The daily pressures of what to do with those hours can be intense. Yet, in spite of all the demands on our time, we seem to find time for our hobbies.

Hobbies are the things we really like to do and prefer to spend time on. For the fictitious Mr. Carlson, his hobby was playing with toy trains. He could always find time to play with them.

In the business world, daily pressures demanding your time can come from many different sources. There can be problems with key customers, production issues, supply chain problems, price wars, and so on. The daily tyranny of the immediate can drain all the time out of a day, leaving nothing left for pondering long-term concerns. As a result, time tends to run out before executives get around to the serious effort needed to create great strategic plans.

So what is a strategist to do in order to fight for executive time and attention? Well, as I said earlier, executives always seem to find time for their hobbies. Therefore, if you want to get top management attention, you need to make them into “Strategy Hobbyists.”

THE PRINCIPLE
A dear old friend of mine used to say that strategic planning departments exist at the whim of senior management. His point was that all businesses have to have things like Human Resources Departments, Accountants, Lawyers, Salespeople and Operations Managers. However, having professional strategists on staff is optional. Many have them; many don’t. It only exists if by whim the management wants it.

Therefore, part of the role of a strategist is to get the audience to want strategy. Otherwise, they will eliminate it (or give it so little time that the process is destined to fail).

As my friend put it “You need to become the plaything of management.” In other words, your goal is to have them want to play with strategy in the same way Mr. Carlson wanted to play with toy trains. Or, as I put it, “You need to make strategy their hobby.”

In general, I believe that people are looking for three things from their hobby. Therefore, if you want to get top management to make strategy their hobby, you need to find ways to have strategy supply these three things. They are discussed below.

1. Boost Their Ego
Hobbies make people feel better about themselves. This can be both in an absolute sense and a relative sense. In an absolute sense, hobbies can provide the opportunity to become an expert in something. It feels good to be an expert in something. One reason why many hobbies involve making things with one’s hands is that one can proudly look at the completed piece and say “I made that.”

In a relative sense, hobbies can provide status relative to others. If you are the expert, people come to you for advice. They look up to you, and not just because of your title. And it allows you to tangibly demonstrate that you are better than others. Part of the fun in playing golf is when you can beat others because of your superior playing ability. It is a way to elevate your stature in a competitive world.

How can we apply this to strategy? Appeal to their egos. Help them see that becoming experts in strategy will boost their stature with their peers. It will help them beat their competition in a way more satisfying than golf. Show them how enacting a business plan can be a way to make a tangible difference to the company that they can point to and say “I did that.”

Unfortunately for the strategist, when you build up their ego, it means focusing attention away from your own ego. However, this can be a small price to pay to keep within their whim.

2. Let their Imagination Escape
Good hobbies help people temporarily escape the drudgeries of the day and transport their mind to a more enjoyable place. Mr. Carlson could escape the drudgeries of being a boring station manager and pretend to be a rail baron during the heyday of the train industry.

Golf courses transport you to a place of lush greenery which feels worlds away from the office. Being the captain of your own sailboat out on the lake feels powerful, free and in control, far from the normal world which often feels out of control. Working with wood or spending time gardening can taking you back centuries to a world that seems a lot less complicated. Hobbies take you to another world—another role—which is a pleasant escape from the norm.

How does this apply to strategy? Strategy is about creating visions of a better and brighter future. It is a way to escape the tedium of the immediate and focus your imagination on good times. In imagining the future, you are in control and things are going your way. You can tackle big issues—fun issues—instead of the petty boring things which normally turn up. Show them that strategyy is a legitimate and honorable way to escape the tedium for awhile.

3. Be Fun
Hobbies are to be an alternative to “work.” Yes, a lot of work may go into a hobby, but the secret is that is does not feel like “work.” It feels like fun.

Does your strategic process feel like fun? I’ve talked to many executives who groan when they are told they have to do strategy work. They hate it. To them, it seems like going through the motions of filling out boring forms, going to dull lectures, and getting books filled with boring statistics. Rather than being an alternative to tedium, it becomes tedium at its worst.

Don’t fall into this trap. Make strategic planning a fun escape that executives look forward to. If it is seen as fun and important, then people will gladly do the work of strategy and create something meaningful. If it is just seen as useless busywork, you will get halfhearted, worthless participation.

SUMMARY
Since strategic planning is often viewed as an optional activity, executives can opt not to do it. Instead, they can fill their time with the pressing issues of today. If you want to make strategic planning a priority, you need to make it appear like a hobby—something people always seem to find time for. To do so, you need to show how strategic planning can boost their egos, let them justifiably escape the tedium of today and have fun. That will get you the time and attention you need to produce a quality plan.

FINAL THOUGHTS
Strategy is still hard work. But if it seems like a hobby, then it doesn’t feel like hard work.

Strategic Planning Analogy #245: It's an Emergency!

THE STORY

There's been lots of discussion over the years about a need to overhaul the US health care system.  One of the complaints centers around the bias the system has against preventive medicine.  There are studies showing that preventative health care and early diagnosis are very cost efficient—if you catch a medical problem early, it is cheaper to fix.

 

Unfortunately, for many poor people, they typically get into the health care system by waiting until they are already terribly ill and then going to the emergency room of a hospital.  This is the most expensive way to provide health care.

 

So why do the poor tend to migrate to the least efficient method of providing health care?  Because it is the most efficient for them.  Due to their circumstances, the poor often cannot get traditional doctor's appointments.  Emergency rooms, however, are required to treat them.  It is the easiest way for the poor to get into the health care system.  So we are rewarding bad behavior.

 

Worse yet, I have heard of multiple cases where poor people have intentionally committed a crime, just so they could spend time in prison, where they can have access to free prison health care.   The logic is that it is better to spend a little time in prison and get free health care than to be free, but have no health care.  They're just working the system to their advantage.

 

THE ANALOGY

When it comes to strategic planning, businesses often seem to operate like the broken health care system. 

 

For example, one key part of strategic planning is to look into the future, to find the changing trends to the landscape in which one competes.  By anticipating change, one can create strategies to take advantage of that change.  This is like preventative care—preventing future problems by addressing environmental concerns early, adjusting before the change has a chance to do irreparable harm.

 

Another key part of strategic planning has to do with regularly examining one's strengths and weaknesses—some form of a SWOT analysis.  This is like early diagnosis—understanding what is wrong with a company's health while the problem is still small and manageable.  

 

Unfortunately, businesses tend to be focused on the "Tyranny of the Immediate."  The top priority seems to revolve around putting out the biggest fires consuming them at that instant.  Long-term issues cannot get proper attention.  This is like the inefficiencies of a hospital emergency room.  We don't get around to treating anything at the company until it reaches crisis proportion.   

 

Any good strategist will tell you that strategic planning is most effective when done like preventative health care and early diagnosis.  The problems are easier to solve.  The customers are more willing to cooperate.  You can avoid all of the time and money needed to correct an image disaster.  Yet the business system seems to favor trying to repair things after the disaster has occurred.

 

What is the strategist to do?  Learn from how the poor use health care.

 

THE PRINCIPLE

Occasionally, we have looked at the topic of "stealth strategy."  This is the concept of trying to get companies to pay the proper attention to strategic issues when they really don't want to.  You need to use stealth in order to sneak the agenda onto the table. 

 

As we have discussed, businesses tend to prefer dealing with repairing emergencies rather than preventing emergencies.  Business procedures tend to resemble a hospital emergency room rather than a doctor's examination room.  It is not conducive to a long-term strategic agenda.  So how do we get the proper attention?  By using the system to our advantage.

 

Poor people know that even though it is not the preferred method, their best access into the health care system is through emergency room.  Then, once in the system, they try to get the system to work for them.  Sometimes, strategists must do the same thing—get onto the agenda by going through the emergency room (stealth strategy).

 

I'm not saying that we should just wait around until the company falls completely apart and then try to do strategic planning.  That is irresponsible...and unnecessary.  Fortunately, there almost always seems to be some sort of emergency already taking place. The tyranny of the immediate has already put something on the emergency room table.  All you need to do is go along for the ride.

 

Once getting in through the emergency room door, you can use the opportunity to shift the discussion in a more strategic direction.  There are two main approaches you can use:  Dr. Doom and Dr. Diagnosis. 

 

1. Dr. Diagnosis

If you want to solve a problem, it helps to know the cause.  When a problem hits the business emergency room, strategists should be volunteering to be the ones to diagnose the cause.  The more control strategists have over determining the cause, the more they can stealthily steer the discussion to deeper, more strategic causes.  Deeper, more strategic causes lead to deeper, more strategic solutions.

 

For example, let's say that the latest sales report comes in a little sickly.  A narrow diagnosis would say that the cause is a lack of sufficient sales promotions.  This would lead to a small, tactical response—a new sales promotion—which may be of dubious long term benefit.

 

However, a strategist might diagnose this same problem as being a poor positioning with the consumer.  This could lead to more strategic cures, like changing the consumer focus, repositioning the offering, changing approaches which work against the global consumer strategy, and so on.

 

Being a part of how the problem is framed may be one of the most valuable tasks a strategist can perform.  By volunteering to be Dr. Diagnosis, you can frame the problem in a manner that forces management to apply a more strategic solution.

 

2  Dr. Doom

Dr. Doom uses the emergency to build a doomsday scenario.  The idea is to get people to see that this is not an isolated problem.  Instead, this could be the beginning of a plague. 

 

The point here is to try to steer the discussion to a broader, more strategic perspective.  Get management to see the whole forest instead of just the one tree in front of them.  The broader and more encompassing you can make the disease, the broader and more encompassing will be the approach towards curing it.  By getting people to think broadly, you have stealthily move the discussion to a more strategic level than it would have otherwise been.

 

This method is most effective when you believe that it is time for the company to undergo a major repositioning of its strategy.  Management is reluctant to undergo a major change in strategy if they are comfortable where they are at.  Dr. Doom makes the current situation less comfortable.  If a plague is coming, it's time to move…NOW!

 

This is often referred to as the "burning platform."  If management believes the company is sitting on a burning platform (fire is destroying the very foundation of the firm), then there is no option but to look for the best way to jump off the platform.  Now the ears are ready to hear the strategic analysis that tells them which way to jump.

 

Some might argue that this is the approach being used by Obama.  He is saying that the current situation is so bad that we need to spend money to build a whole new social agenda (broadening the discussion beyond just the economy).  Whether you agree with his point of view or not, he did use the economic crisis to get the larger social agenda on the table for discussion.

 

SUMMARY

The business world tends to focus on the near-term, fixing the crisis of today. Strategists tend to focus on the long-term, preventing even bigger problems tomorrow.  In order to get the attention of near-term management, strategists should use the near-term problems as launching points for a long-term discussion.  This is done by either:

 

a) Broadening the definition of the cause of today's problem to something bigger and more strategic (Dr. Diagnosis); or

 

b) Broadening the definition of the effect of today's problem to something bigger and more strategic (Dr. Doom).

 

FINAL THOUGHTS

This discussion has been about a powerful strategic tool.  Be careful how you use it.  If you treat every little thing as always being the plague, you become like the boy who cried "wolf!" too often.  People will stop listening to you.  So pick your battles carefully.

Avoidance

THE STORY
When I was a boy, I was terrible at sports. I had very little muscle tone and was not well coordinated. As a result, I avoided sports in order to avoid ridicule.

The exception was high school gym class. Here I had no choice. Playing the sport was mandatory. It was my daily bout with humiliation.

The one exception to this rule was when the gym class played touch football. I was not a big fan of the game and I didn’t know the rules all that well, but still you had to play the game.

I would play as a tackle on defense. I was told that my role was to try to touch the quarterback before he got rid of the ball. I figured that the easiest way to get to the quarterback would be if I lined up in a place where there was nobody from the other side was standing. Since everyone knew how terrible I was at sports, the other team didn’t seem worried that I lined up in a place that was unguarded.

When the ball was snapped, I just ran unabated to the quarterback and touched him for a sack. Even someone as bad at sports as I was could occasionally get to a quarterback if nobody stopped him. Eventually, the other team figured this out and made sure someone tried to block me. But I figured that avoiding a tackle would still be my best tactic, so when the ball was snapped, I’d just spin to the left or the right and run in untackled towards the quarterback.

To keep me from spinning to the left or to the right, the other team started putting two guys on me—one on each side so I could not spin. Since I was in such poor athletic condition, there was no way that I could overcome that. However, by double teaming me, it left someone else uncovered who was often able to sack the quarterback. So I was still helping out my team.

THE ANALOGY
Businesses often use sports analogies to describe their strategies. They talk about “winning” or “defeating the enemy.” The strategy sometimes is described as a direct confrontation with a competitor and that we must fight hard to overcome them in glorious victory.

Although there are some benefits to describing strategy in sports-related terms, it can lead to some problems if taken too far. There are two weaknesses to a sports mindset. First, it assumes that the battle is a head to head confrontation with a single opponent. Second, it assumes that both sides are playing the same game by the same rules.

As we saw in the story above, I was not well schooled in knowledge about the game of football and only vaguely understood the rules. I only knew that I was supposed to try to touch the quarterback before he got rid of the ball. To achieve this goal, I did two things. First, I tried to avoid direct confrontation with the opposing team. Second, I didn’t pay any attention to the conventional rules which would make a tackle believe that they had to “tackle” someone (after all, it is part of the position’s name).

Because I avoided direct confrontation and didn’t play by the conventional “rules” of my position, I was able to succeed, even though I had no athletic skills.

Business strategies often work the same way. In most cases, business success does not come from directly attacking a competitor and their position, but rather by avoiding direct confrontation and moving into an uncontested space. In addition, most winning strategies tend to reinvent the rules for playing the game.

Think of how easy it would be to win a sporting event if you played in an arena where there was no opposing team, or if there was opposition, they were forced into playing by a less competitive set of rules than your team. Well, if you invent your strategy properly, you can set up that type of situation for your company.

THE PRINCIPLE
The principle here is “avoidance.” Great strategies typically either avoid direct confrontation with a competitor, or they avoid playing by the conventional rules of the marketplace.

1) Avoid Direct Confrontation
Over the years, there have been many classic head to head battles in the marketplace: Coke vs. Pepsi, McDonalds vs. Burger King, General Motors vs. Ford, and so on. One thing history tells us is that even over long periods of time, direct confrontations rarely cause a change in leadership. Coke stays on top of Pepsi, McDonalds stays on top of Burger King, General Motors stays on top of Ford, and so on. Head to head confrontations by a challenger are rarely successful.

Instead, success usually comes when a challenger avoids direct confrontation and moves into uncontested space. Pepsi may have lost the cola war, but they have a winner in Mountain Dew, which took on an uncontested space in the beverage market. Every time Coke has tried a direct attack on Mountain Dew, they have lost (remember Mello Yello?).

And then there was little Gatorade, who invented an entirely new beverage category, called sports drinks. By building strength in a brand new and uncontested space, it was difficult to overcome. The only way Pepsi could win in the new space was to acquire Gatorade.

Ford may have lost the automobile war, but they took an early lead in what was at the time the more uncontested space of pickup trucks. Ford has been able to successfully withstand direct attacks from GM on their pickup business for generations.

Finding a new, uncontested area and gaining an early strength can give a company an edge which is hard to lose. Good strategies exploit this principle. I heard a great story recently about Steve Jobs at Apple. When he came back to run Apple the second time, Jobs was taking over a company that had some difficulties. At that time, Jobs was asked what he was going to do in order to get Apple back in shape. His answer was that he was going to wait for the next big thing. As it turns out, the next big thing was digital music. Jobs quickly dove in to capture that new uncontested space with the ipod.

Jobs knew that if he tried a direct confrontation in computers, he would lose, so he looked for new uncontested space where his core competencies would be useful. With the ipod, Jobs made Apple into a strong winner again.

2) Avoid Conventional Rules
The second principle is winning by avoiding conventional rules. In this way, business is not like sports. The rules in business are not etched in stone. You can steal share away from the competition by playing by a different set of rules.

Take the retailer DSW. Its early success came by reinventing the rules about how shoes are sold. Before DSW, the traditional way of selling shoes in department stores was to hide nearly all of the inventory in a back room. Consumers were forced to give up control and sit down while a salesperson made choices for them out of the back room. DSW changed all that by putting all of the inventory on the sales floor. Customers could control their destiny and make their own choices.

Traditionally, shoes at department stores were sold through extensive promotions. The standard price was held quite high, so that huge % discounts could be claimed on frequent sales. This forced customers to wait on buying shoes until there was a sale. DSW changed the rules by having everyday prices that were similar to the sale prices of the other companies. Now customers could come in any time they wanted and be assured of paying a low price.

By changing the rules, DSW created a more appealing consumer proposition, giving them more control over the experience at a better overall value. It was difficult for department stores to change their rules to match DSW. First, their stores were not designed to display all of the shoes. It would take extensive and expensive remodeling to adopt the new rules of display. Second, the entire department store’s strategy revolved around high regular prices with deeply discounted sales. It would be difficult for department stores to price shoes in a manner differently than the rules being used for the rest of their store.

SUMMARY
Strategies tend to be more successful if they follow one or both of the following principles. First, they avoid direct confrontation with an established leader and instead try to create leadership in a new and relatively uncontested space. Second, they reinvent the rules of competition in their favor, preferably in a manner which is hard for others to easily imitate. These two rules of avoidance tend to be much more successful than direct head-to-head competition.

FINAL THOUGHTS
During the 1930s, the Green Bay Packers won nearly all of the football championships. Why? They had examined the rules of football and realized that the forward pass was legal. Nobody else in the league was using the forward pass at that time. As a result, opposing defenses were not designed for defending the forward pass. By changing the rules, they were able to win championships. You can do the same.

Sometimes, It’s Not Nice to Share

THE STORY
I’ve worked at several companies who have had a portfolio of retail businesses and decided to centralize most of the overhead of the divisions into corporate shared services. Although each company handled it slightly differently, they tended to follow a pattern something like this:

First, someone would get the notion that if you combine division level overhead to a corporate location, the company is better off. They make a case that:

A) The quality of expertise should go up due to specialization; and
B) Costs should go down due to eliminating duplication and through economies of scale.

They win the argument, so a corporate shared services area is set up. The people running these new shared services areas get fancy new titles and increases in their salaries. To justify their position, they create a bureaucracy to interact with the divisions. The bureaucracy, of course, requires additional people to do the interacting.

Not long thereafter, the divisions make three complaints about the shared services:

1) It takes longer to get anything done.
2) More time is wasted in meetings.
3) The quality of the output from the service is not as good as before.
4) It costs a lot more money.

The complaints are investigated and found to be true in many cases. As a result, the shared service programs are scaled back significantly or eliminated altogether. Then things return pretty much back to where they were before shared services, with the divisions running much more independently.

THE ANALOGY
Strategies often involve the building of a portfolio of businesses. Within such a strategy, it is common to build at least part of the portfolio via acquisitions. To help justify the high purchase prices for acquisitions, savings are factored into the financial model for the various economies of scale which are expected from combining the new business with the rest of the portfolio.

Unfortunately, it is commonly the case that after the acquisition occurs, the savings from combining the businesses turn out to be far less than what was put into the business plan. As a result, it soon becomes apparent that too much was paid for the acquisition. Now the acquiring company is faced with the reality of having of destroyed shareholder value, because they paid more for the company than they will get back in earnings/savings.

The problem is that combining certain overhead functions turns out to be counterproductive. As we saw in the story above, shared services in many cases can increase costs while reducing quality. It turns out that the number of areas which make sense to combine are far fewer than one would at first think.

Although we tell our children that “It is nice to share,” in the business world, it often makes more economic sense “not to share.” Therefore, when developing strategies, be careful not to rely too heavily on sharing of overhead to justify your tactics.

THE PRINCIPLE
What we are really talking about here are synergies. If we overestimate synergies, we can end up with a seriously flawed strategy—maybe flawed enough to destroy a company. In order to ensure that your strategy does not come de-railed by poor assumptions on synergies, three principles should be kept in mind.

1) Resource Vs. Outsource
2) Distinctive Vs. Distractive
3) Frozen Vs. Flexible

These three principles are discussed below.

1) Resource Vs. Outsource
Often times, aggressive synergistic models are based on an assumption that divisions will outsource a number of functions to corporate. Complete outsourcing is rarely cost effective because the division gives up too much control in a complete outsource. The divisions lose control over their destiny. It is difficult enough to execute a strategy when you control your functions. If you have outsourced your functions, then it can be like fighting two wars—one against the outside marketplace and an internal war with the shared service group.

Corporate may mean well, but when the entire function is outsourced, the division tends to get stuck with too much bureaucracy, too many costs, too much wasted time, and a product not always well suited to the unique needs of the division. Divisions tend to need functional people within the division to fight for what is right for the division.

Many times, one size does not fit all. A company in the incubator stage has different needs from a rapidly growing business or a mature business. Some divisions can afford more service than others. To put them through the same process would be like telling all women that they should be wearing a size 6 dress.

Rather than “outsourcing,” one should be looking at “resourcing.” There are many resources within the portfolio which can be shared between divisions. For example, one can share access to channels of distribution, knowledge about certain customer groups, patents, vendors, sales reps, intellectual property, employees, and so on.

For example, I have a friend who used to work at 3M. He says 3M often paid a premium to acquire a company just to get access to a patent which they knew could be valuable if spread across a few of their divisions. The deals worked based on the sharing value of the patent resource rather than imaginary synergies from outsourcing.

Resourcing does not require divisions to give up control of functions. Instead, it is a means to empower a division’s function to be better off than it was before. Whereas outsourcing is primarily taking away something from a division, resourcing is primarily giving something to a division. It is like sharing gifts at Christmas.

When looking at acquisitions, one is more likely to have success in reaping benefits if the benefits are based on understanding the value of specific resources which can be shared within the portfolio, rather than difficult-to-achieve synergies through generic centralization of complete functions through outsourcing.

2) Distinctive Vs. Distractive
Certain functions are core to the success of a business. They help provide the distinctiveness which ensures strategic success at the point of implementation. In retailing, one such core function is Advertising/Marketing. Marketing is how one communicates the strategy to the customer. Advertising decisions at most retailers tend to require input from many parts of the division under very short time-frames. It is a valuable tactical tool. To lose control of advertising would be to lose control of a key determinant of strategic and operational success.

Yet, on more than one occasion, I have seen marketing/advertising outsourced from a division into a corporate shared service program. Taking away a core function from a division can make them “average” at the point where they need to be “distinctive.” We have already talked about how outsourcing can lower productivity. In certain core areas, outsourcing can also make it nearly impossible to stay on-strategy.

By contrast, some functions tend to be business distractions. For example, issuing payroll checks rarely provides competitive distinction. It is just a distraction which needs to get done. If you can take away these distractions and centralize them, the division can focus on the more critical factors.

Core strategic functions which provide distinction need to be out in the field with the division on the front lines. Functions which provide no competitive leverage (distractions) can be placed at corporate. Different businesses may have different points of distinction and distration, so one needs to examine this on a case to case basis.

3) Frozen Vs. Flexible
One of the problems with too much integration of division functions with corporate is that portfolios are not frozen. New divisions are added over time, and old divisions are divested over time. If one tries to squeeze out too many synergies by tight intertangling of the divisions with each other and corporate, it becomes more difficult to maintain flexibility when it is time to divest one of the pieces. There is value to maintaining some of that flexibility. That value can be destroyed if synergies are attempted beyond the two points already mentioned.

Instead of tight intertangling, one can get some of the same benefits with standardization. For example, if every division uses basically the same standard software systems (on non-core processes) and the same standard language to talk about business, it is easy to share resources back and forth without having to be intertangled, because standardization breaks down the barriers to working together. Yet at the same time, it makes it easier to unfreeze the portfolio and divest of pieces, because they are not so intertwined.

SUMMARY
Making too aggressive an assumption on synergies can cause one to make the wrong strategic decisions. Subjecting divisions to overly aggressive outsourcing to corporate can end up counterproductive. To be safe, only take into account synergies regarding:

1) Resource Sharing
2) Non-Distinctive Functions
3) Those that still allow flexibility in adding to or subtracting from the portfolio.

FINAL THOUGHTS
Often, the problem with synergies is that they do not really exist in the first place. Not all business combinations make sense. Instead of 1+1=3, one can end up with 1+1=0.5. You cannot always blame the people executing the strategy when synergies to not live up to plans. Sometimes, the original design of the plan is wrong.

Play it Backwards

THE STORY
Back in 1969, the world went wild trying to unravel one of the biggest hoaxes in pop culture history. A number of people started playing the music of the Beatles backwards. They also started looking at the Beatles album covers backwards in the mirror. When they did so, there appeared to be clues indicating that bass player Paul McCartney was dead.

Many of these hidden messages in the music and hidden symbols on the album covers could only be detected if you looked at them backwards. Although the Beatles deny the existence of such a hoax, there seemed to be far too many clues to make this completely random.

THE ANALOGY
Strategies are based upon choosing a position in the marketplace. The position stands as a guidepost, pointing the direction in which the company is to move. It should describe the manner in which the company is going to win in the marketplace, and why certain consumer segments should prefer it.

When choosing a position, it should not only be able to tell you the right things to do. It should also tell you what are the wrong things to do, things which are inconsistent with your strategy.

Unfortunately, many companies develop mission statements and other such strategic documents that are nothing more than platitudes. They talk of noble goals, such as making money, or being a leader, or of enriching lives, but they are worthless at providing any sort of strategic direction.

One way to tell if your positioning is truly strategic or merely a platitude is to play it backwards, similar to what people did to the Beatles music. For example, if your statement says that your mission is to make money, play it backwards and the reverse would say that your mission is to lose money. Since people rarely go into business to lose money, this is not really a viable option. Therefore, if the opposite is not viable, then the original is just a platitude.

The same could be said about mission statements around “being a leader” or “enriching lives.” Playing it backwards, it does not seem to be viable to have a position of “being a loser” or “hurting lives.” Thus, these are platitudes as well.

If all you hear when you play your statement backwards are non-viable options, then your mission is just a meaningless platitude. And if that is the case, then maybe there is a hidden message in your statement about your pending death as well.

THE PRINCIPLE
The principle here revolves around making choices and trade-offs. Rarely is a company strong enough to be all things to all people. And even if you were strong enough to be all things to all people, the consumers may still reject you because they favor being served by specialists, rather than generalists.

Therefore, companies need to make trade-offs—emphasizing certain benefits while deemphasizing others. For example, Wal-Mart has a position which revolves around providing the lowest prices. To succeed in providing the lowest possible prices, Wal-Mart has to make some trade offs. For example, Wal-Mart is not known for its service. If Wal-Mart added too much service, it could no longer afford to provide its low prices.

Harvard Professor and strategic expert Michael Porter says that one of the most important tasks of strategy is to determine which trade-offs you are going to make so that you can stand out and win in a particular direction.

If your position is based on a clear understanding of your trade-offs, then it will provide clear direction on what you are to do. When you play it backwards, you can tell that it is not just a platitude. For example, if you play backwards the Wal-Mart strategy, it would say that you are not going to win based on low prices. Is that a viable strategy? Of course it is. There are many companies that succeed by making a different set of trade-offs in order to win based on service, or convenience, or quality, etc.

Unfortunately, the trap of thinking in terms of platitudes rather than trade-offs is very common. So common, in fact, that it is often made fun of in Dilbert cartoons. In his book, The Dilbert Principle, Scott Adams defines the mission statement as “a long, awkward sentence that demonstrates management’s inability to think clearly.” Two of his parodies showing how useless a platitude-rich vision statement can be are as follows:

• “We enhance stockholder value through strategic business initiatives by empowered employees working in new team paradigms.”

• “We will produce the highest quality products, using empowered team dynamics in a new Total Quality paradigm until we become the industry leader.”

After reading those statements, could you tell anyone…
…What field of business the firm is operating in?
…What solution is being provided?
…How that solution is superior to other alternatives
and why some people would prefer it?
…What trade-offs are being made to win with this solution?

You cannot be motivated to act in a certain manner unless you first understand what you are supposed to be doing (and via trade-offs, know what you aren’t supposed to be emphasizing).

Fortune magazine once did a parody of bad vision statements by providing a universal multiple choice vision statement. It went as follows:

“OUR VISION:
TO BE A…
a)Premier; leading; preeminent; world class; growing
COMPANY THAT PROVIDES…
b)Innovative; cost-effective; focused; diversified; high quality
c)Products; services; products and services
TO…
d)Serve the global marketplace; create shareholder value; fulfill our covenants with our stakeholder; delight our customers
IN THE RAPIDLY CHANGING…
e)Information solutions; business solutions; consumer-solutions; financial-solutions
INDUSTRIES.”

Platitudes do not provide direction. They say you want to lead, but they don’t show the way. Platitudes do not inspire. Platitudes don’t tell people how to make trade-offs. Platitudes do not tell you how to differentiate yourself from other firms who have the same platitudes.

A better fill-in-the-blanks option would be as follows:

When it comes to solving the problem of ____________, I will win by owning the solution which places the highest priority on _______________, and I will make the appropriate trade-offs to remain a leader in this direction in the mind of the consumer who wants to make similar trade-offs to solve this problem.

A couple of retail examples could be as follows:

When it comes to the problem of feeding my family, I will win by owning the solution which places the highest priority on fresh, organic and healthy foods, and I will make the appropriate trade-offs to remain a leader in this direction in the mind of the consumer who wants to make similar trade-offs to solve this problem. (Could this describe someone like Whole Foods?)

When it comes to solving the problem of being appropriately dressed for work, I will win by owning the solution which places the highest priority on quality classic tailoring which lasts beyond one fashion season, and I will make the appropriate trade-offs to remain a leader in this direction in the mind of the consumer who wants to make similar trade-offs to solve this problem. (Could this describe a portion of what Talbots is trying to do?)

When it comes to solving the problem of providing my family with the everyday necessities of life, I will win by owning the solution which places the highest priority on paying the lowest prices in a one-stop shopping environment, and I will make the appropriate trade-offs to remain a leader in this direction in the mind of the consumer who wants to make similar trade-offs to solve this problem. (Could this describe a Wal-Mart Supercenter?)

Now aren’t these statements more practical than a set of platititudes?

SUMMARY
For a strategy to be useful, it must provide direction. Platitudes do not provide direction. The way to tell if you have a platitude is to play it backwards. If it doesn’t make sense in reverse, then it is a platitude. Good strategies show the trade-offs one is willing to make in order to win in a particular direction. When you play that backwards, what you see are other ways to make a different set of trade-offs.

FINAL THOUGHTS
Not everyone wants to make the same set of trade-offs to solve a problem. Therefore, when you are choosing the trade-offs for your firm, you are not only making choices about what you are providing, but also who you are providing them to. When making trade-offs, you are going to make some people unhappy with what you are doing. But as long as there are enough people who want to make the same trade-offs as you do, that’s okay.

Talk it Up

THE STORY
If someone tells you that they work in marketing, they really haven’t told you much. There are too many different types of careers which fall under the title of marketing.

For example, the person may be in personal selling or in a sales department and call that marketing. Or the person could be in advertising and call that marketing. Perhaps their position is in the field of brand management. That is often called marketing as well.

There are many other distinctly different job activities which often get classified as marketing as well. It can get very confusing. Are these people apprehensive or ashamed about telling people what they do? Does “marketing” make their job sound more glamorous?

When someone tells me they are a CMO, I’m sure to them it means Chief Marketing Officer. To me, it means Chief Mystery Officer—at least until I get to know them.

THE ANALOGY
There’s something about marketing that draws people to it, like bugs to a light. Not only do many people like to describe their job in terms of marketing, an even greater number like to talk about marketing and advertising, even if their job has nothing to do with it.

I don’t think I’ve ever worked for a company where there wasn’t a majority of executives who thought of themselves as “a bit of an expert” in advertising. And even if they didn’t think of themselves as experts, they always seemed to have an opinion about the quality of the company’s advertising and were willing to tell you all about it (even if you didn’t want to hear it).

Developing and implementing strategy tends to require a lot of talking across multiple areas of the business. Unfortunately, it is common these days for people to not be nearly as eager to talk about strategy as they are to talk about marketing and advertising. So if talking is a key part of strategic planning, and people would much rather talk about marketing/advertising than talk about strategy, then perhaps one should take advantage of the willingness of people to talk marketing and use that as a hook to begin a conversation which you can eventually steer to strategic issues.

THE PRINCIPLE
This is the second in an occasional series of blogs on “Stealth Strategy” (For the first blog, see "Minutes Last Forever"). The principle here is that many firms no longer show an interest in doing a formalized strategic planning process. They would rather spend time talking about and doing other things. If you overtly try to direct their attention to strategic issues, their radars will pick up on that and they will try to shut you down. Therefore, if you want to get a strategic dialogue going, you have to come in under the radar and get the discussion going in a stealthy manner. Advertising can be a tool to get in under the radar.

Since people love to talk about marketing and advertising, one can use that interest to strike up a conversation. Then, though a series of questions, one can turn a critique of advertising into an effective critique of the company’s strategy (without ever mentioning the word “strategy”). Although these discussions might not directly lead to a formalized change in strategy, they may lead to a change in the advertising message.

If you do your job properly, you may get the advertising message changed to talk about your product or company in a way that is more strategically sound. Then, once you’ve announced to the world this strategically sound message through advertising, it pretty much commits the company to delivering on that message. Therefore the company is compelled to operate the company around the strategic promise in the advertising. The end result is that people are acting on delivering an improved strategy, even though no formalized strategic planning process was used.

This is not that far-fetched. Most of marketing involves some form of communication with the customer in order to influence behavior which results in sales. Much of strategy involves developing a position for your firm/product which is desirable, unique and differentiating, followed by:

1) Building an infrastructure to deliver that position; and

2) Getting customers to believe that you own that position.

The goals of marketing and strategy are not that dissimilar. The most effective marketing message in the long run is a message based on a solid positioning in the marketplace. Good positioning is the best way to create profitable sales. Without a strong position, marketing must resort to deep price concessions or extra “goodies” to induce sales, which significantly reduces profitability. With a strong position, one is better able to create demand for your brand without these costly concessions.

Therefore, if you want to improve marketing, one needs to develop strong market positioning. Strong positions come from doing the work of strategy, even if you call it marketing. And then, once the position is developed under the guise of marketing, it is only a short leap to turn the discussion towards building the proper internal business capacities in order to deliver on the promise of the advertising.

Let’s take an example of how this could work. Let’s assume that you are walking down the hallway and you cross paths with a top level executive. The executive says to you, “Say, did you see our new ad on TV last night? I thought it stunk. What did you think?”

You could respond in many ways, depending upon your strategic agenda. For example, if you are trying to get a better strategic focus around who your customer should be, you could respond by saying, “The problem I had with the ad was that I couldn’t figure out who we were targeting that ad towards. Who do you think is the right type of customer to be targeting?”

If your goal is to create a unique position for the company, your response could be, “The problem I had with the ad was that you could have taken our name off of the ad and put any one of our competitor’s names into the ad and it still would have made sense. The ad did not give a compelling reason to choose us over any of those competitors. I think our ad needs to explain the ways in which we are uniquely superior. In what ways do you think we are uniquely superior, so that we can come up with a stronger advertising message?”

If your goal is to get the company to think about how the external trends are changing the landscape, requiring a need for a new strategy, you could respond something like this, “What was most disturbing to me was when I compared our ad to what others are doing. Their ads seem to be more in tune with where the trends are heading. Did you see the ad from company “X”? We normally don’t think of them as a competitor, but their ad is clearly changing the way people look at all kinds of options, including what we offer. If their ad gets people to look at the world in this new way, we could be in serious trouble. Don’t you think we ought to reassess our ad message in light of this?”

By now, you should be getting the idea. If you couch your strategic comments in an advertising context, they can appear less intimidating, and people may be more willing to talk about them. The talking can lead to changes in advertising which can be used to get complementary changes in the rest of the organization. For example, if you succeed in getting the advertising message to express the proper strategy, the next time someone asks you about your thoughts on the advertising, you can say,

“I love the message in the ad, but I’m afraid that our operations are not quite living up to the promise made in the ad. If we could just tweak a few operational issues, I believe the advertising message would be even more effective.”

If advertising is the subject that gets the talking going, then take your strategic ideas and “talk them up” in the context of advertising.

SUMMARY
Because some people have had bad experiences with formalized strategic planning in the past, there can be some barriers to getting companies to discuss strategy. Since strategy is closely related to marketing, and since it is common for executives to be more willing to talk about marketing than strategy, marketing can be used as a tool to get strategy implemented. Just talk up strategy in the context of advertising (and don’t mention the “S” word).

FINAL THOUGHTS
Sometimes, the first person one should be talking to is the CMO. If you can get the marketing team as your ally in this process, you can use formal marketing meetings as a platform for holding formal stealth strategy meetings.

Minutes Last Forever

THE STORY
In ancient times, countries went to war in many ways like today’s society plays sports. There was a specific time each year when war was in season. The winner of the annual warfare season took his plunder and things were settled until the next year.

Even the Bible speaks of this phenomenon in II Samuel 11:1, when it says, “In the spring, at the time when kings go off to war…” or in 1 Kings 20:22, when it says, “Afterward, the prophet came to the king of Israel and said, ‘Strengthen your position and see what must be done, because next spring the king of Aram will attack you again.’”

Just as the Old Testament of the Bible is the Israeli account of their battles, other Kings kept records of their battles.

I saw a video of an archaeologist who was an expert in reading the ancient Egyptian Hieroglyphics. Every year in the ancient hieroglyphic records were the accounts of the annual warfare of the Egyptians, spoken of in the most favorable manner. It reminded me of the National Football League’s NFL Films division, which at the end of the year produces a film for every team in the league, giving an account of the past year’s successes. Even the teams that did extremely poorly get a positive slant, with the films saying things like “It was the beginning of a new era” or “The turnaround has begun.”

What was interesting in the documentary on the Egyptian hieroglyphics was that at the time when many biblical scholars believe that Moses would have lead the Israelites out of Egypt, the hieroglyphics did not mention a single battle for three years. It was the only time when there was not a single mention of the annual warfare. There is speculation that the defeat to the Israelis at the Red Sea was so bad that there was no positive spin that the Egyptians could place on the event, so that only left the option of silence.

So, while the Bible mentioned a great victory by the Israelis that wiped out the great Egyptian army in the Red Sea (and may have required a couple of rebuilding years before the Egyptians were ready to battle again), the Egyptian version was unusually silent on the subject. I guess the records of what happened depend upon which side you are on.

THE ANALOGY
They say that the victors write the history. Although the times of the battles of ancient Egypt and ancient Israel are long gone, and the eyewitnesses are long dead, their records still remain, thousands of years after the fact. These records give us our perspective on what happened.

In the business world, a similar phenomenon can happen. There is a hustle and bustle to the fast pace of activity. At times it can all sort of blur together. Memories can get a little fuzzy on the details. In fact, over time, memories of specific events could fade away. Key players may leave the firm. What does not fade away, however, are the records of what occurred. A skillful strategist can use the lasting power of documentation as a tool to help mold and direct strategy long after the particular event is over.

THE PRINCIPLE
This is the first in an occasional series of blogs on “Stealth Strategy.” The principle here is that many firms no longer show an interest in doing a formalized strategic planning process. Given some of the bad strategic planning processes that I’ve seen over the years, I can understand why people would want to walk away from these processes. However, just because there are bad strategic planning processes does not mean that companies can afford to stop doing strategic thinking.

If you do not think about your company strategically, your competition will do it for you, and you will not like the results. So the goal is to try to get a company to think strategically without setting off those negative feelings about strategic planning in some people who would want to shut down the process. That is why I call it stealth strategy—it is getting under the radar of anti-strategists and bringing strategic thinking into the business process without people realizing that they are doing strategy.

In many companies, the places where a lot of decisions are made are in committee meetings. Therefore, if you can get these meetings to think strategically, you are by default getting the company to act strategically, whether they realize it or not.

Therefore, one might think that a good way to get a company thinking strategically would be to try to head up these committee meetings. Unfortunately, people in business tend to understand power and they would see you in a power position if you ran the committee. The radar of the other committee members would be very active in monitoring your activities in order to keep your power in check. A committee leader cannot sneak something in, because they are the most visible member. Besides, in an effort to monitor the meeting, the committee leader often needs to have an appearance of being unbiased in order to get all of the members of the committee to participate. Therefore, the committee leader may be the least able to direct a committee to think strategically.

Fortunately, there is a more powerful alternative. Volunteer to take the notes and write-up the committee meeting minutes. Most people hate doing that job and will gladly give it to you. Being the writer of the notes is not a position people typically feel threatened by, so their radar will not be active against you. Yet, as we saw in the story above, the documentation of an event outlasts the memory of the event and becomes the official record of what happened.

In the story, depending on your perspective (Egyptian vs. Israeli), the document writers saw the world in a different way, and their record reflected that point of view. These points of view then became the official points of view. As the writer of the meeting minutes, you can record them from a strategic perspective and make strategy the key thrust in what gets taken away from the meetings. This, then, becomes the official thrust of the meetings.

If your committee meetings are similar to most of the ones I’ve seen, there is a lot of confusion going on. Multiple side conversations may be going on at the same time. Decisions may not be entirely clear on what exactly was decided or exactly what everyone was specifically to be held responsible for doing. A lot of verbal back and forth may occur that drifts around a topic and never really gets summed up well at the meeting. Some people may be bored and not really be paying close attention. Others may be using the committee to draw attention to themselves in an attempt to gain an advantage in office politics that has nothing to do with the topic at hand. That is why I have often heard people come out of committee meetings and make a comment to a colleague something like this, “What exactly just happened in there?”

Here, then, is your great opportunity. Because of the confusion, there is a need for someone to summarize what happened into a logical flow so that people understand specifically what was decided and specifically what tasks were assigned. If you take a strategic perspective to your summary minutes to the meeting, you can frame the discussions into a strategic context and explain the conclusions as strategic initiatives (avoiding the word strategy in your summary). The nature of the assigned tasks can also be framed as strategic initiatives.

Over time, people will forget the details of the meeting, and your minutes will be the official recollection. They can be circulated to the bosses of the attendees. Since the bosses were not at the meeting, the only official record of what happened are your recollections in a strategic context. By reading the minutes, you are then influencing the way these bosses think strategically about the committee issues.

At subsequent committee meetings, you can refer to the minutes to help direct further thinking at a strategic level. It is not as threatening, because you are not personally demanding it, but merely saying, “Didn’t this whole group agree last week to think about this topic in such-and-such a way?” Better yet, if you have an accomplice in the committee, you can play the part of the lowly writer, and let your friend speak up for the minutes.

The goal here is not to deceive the group or to lie about what happened. They will catch on to that and make you change the minutes. Rather, the goal is to slowly, meeting by meeting, use a strategic perspective to the way you summarize the activity, so that the group is influenced to approach the objective at hand in an every more strategic manner at future meetings. The more you frame the problem as a strategic issue, the more the committee will need to resolve the problem via strategic thinking, as long as it is done in a stealthy manner.

Years later, some of the official records of that meeting may still be influencing the strategic approach which the company takes to an issue. Remember, committee meetings may only last an hour or two, but the committee minutes may last forever. We still have the hieroglyphics and the Biblical accounts.

SUMMARY
Because bad prior experiences may have caused executives to be turned off by formalized strategic processes, one must often turn to alternative approaches to get a company to think and act strategically. One method is to use already in-place committee meetings as a strategic forum rather than official strategic planning meetings. The best way to do this is usually not by heading the committee, but by being the keeper of the committee meeting minutes.

FINAL THOUGHTS
To paraphrase an old friend of mine, “What happens during a committee meeting is not nearly as important as the posturing which takes place just prior to the meeting and the summarizing and record-keeping which takes place just after the meeting.”