THE STORY
Auto executive Bob Lutz likes to talk about the disasters one creates when designing cars based on consumer research. Regarding the Ford Thunderbird, he said,
“Ford ruined the Thunderbird by taking [consumer survey] responses too seriously. The original Thunderbird was a sleek, zippy, tightly designed two-seater. Ford asked T-bird customers what they’d like more of: Would they like, say, a little extra room? They would. How about a back seat? You bet. So Ford introduced an “improved” four-seater (and later a four-door). The restyled car was no longer the sleek sportster that had first attracted drivers. It’s mystique paled, and what had been a unique addition to Ford’s line was now just another car.”
The larger, more boring Thunderbird sold poorly enough that it had to be retired.
When at Chrysler, Lutz saw this problem again. In the 1980s, the Chrysler sub-compacts were not selling as well as the Ford Escort. Chrysler asked the customers what the problem was. In Lutz’s words:
“By a vast majority, respondents said they would like the car much better if it were just a little bigger—say four inches longer on its wheelbase. Now, anyone even passingly familiar with the US auto market knows that most people buy subcompacts because that’s all they can afford, not because they have some warped desire to sit with their knees up around their chest. Thus, when asked what they’d like changed about their cars, it’s axiomatic that subcompact owners would like them bigger.”
According to Lutz, the Chrysler executives were so fixated on giving the customer what they wanted, that they embarked on a $170 million campaign to find a way to make their sub-compacts four inches longer and still sell them at the same low price. It never occurred to these executives that Chrysler already had popular cars that were four inches longer for which people were willing to pay a higher price. Eventually, Lutz had to put his foot down and stop the nonsense.
And then, there was the Edsel, one of the biggest design disasters in automotive history. Oh, by the way, it was also one of the most consumer-researched designs in automotive history. Consumers were given choices of many different types of designs on each part of the car. Then Ford took the winners of each part and put it all together. When all of the “consumer chosen” parts were assembled, the total design was a mess that consumers rejected.
THE ANALOGY
We live in a Web 2.0 world. Because the Web 2.0 provides unprecedented opportunities for two-way dialogue, companies are rushing to get consumer interaction—even moreso than in the heyday of Bob Lutz. It is not uncommon these days for companies to have their advertising designed by consumers or even have their products designed by consumers.
In fact, based on what companies are doing, you might conclude that the need for strategy in a Web 2.0 world is being made obsolete. Why develop strategies, when all you have to do is whatever the customer says?
Although it can be insightful to learn what customers are thinking, the examples in the auto industry above point out that if you put too much power in the hands of the customers, it can actually destroy your business.
Just because we have new web tools to better interact with customers does not mean that customers have suddenly gotten any smarter or more insightful. They still say some silly things that could get us into serious trouble. All these new tools merely do is make it easier to fall into the trap of listening too closely to our customer to our own demise.
THE PRINCIPLE
The principle here is that strategies should incorporate many issues which transcend the interests or opinions of customers. If you limit strategy to merely the level of consumer interaction, we can end up making some self-destructive decisions.
The weaknesses of relying too much on consumer input can be summarized as follows:
1) Consumers Don’t Care If Your Business Survives
2) Consumers Can Only Interact Incrementally
3) Consumers are More Interested in Being Polite than in Being Honest
Each of these will now be discussed in greater detail.
1) Consumers Don’t Care If Your Business Survives
One of the chief goals of strategy is to provide a path to long-term prosperity (or at the very least a path to cash out of the business well). Consumers do not typically care about these things. They don’t worry about whether investors (shareholders, banks, hedge funds, etc.) get a return on their investment or whether the employees have prosperous careers. They just want what’s in it for them. And if they are honest, that means they want it all, they want it now, and they don’t want to pay for it.
Very few businesses can develop a sustainable business model around those qualifications. And guess what…in most cases, the customer doesn’t care if you business is sustainable. There are usually enough options that they will just go somewhere else to make their demands.
So if you single-mindedly try to please the customer by giving them whatever they want, and ignore your other stakeholders, you will typically end up with an unsustainable business model.
2) Consumers Can Only Interact Incrementally
Even if customers did care about the long-term viability of your business, they do not have the proper perspective to make long-term decisions. They do not know what is technologically possible. They have full-time jobs and concerns of the immediate. Consumers do not spend 40 hours a week thinking about the potential for where your brand and where it could go in the future.
As a result, consumers can only react incrementally to what is in front of them today. In the case of autos, they may be able to tell you to make them a little bigger or put in more cup holders, but they cannot help invent the future of personal transportation. Nobody was clamoring for a minivan before it was invented. They only clamored for it after a business put it on the market.
Most great business ideas are transformational—upsetting current conventions by providing something completely different than what was in the marketplace. These came out of the minds of visionary business people, not consumers. Nobody asked for the transformational coffee phenomenon of Starbucks, but now they are everywhere.
At Sony, they are proud to say that nobody ever asked for any of those great transformational inventions they have given us over the years. Instead, Sony’s great inventions came out of a deep understanding of consumer behavior (perhaps knowing people better than they know themselves) and a deep understanding of technological possibilities (for which consumers are unaware).
Incrementally, a consumer can suggest a new coffee variation for Starbucks or a new feature for a Sony computer, but beyond that, they are typically not much help. And if your company stays at only the incremental level in its thinking, your company will be passed by from other firms who are thinking transformationally, and who end up taking your customers with them (even though the customers did not ask for the transformation).
3) Consumers are More Interested in Being Polite than in Being Honest
When consumers are asked their opinions, they want to be helpful, but certain biases tend to creep into their responses to cause distortions. For example, there is a bias for consumers to say they will buy your product in your survey at a given price even if they would not, because they want to please you and encourage you. People don’t want to appear to be cheapskates, so they will tell you they are more willing to part with their money for something than they would in reality.
To quote an article in the May 18, 2007 Wall Street Journal, “The moment you ask someone for their opinion I have created a bias because of the natural human instinct to please.” Bob Lutz puts it more bluntly when he says “consumers often lie—albeit for the noblest of reasons.” Lutz’s point is that we tend to give very rational answers when being surveyed, because that is the “responsible” thing to do. Unfortunately, our true behavior is more likely to be driven by emotions.
So even if the consumer has our best long-term interest at heart and thinks about transformational issues, they may still give us answers that do not reflect their true intentions.
SUMMARY
Although consumers can tell us a lot of things, they cannot tell us what our strategy should be. If we let too much consumer commentary affect our strategic decisions, we will most likely miss the mark and allow others to take our business away, because these firms give the consumers what they really want, rather than what they say they want.
FINAL THOUGHTS
Web 2.0 technology is a great tool, just as a hammer is a great tool. But to build your strategic house, you need more than a single tool; you need the entire tool belt.
Sunday, May 20, 2007
Thursday, May 17, 2007
The Chisholm Trail
THE STORY
One summer, I drove the back roads through central Oklahoma. Quite a few of the cities along the way had museums dedicated to the Chisholm Trail. I visited several of these museums.
The Chisholm Trail was the path that cowboys used to move cattle from the south of Texas to Abilene, Kansas, back in the late 1800s. In Abilene, the cattle were placed on trains, where they were shipped back east for food. At its peak, nearly a million head of cattle took the Chisholm Trail to Abilene in a single year. As many as 5,000 cowboys a day would get their payday at the end of the trail.
With all of the books and movies and songs about the Chisholm Trail, you’d think that this phenomenon went on for decades and that cowboys made a lifetime career out of moving cattle up the trail. However, after going through several Chisholm Trail museums, I heard over and over again that it was a short-lived phenomenon. In fact, the original Chisholm Trail to Abilene was really only a major factor for four years—from 1868 to 1872.
The problem was that those same train tracks which made it possible to get the cattle to population centers of the east, were also the same train tracks which brought people from the east who wanted to settle in Kansas. These new settlers started up ranches, which they surrounded with barbwire fences, making it hard to get the cattle into Abilene. Then the new settlers started to complain that the Texas cattle were bringing diseases to their ranch livestock and that the rowdy cowboys were a bad influence on the community.
This started a phenomenon of pushing the trail further west every few years to an even more remote outpost, in order to get around the settlers who kept building further west. Eventually, the process ended completely when a rail line was built all the way to south Texas.
THE ANALOGY
Many things can immediately look like great ideas. Take, for example, the Chisholm Trail. At the time, cattle in the north and east cost over $40 a head. Cattle in Texas could be had for only $4 a head. Even though you needed to spend a bit of money to get the cattle to the north and east, you could still make a fortune on Texas cattle if you could find a way to get them to the population centers in a reasonable manner. This made the Chisholm Trail to the Abilene train depot look like a “no brainer.”
Unfortunately, those trains—which the cattle-drivers and cowboys saw as their means to a fortune—were also the means to their demise. The good news was that the trains sent the cattle east. The bad news was that the trains sent civilization west. The civilization pushing west would try to abolish the cattle drives, making them take ever longer and less profitable paths to get the job done. Eventually, those trains did the entire transportation directly from the south of Texas, making cattle-drivers and cowboys obsolete.
The same phenomenon often happens in business. Someone will come up with a new idea or new technology which immediately looks great. People will latch onto the new idea or technology thinking it will provide a lifetime of great profits. Unfortunately, over time people find out that these “good” ideas also come with some “bad” consequences. Many times, the bad can eventually outweigh the good, causing disastrous results instead of prosperous results over the long haul.
THE PRINCIPLE
This is the principle of “unintended consequences.” The idea is that we can often see the initial consequences of an action, which look great, such as the positive consequence for cattle-drivers of getting cattle to the Abilene train station. However, we often stop our examination with the initial consequence and do not look for the secondary and tertiary consequences. Many times, the secondary and tertiary consequences are not as favorable (like trains bringing back settlers, or trains eventually making the whole journey without cattle-drivers).
When the initial intended consequences are combined with all of the unintended consequences, what started out as a great idea may turn out to be a bad idea. Therefore, when building a strategy, always take time to fully test out its viability by looking for all of the possible unintended consequences which could arise out of your strategy.
Unintended consequences tend to come from one of three sources:
1) Your Competition
2) Your Customers
3) Yourself
We will look at each of these in detail.
1) Unintended Consequences From Your Competition
In an earlier blog (see “Bombs Start Wars”), we talked about the concept that if you come up with a strategy which starts taking significant market share away from competition, do not expect the competition to stand still. Instead, expect them to react in a manner to regain their market share. Depending upon the unintended consequences of how they react, your market share gains could be very short-lived and in fact you may end up in a worse situation than you were before.
The easiest example would be a strategy to lower prices in order to gain market share. At first, it sounds great. I lower prices. I gain market share from the higher-priced competition. I make more money.
Unfortunately, the competition may respond by resetting their prices below your new prices. This could start a nasty price war in which everyone eventually ends up with about the same share they had at the beginning, but far fewer profits, because the prices they charge are so much lower.
Another example would be if you go after taking share from a competitor’s most profitable product, and they respond with the unintended consequence of going after your most profitable product. You might gain a little more profit from your new venture, but not enough to make up for the losses on your formerly most profitable product.
Never assume that competition will stand still. Always factor in unintended consequences from the competition when you have a strategy which will hurt them.
2) Unintended Consequences From Your Consumers
Consumers are very crafty about finding ways to get the best value for their money. Sometimes, your initial actions, which you think will lead to getting more consumer money have the unintended consequence of leading to getting less of their money.
For example, let us assume that you are a retailer known for having consistently low everyday prices. You then decide that you can get some incremental business (and profits) by holding an occasional sale. At first, this works great. But then come the unintended consequences: eventually your consumers figure out that if they wait for a sale, they can get a better deal. So your everyday business goes down and your sale business goes up. In the end, you have about the same amount of business you had before, except that a greater proportion of it comes at the lower margin sale price. So in the end, all you have done is lower the amount of gross margin made at the cash register (due to selling more at the lower sales margin) while increasing your cost by adding the costs of running the sales. You are worse off than before.
Another example: gas stations thought they were providing a great service by allowing customers to pay for their gas right at the pump with a credit card. The hope was that customers would love the convenience and flock to the station (and they might buy a little bit more gas at each fill-up if they were buying it on credit). First came the unintended consequence that practically every competitor put in the same convenience, causing it to no longer be a unique differential to cause people to switch to you. The second unintended consequence came when customers who paid at the pump no longer came into the store to buy the high margin snacks and convenience items. So now, the gas stations were selling perhaps a little bit more of the low margin gas, but were selling less of the high margin convenience items. I’m not sure that provided a good return on the investment in those new gas pumps.
3) Unintended Consequences From Yourself
Sometimes we can be our own worst enemy and cause our own unintended consequences. For example, what we do favorably with one part of our product mix could hurt other parts of our product mix. This has happened to consumer electronics retailers, who in the desire to increase sales dramatically dropped the prices on their electronics products. When the prices dropped to so low, it made the extended warranties much less valuable. The extended warranties were providing most of the profits. Now the retailers are scrambling to find a replacement for the extended warranty profits.
Sometimes a company can destroy its own image. For example, if your firm is has a successful high-end fashion image and you think you can get some incremental profits by reaching out to a broader audience, you may end up destroying that image. The elite fashion taste-makers may no longer find your brand appealing, because it has lost its exclusivity. It may now be seen as to “common” to them, and the tastemakers could abandon you for a different brand. And when the tastemakers abandon you, the other eventually will as well and you will be left with nothing. The unintentional consequence of trying to appeal to a broader audience could leave you appealing to no audience.
SUMMARY
Almost every strategic action causes a change in the marketplace. Some of those changes are easily predictable. Others may be less obvious. The less obvious consequences of your change may be the most important ones. Try to discover these potential unintended consequences before embarking on your strategy. Otherwise, you may end up with undesirable, unintended results.
FINAL THOUGHTS
There are always unknowns when blazing a new trail, be it the Chisholm Trail or a new strategic trail. Just because you cannot predict all of the potential outcomes should not deter you from blazing the new trail. If you wait until everything is known, then it is often too late. However, one should never blaze a new trail blindly. Prepare yourself for unintended consequences in advance.
One summer, I drove the back roads through central Oklahoma. Quite a few of the cities along the way had museums dedicated to the Chisholm Trail. I visited several of these museums.
The Chisholm Trail was the path that cowboys used to move cattle from the south of Texas to Abilene, Kansas, back in the late 1800s. In Abilene, the cattle were placed on trains, where they were shipped back east for food. At its peak, nearly a million head of cattle took the Chisholm Trail to Abilene in a single year. As many as 5,000 cowboys a day would get their payday at the end of the trail.
With all of the books and movies and songs about the Chisholm Trail, you’d think that this phenomenon went on for decades and that cowboys made a lifetime career out of moving cattle up the trail. However, after going through several Chisholm Trail museums, I heard over and over again that it was a short-lived phenomenon. In fact, the original Chisholm Trail to Abilene was really only a major factor for four years—from 1868 to 1872.
The problem was that those same train tracks which made it possible to get the cattle to population centers of the east, were also the same train tracks which brought people from the east who wanted to settle in Kansas. These new settlers started up ranches, which they surrounded with barbwire fences, making it hard to get the cattle into Abilene. Then the new settlers started to complain that the Texas cattle were bringing diseases to their ranch livestock and that the rowdy cowboys were a bad influence on the community.
This started a phenomenon of pushing the trail further west every few years to an even more remote outpost, in order to get around the settlers who kept building further west. Eventually, the process ended completely when a rail line was built all the way to south Texas.
THE ANALOGY
Many things can immediately look like great ideas. Take, for example, the Chisholm Trail. At the time, cattle in the north and east cost over $40 a head. Cattle in Texas could be had for only $4 a head. Even though you needed to spend a bit of money to get the cattle to the north and east, you could still make a fortune on Texas cattle if you could find a way to get them to the population centers in a reasonable manner. This made the Chisholm Trail to the Abilene train depot look like a “no brainer.”
Unfortunately, those trains—which the cattle-drivers and cowboys saw as their means to a fortune—were also the means to their demise. The good news was that the trains sent the cattle east. The bad news was that the trains sent civilization west. The civilization pushing west would try to abolish the cattle drives, making them take ever longer and less profitable paths to get the job done. Eventually, those trains did the entire transportation directly from the south of Texas, making cattle-drivers and cowboys obsolete.
The same phenomenon often happens in business. Someone will come up with a new idea or new technology which immediately looks great. People will latch onto the new idea or technology thinking it will provide a lifetime of great profits. Unfortunately, over time people find out that these “good” ideas also come with some “bad” consequences. Many times, the bad can eventually outweigh the good, causing disastrous results instead of prosperous results over the long haul.
THE PRINCIPLE
This is the principle of “unintended consequences.” The idea is that we can often see the initial consequences of an action, which look great, such as the positive consequence for cattle-drivers of getting cattle to the Abilene train station. However, we often stop our examination with the initial consequence and do not look for the secondary and tertiary consequences. Many times, the secondary and tertiary consequences are not as favorable (like trains bringing back settlers, or trains eventually making the whole journey without cattle-drivers).
When the initial intended consequences are combined with all of the unintended consequences, what started out as a great idea may turn out to be a bad idea. Therefore, when building a strategy, always take time to fully test out its viability by looking for all of the possible unintended consequences which could arise out of your strategy.
Unintended consequences tend to come from one of three sources:
1) Your Competition
2) Your Customers
3) Yourself
We will look at each of these in detail.
1) Unintended Consequences From Your Competition
In an earlier blog (see “Bombs Start Wars”), we talked about the concept that if you come up with a strategy which starts taking significant market share away from competition, do not expect the competition to stand still. Instead, expect them to react in a manner to regain their market share. Depending upon the unintended consequences of how they react, your market share gains could be very short-lived and in fact you may end up in a worse situation than you were before.
The easiest example would be a strategy to lower prices in order to gain market share. At first, it sounds great. I lower prices. I gain market share from the higher-priced competition. I make more money.
Unfortunately, the competition may respond by resetting their prices below your new prices. This could start a nasty price war in which everyone eventually ends up with about the same share they had at the beginning, but far fewer profits, because the prices they charge are so much lower.
Another example would be if you go after taking share from a competitor’s most profitable product, and they respond with the unintended consequence of going after your most profitable product. You might gain a little more profit from your new venture, but not enough to make up for the losses on your formerly most profitable product.
Never assume that competition will stand still. Always factor in unintended consequences from the competition when you have a strategy which will hurt them.
2) Unintended Consequences From Your Consumers
Consumers are very crafty about finding ways to get the best value for their money. Sometimes, your initial actions, which you think will lead to getting more consumer money have the unintended consequence of leading to getting less of their money.
For example, let us assume that you are a retailer known for having consistently low everyday prices. You then decide that you can get some incremental business (and profits) by holding an occasional sale. At first, this works great. But then come the unintended consequences: eventually your consumers figure out that if they wait for a sale, they can get a better deal. So your everyday business goes down and your sale business goes up. In the end, you have about the same amount of business you had before, except that a greater proportion of it comes at the lower margin sale price. So in the end, all you have done is lower the amount of gross margin made at the cash register (due to selling more at the lower sales margin) while increasing your cost by adding the costs of running the sales. You are worse off than before.
Another example: gas stations thought they were providing a great service by allowing customers to pay for their gas right at the pump with a credit card. The hope was that customers would love the convenience and flock to the station (and they might buy a little bit more gas at each fill-up if they were buying it on credit). First came the unintended consequence that practically every competitor put in the same convenience, causing it to no longer be a unique differential to cause people to switch to you. The second unintended consequence came when customers who paid at the pump no longer came into the store to buy the high margin snacks and convenience items. So now, the gas stations were selling perhaps a little bit more of the low margin gas, but were selling less of the high margin convenience items. I’m not sure that provided a good return on the investment in those new gas pumps.
3) Unintended Consequences From Yourself
Sometimes we can be our own worst enemy and cause our own unintended consequences. For example, what we do favorably with one part of our product mix could hurt other parts of our product mix. This has happened to consumer electronics retailers, who in the desire to increase sales dramatically dropped the prices on their electronics products. When the prices dropped to so low, it made the extended warranties much less valuable. The extended warranties were providing most of the profits. Now the retailers are scrambling to find a replacement for the extended warranty profits.
Sometimes a company can destroy its own image. For example, if your firm is has a successful high-end fashion image and you think you can get some incremental profits by reaching out to a broader audience, you may end up destroying that image. The elite fashion taste-makers may no longer find your brand appealing, because it has lost its exclusivity. It may now be seen as to “common” to them, and the tastemakers could abandon you for a different brand. And when the tastemakers abandon you, the other eventually will as well and you will be left with nothing. The unintentional consequence of trying to appeal to a broader audience could leave you appealing to no audience.
SUMMARY
Almost every strategic action causes a change in the marketplace. Some of those changes are easily predictable. Others may be less obvious. The less obvious consequences of your change may be the most important ones. Try to discover these potential unintended consequences before embarking on your strategy. Otherwise, you may end up with undesirable, unintended results.
FINAL THOUGHTS
There are always unknowns when blazing a new trail, be it the Chisholm Trail or a new strategic trail. Just because you cannot predict all of the potential outcomes should not deter you from blazing the new trail. If you wait until everything is known, then it is often too late. However, one should never blaze a new trail blindly. Prepare yourself for unintended consequences in advance.
Wednesday, May 16, 2007
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.
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.
Monday, May 14, 2007
Psst...It's a Secret
THE STORY
Once upon a time, there was a businessman who made a lot of money. He was afraid that one of his nearby competitors would steal his money, so he buried the money in a hole on his business property and did not tell anyone where it was hidden.
The wealthy man thought that he was very clever. “Those competitors will never get the better of me now,” he said. “If I ever run into a little bit of trouble, I can just dip into my underground treasure. There’s enough hidden treasure to keep this company strong for generations. My children will never have to worry.”
Unfortunately, shortly after burying the treasure, the wealthy man died in an automobile accident. His children were not yet wise enough to run the business without him. When times of trouble came, they did not have any extra money to use because they did not know about the buried treasure or where it might be hidden.
As a result, the business eventually fell into bankruptcy. The children sold the business, at a huge loss, to one of the neighboring competitors, a person that the wealthy father hated, and one of the people he thought might steal his money (which was why he buried it in the first place).
After this competitor took over the business, he decided to renovate the property. He brought in some earthmoving equipment to build a new foundation. While digging, the equipment found the buried treasure. So, in the end nothing turned out like the wealthy man had planned. His business did not last for generations, and his competitor “stole” his money anyway.
THE ANALOGY
Sometimes, if we keep something too much of a secret, it can lead to ruin. Money is only useful for its ability to purchase something of value. If the money is never ever used, it has no real usefulness or value. The children of the wealthy man owned a great deal of money. Technically, they were wealthy people. However, because they were unaware of their wealth and unaware of how to tap into that wealth, it did them no good. Instead of living in wealth, they had a lifestyle of poverty.
Had their father been less secretive about his money, the children could have tapped into that money and put it to good use in saving the business. Instead, because they didn’t know what they had, they gave away the wealth to the competition.
Sometimes, businesses treat their strategy similar to how that wealthy businessman treated his treasure. They hide their strategy so the competition cannot get hold of it. Because they are afraid of it getting in the wrong hands, they don’t let it get into anyone’s hands. They don’t ever talk about it around employees or customers. It is protected as a highly valuable secret, buried away somewhere in a company vault.
The problem is that if nobody is aware of the strategy or how to tap into the value behind the strategy, it is as useful to the company as that buried treasure was to those children. For a strategy to have any value, it has to be used out in the marketplace. Just as those children couldn’t spend money they were unaware of, employees cannot implement and reap the benefits of a strategy they are unaware of. Customers cannot prefer your business if you hide from them the reasons why they should prefer it.
In the end, if you bury your strategy, you have taken the power of it away from your employees and the benefit of it away from your customers. As a result, that competition you were trying to keep the information from will end up winning anyway, because the strategy was never effectively used against them.
THE PRINCIPLE
The principle here is that strategies are most useful when they are widely discussed. Keeping them a secret robs them of their value. There are four key points related to this principle:
1) It’s Okay For Your Competition To Know Your Strategy
2) Employees And Customers Need To Hear The Strategy Often
3) Although Strategies Should Be Open To Public, Tactics Should Be Kept Private
4) If Your Strategy Is Nothing But Platitudes, Then Forget Point 1 Through 3 And Go Build A Real Strategy.
We will talk about these points in the context of the “Fast Fashion” strategy used by a handful of apparel retailers like H&M, Zara, and Forever 21.
1) It’s Okay For Your Competition To Know Your Strategy
A CEO once said to me, “You know how every once in awhile we somehow get access to ‘secret’ documents from other companies? Well, you can pretty much assume that those other companies are also getting some ‘secret’ documents of ours.”
The point is that in today’s digital age, it is fairly easy for some items to get into the wrong hands. It is almost impossible to hide everything. Therefore, unless you completely hide your strategy from everyone, including employees and customers, some of it will leak out, either through vendors or disgruntled customers, or former employees who start working for the competition. Therefore secrecy really is not an option, because it cannot be held secret.
To paraphrase a former boss of mine, “We should just mail our strategy to all of our competitors so that we can get rid of the suspense and get on with the business of executing the strategy.” The reason he could be that nonchalant about the strategy is that he knew that if your strategy is strong enough, it doesn’t matter if the competition knows what it is.
A strong strategy takes advantage of the unique position and strengths of your organization and builds an integrated approach so strong that even if the competition knew what your strategy was, they couldn’t copy it because it would take them years to figure out all of the intricacies behind it. Besides, because their starting position and their strengths are different than yours, they are not starting form a place which even makes the strategy most appropriate (or perhaps even achievable for them). By the time they could catch up to where you are today, you will already firmly own the position in the mind of the customer and have improved upon the model.
In fact, if a competitor knows your strategy and fears your power, they might respond by choosing an alternative strategy which is compatible and complementary to your strategy in order to avoid direct confrontation. That is a win-win for both companies.
As I mentioned in a prior blog, former Green Bay Packer Coach Vince Lombardi used to say that a team should execute its strategy so well, that even if the opposing team knows in advance every one of your plays, they could not stop it (see "Keep an Eye on the Ball").
In the case of the Fast Fashion strategy, the apparel retailers which use this strategy are successful because they have reinvented the supply in a new way, so that they have a constant supply of new, spot on fashionable goods comparable to the big designer labels at inexpensive prices. Rather than having about 5 new seasons a year, these retailers have 10 or more new seasons a year. Customers love it because there is always something new, current and exciting in the store and the prices are a great value. The retailers love it because customers come in more frequently to see the newness and they are more likely to pay full price, because the customers know the goods won’t be around very long before being replaced on the racks with something else.
It is okay that other retailers know this strategy, because just knowing the strategy does not benefit the competition. They do not know the secrets behind how to reinvent the entire supply chain to make it work. Even if they did, it would take them years to put it into place. And it would be so disruptive in the interim that their business would suffer short term. In addition, it might not be compatible with their other strategic goals to match this strategy. For example, if the competition is known for carrying the authentic designer labels, adapting this strategy could cause those labels to no longer sell to them, which might destroy decades of image building.
2) Employees and Customers Need to Hear this Strategy Often
For the Fast Fashion strategy to work, everyone in the company needs to be working in the same direction. There is no room for time lost due to misdirected activity. This is not a strategy that works in a vacuum. Everyone in the organization needs to know the strategic priorities around supply chain speed in order to pull it off. If the strategy is totally hidden, to protect it from the competition, how can the employees be rallied together around the principles and priorities of the strategy?
The same is true for the customers. If they are unaware that you are rapidly moving the inventory in and out, they will not frequent you more often. They will wait for a clearance sale and be disappointed when none of the goods they wanted made it to clearance. This will disrupt the sales side of the equation, causing the operational side to no longer be successful. The supply side reinvention only works when customers change to fast fashion buying patterns. The customers need to know the strategy in order to appropriately change their behavior to make the entire integrated strategy work.
3) Although Strategies Should Be Open To Public, Tactics Should Be Kept Private
It’s one thing for people to know that you have a Fast Fashion strategy. It is quite another thing for people to know the tactics behind how you reinvent the supply chain to not only be faster, but also less expensive. The Fast Fashion retailers all carefully guard their trade secrets around these tactics.
Even though tactics tend to appear as lesser and more mundane when compared to the broad strategy, in reality these little tactics are the crown jewels which need protection, not the strategy. As the old saying goes, the devil is in the details. Protect your tactical details and you protect your strategy from being mimicked. Coke spends a fortune telling everyone why they should love their product, but they never give away the tactics behind the secret recipe and how it is made.
4) If Your Strategy Is Nothing But Platitudes, Then Forget Point 1 Through 3 And Go Build A Real Strategy
If your strategy is a variation on some useless platitudes like “We strive to be leaders” or “We want to make a lot of money” or “We want to be a great company” then it really doesn’t matter who knows it. It doesn’t tell employees what to do or how to prioritize when making decisions. It doesn’t tell customers why they should prefer you. And it is irrelevant to competition. Heck, it is irrelevant in general. Get rid of it and form a real strategy (this topic requires it own blog).
SUMMARY
It’s okay to let everyone know your strategy. In fact, it is impossible to successfully implement a strategy if employees and customers do not know what it is. And if the strategy is a good one, it really won’t matter very much if the competition knows it as well. Just make sure to hide the tactics.
FINAL THOUGHTS
I’ve seen places where companies not only keep employees in the dark about their strategy, but about almost everything. The employee is not the enemy. Remember, the only thing that grows well in the dark are mushrooms.
Once upon a time, there was a businessman who made a lot of money. He was afraid that one of his nearby competitors would steal his money, so he buried the money in a hole on his business property and did not tell anyone where it was hidden.
The wealthy man thought that he was very clever. “Those competitors will never get the better of me now,” he said. “If I ever run into a little bit of trouble, I can just dip into my underground treasure. There’s enough hidden treasure to keep this company strong for generations. My children will never have to worry.”
Unfortunately, shortly after burying the treasure, the wealthy man died in an automobile accident. His children were not yet wise enough to run the business without him. When times of trouble came, they did not have any extra money to use because they did not know about the buried treasure or where it might be hidden.
As a result, the business eventually fell into bankruptcy. The children sold the business, at a huge loss, to one of the neighboring competitors, a person that the wealthy father hated, and one of the people he thought might steal his money (which was why he buried it in the first place).
After this competitor took over the business, he decided to renovate the property. He brought in some earthmoving equipment to build a new foundation. While digging, the equipment found the buried treasure. So, in the end nothing turned out like the wealthy man had planned. His business did not last for generations, and his competitor “stole” his money anyway.
THE ANALOGY
Sometimes, if we keep something too much of a secret, it can lead to ruin. Money is only useful for its ability to purchase something of value. If the money is never ever used, it has no real usefulness or value. The children of the wealthy man owned a great deal of money. Technically, they were wealthy people. However, because they were unaware of their wealth and unaware of how to tap into that wealth, it did them no good. Instead of living in wealth, they had a lifestyle of poverty.
Had their father been less secretive about his money, the children could have tapped into that money and put it to good use in saving the business. Instead, because they didn’t know what they had, they gave away the wealth to the competition.
Sometimes, businesses treat their strategy similar to how that wealthy businessman treated his treasure. They hide their strategy so the competition cannot get hold of it. Because they are afraid of it getting in the wrong hands, they don’t let it get into anyone’s hands. They don’t ever talk about it around employees or customers. It is protected as a highly valuable secret, buried away somewhere in a company vault.
The problem is that if nobody is aware of the strategy or how to tap into the value behind the strategy, it is as useful to the company as that buried treasure was to those children. For a strategy to have any value, it has to be used out in the marketplace. Just as those children couldn’t spend money they were unaware of, employees cannot implement and reap the benefits of a strategy they are unaware of. Customers cannot prefer your business if you hide from them the reasons why they should prefer it.
In the end, if you bury your strategy, you have taken the power of it away from your employees and the benefit of it away from your customers. As a result, that competition you were trying to keep the information from will end up winning anyway, because the strategy was never effectively used against them.
THE PRINCIPLE
The principle here is that strategies are most useful when they are widely discussed. Keeping them a secret robs them of their value. There are four key points related to this principle:
1) It’s Okay For Your Competition To Know Your Strategy
2) Employees And Customers Need To Hear The Strategy Often
3) Although Strategies Should Be Open To Public, Tactics Should Be Kept Private
4) If Your Strategy Is Nothing But Platitudes, Then Forget Point 1 Through 3 And Go Build A Real Strategy.
We will talk about these points in the context of the “Fast Fashion” strategy used by a handful of apparel retailers like H&M, Zara, and Forever 21.
1) It’s Okay For Your Competition To Know Your Strategy
A CEO once said to me, “You know how every once in awhile we somehow get access to ‘secret’ documents from other companies? Well, you can pretty much assume that those other companies are also getting some ‘secret’ documents of ours.”
The point is that in today’s digital age, it is fairly easy for some items to get into the wrong hands. It is almost impossible to hide everything. Therefore, unless you completely hide your strategy from everyone, including employees and customers, some of it will leak out, either through vendors or disgruntled customers, or former employees who start working for the competition. Therefore secrecy really is not an option, because it cannot be held secret.
To paraphrase a former boss of mine, “We should just mail our strategy to all of our competitors so that we can get rid of the suspense and get on with the business of executing the strategy.” The reason he could be that nonchalant about the strategy is that he knew that if your strategy is strong enough, it doesn’t matter if the competition knows what it is.
A strong strategy takes advantage of the unique position and strengths of your organization and builds an integrated approach so strong that even if the competition knew what your strategy was, they couldn’t copy it because it would take them years to figure out all of the intricacies behind it. Besides, because their starting position and their strengths are different than yours, they are not starting form a place which even makes the strategy most appropriate (or perhaps even achievable for them). By the time they could catch up to where you are today, you will already firmly own the position in the mind of the customer and have improved upon the model.
In fact, if a competitor knows your strategy and fears your power, they might respond by choosing an alternative strategy which is compatible and complementary to your strategy in order to avoid direct confrontation. That is a win-win for both companies.
As I mentioned in a prior blog, former Green Bay Packer Coach Vince Lombardi used to say that a team should execute its strategy so well, that even if the opposing team knows in advance every one of your plays, they could not stop it (see "Keep an Eye on the Ball").
In the case of the Fast Fashion strategy, the apparel retailers which use this strategy are successful because they have reinvented the supply in a new way, so that they have a constant supply of new, spot on fashionable goods comparable to the big designer labels at inexpensive prices. Rather than having about 5 new seasons a year, these retailers have 10 or more new seasons a year. Customers love it because there is always something new, current and exciting in the store and the prices are a great value. The retailers love it because customers come in more frequently to see the newness and they are more likely to pay full price, because the customers know the goods won’t be around very long before being replaced on the racks with something else.
It is okay that other retailers know this strategy, because just knowing the strategy does not benefit the competition. They do not know the secrets behind how to reinvent the entire supply chain to make it work. Even if they did, it would take them years to put it into place. And it would be so disruptive in the interim that their business would suffer short term. In addition, it might not be compatible with their other strategic goals to match this strategy. For example, if the competition is known for carrying the authentic designer labels, adapting this strategy could cause those labels to no longer sell to them, which might destroy decades of image building.
2) Employees and Customers Need to Hear this Strategy Often
For the Fast Fashion strategy to work, everyone in the company needs to be working in the same direction. There is no room for time lost due to misdirected activity. This is not a strategy that works in a vacuum. Everyone in the organization needs to know the strategic priorities around supply chain speed in order to pull it off. If the strategy is totally hidden, to protect it from the competition, how can the employees be rallied together around the principles and priorities of the strategy?
The same is true for the customers. If they are unaware that you are rapidly moving the inventory in and out, they will not frequent you more often. They will wait for a clearance sale and be disappointed when none of the goods they wanted made it to clearance. This will disrupt the sales side of the equation, causing the operational side to no longer be successful. The supply side reinvention only works when customers change to fast fashion buying patterns. The customers need to know the strategy in order to appropriately change their behavior to make the entire integrated strategy work.
3) Although Strategies Should Be Open To Public, Tactics Should Be Kept Private
It’s one thing for people to know that you have a Fast Fashion strategy. It is quite another thing for people to know the tactics behind how you reinvent the supply chain to not only be faster, but also less expensive. The Fast Fashion retailers all carefully guard their trade secrets around these tactics.
Even though tactics tend to appear as lesser and more mundane when compared to the broad strategy, in reality these little tactics are the crown jewels which need protection, not the strategy. As the old saying goes, the devil is in the details. Protect your tactical details and you protect your strategy from being mimicked. Coke spends a fortune telling everyone why they should love their product, but they never give away the tactics behind the secret recipe and how it is made.
4) If Your Strategy Is Nothing But Platitudes, Then Forget Point 1 Through 3 And Go Build A Real Strategy
If your strategy is a variation on some useless platitudes like “We strive to be leaders” or “We want to make a lot of money” or “We want to be a great company” then it really doesn’t matter who knows it. It doesn’t tell employees what to do or how to prioritize when making decisions. It doesn’t tell customers why they should prefer you. And it is irrelevant to competition. Heck, it is irrelevant in general. Get rid of it and form a real strategy (this topic requires it own blog).
SUMMARY
It’s okay to let everyone know your strategy. In fact, it is impossible to successfully implement a strategy if employees and customers do not know what it is. And if the strategy is a good one, it really won’t matter very much if the competition knows it as well. Just make sure to hide the tactics.
FINAL THOUGHTS
I’ve seen places where companies not only keep employees in the dark about their strategy, but about almost everything. The employee is not the enemy. Remember, the only thing that grows well in the dark are mushrooms.
Thursday, May 10, 2007
It’s Better to Consistent Than To Be Accurate
THE STORY
Awhile back I was working on a project with one of the world’s largest investment banking firms. My task was to create a model to predict the detailed monthly financials of a retail chain going out about 5 years into the future.
My team created a very complex model which taxed the extremes of the capability of an excel spreadsheet. This model was so complex, and involved the interplay between so many different inputs, that the output in any given month fluctuated around a bit.
These little fluctuations bothered the people at the investment bank. They wanted nice, smooth progressions in the numbers over time. Therefore, they scrapped the huge, complex (but fairly accurate) model and built a simplistic little ditty based on extrapolating a couple of metrics. It didn’t exactly tie to all of our detailed assumptions, but all the numbers moved in smooth progressions over time and it roughly matched the macro trends of the complex model.
What these investment bankers told us was that it was better to be consistent than to be accurate. So the simple little model won out over the complex one.
THE ANALOGY
Businesses are made up of hundreds of thousands of little tasks which come together to create the financial outcomes. In addition, there are probably just as many activities in the external environment which also impact one’s financials. Depending on how all of these activities come together, one will get different results.
Trying to model all of these events and accurately guess how they will play out in the future is an extremely difficult task. It is easy to get lost in the minutiae and lose site of the big picture.
The task of strategy is not to accurately predict all of the events of the future in great detail. The task of strategy is to provide enough insight into the future so that whatever decisions you have to make “today” will have enough futuristic context so that you can properly choose a path that will improve your condition over time. Additional details do not always cause additional insight. Sometimes, they just cloud the issue and make it more difficult to see the big picture (for more on this topic, see the blog “Too Many Clocks”).
Therefore, instead of using up valuable time in building extremely complex (but potentially more accurate) models, that time could be better spent in understanding the strategic implications of the big picture (which can be derived with a simpler model) and developing the right strategic alternatives.
THE PRINCIPLE
Strategists are in the business of selling—selling visions, selling ideas and selling alternatives. For example, if you cannot sell a vision of the future, then you cannot get consensus on what to do to improve yourself in the future. Facts are a key element in the selling process, but it is not the only element. Beyond a certain point, additional facts do not increase your persuasive abilities. Other issues also come into play. That is why it can be more important to be consistent than to be accurate. In particular, there are three principles which cause this statement to be true.
1) The Principle of Focus
2) The Principle of Credibility
3) The Principle of Large Numbers
These are discussed in more detail below.
1) The Principle of Focus
It is difficult enough trying to reach strategic decisions when people are focused on the right issues. It is virtually impossible if people are focused on the wrong thing. In selling a vision of the future, what you want is to have people focused on the key assumptions which would cause you to reach a different conclusion, depending on how you think the assumption would turn out.
For example, if you were trying to create a strategy in the health care industry, you might come to a different conclusion depending upon your assumptions around how active the government will be in managing health care in the future. Therefore, discussions around expectations of government involvement in health care management would be very important in developing your strategy.
If you produce data which looked like the data that came from the complex model I referred to earlier, your added accuracy would cause your numbers to have little wiggles in them over time. Your audience could get fixated on the wiggles and start asking questions about all the nuances in you model which caused the wiggles. Then your conversation would be side-tracked into all sorts of minutiae. The big issues, like how much the government will get involved in health care, could get squeezed out of the discussion.
Models are only representations of assumptions. Their goal is to help roughly quantify the direction and magnitude of the impact of an assumption on your business model. That way, you can see the impact of the assumption on your business and then make decisions which optimize under that assumption’s scenario. If your model is so complex that it clouds the impact of the assumptions, then the model is no longer useful in helping you make decisions. Rather than focusing your audience on the key assumptions, it gets them focused on “wiggles.”
In general, most key assumptions revolve around how you think an issue will trend—for example, will it get stronger, weaker, or stay the same over time. Since we tend to think of these assumptions in terms of smooth trends, then the model is more effective in helping us understand these assumptions if it also reflects consistently smooth trends. Again, the goal is not accuracy, but usefulness in making decisions. Consistently smooth trends help keep us focused on the assumptions and their general impact. That is typically enough information to make the right decision for today.
2) The Principle of Credibility
One’s ability to be effective at selling is directly related to one’s level of credibility. If your audience believes you have credibility, then you can be more effective in selling your visions, ideas and alternatives. Conversely, if you have no credibility, it doesn’t matter what you say or do, because nobody will take you seriously.
We are conditioned to believe that life tends to move rather consistently through time. If we think of our assumptions in consistent terms (e.g., things getting gradually better or gradually worse over time), we would also expect their impact to be consistent over time on the model. If your model does not have this type of consistency, it makes people question the accuracy of the model. Complex models with wiggles in them are difficult for people to understand. If the model is so complex that they cannot assess its accuracy themselves, they are less at ease and have to trust even more in your credibility. But if the wiggles cause them to think that there must be something wrong with the model, because “it doesn’t look right,” then you have lost your credibility.
It is better for your credibility to be a little less accurate in your modeling and create models with smooth consistency over time, so that the model appears more “believable” to your audience. As long as the simpler model does not distort the facts enough to come to the wrong conclusion, the simpler model will be a more effective selling tool.
3) The Principle of Large Numbers
The law of large numbers says that it is often easier to forecast an aggregate outcome of many factors than to forecast the all of the individual outcomes of every factor. This is true because there is often more variability in the outcomes of the individual components than in the outcome of total integrated unit. When you aggregate many parts together, the variabilities of the individual parts tend to offset one another. Because the offset, they reduce the variability of the whole.
For example, if you were a retailer trying to forecast your gross margin, it may be easier to forecast the aggregate gross margin for the entire company than to forecast the gross margin on every single item you might sell and then add all of the items up. This is because the variability on the gross margin for each individual item sold is much higher than the variability over time in the aggregate for the entire company.
Therefore, building a simple model that creates smooth consistent trends on a few key aggregate outcomes might actually end up being more accurate than a model which tries to forecast all of the individual components. Hence, by concentrating on consistency over accuracy, you might end up with better consistency AND better accuracy.
SUMMARY
Effective strategy building requires effective salesmanship. Better salesmanship (and hence better strategy) usually comes from simple models that are easy to comprehend and follow smooth trends. That is why it is more important to be consistent than to be accurate.
FINAL THOUGHTS
One of the problems we can often run into is trying to make too many decisions too soon. Frequently, some of the more tactical issues are better handled when delayed until closer to the time when the tactic must be implemented. By keeping strategic models relatively simple, it keeps discussions on the strategic level (where more lead time is needed) rather than getting into the tactics too soon.
Awhile back I was working on a project with one of the world’s largest investment banking firms. My task was to create a model to predict the detailed monthly financials of a retail chain going out about 5 years into the future.
My team created a very complex model which taxed the extremes of the capability of an excel spreadsheet. This model was so complex, and involved the interplay between so many different inputs, that the output in any given month fluctuated around a bit.
These little fluctuations bothered the people at the investment bank. They wanted nice, smooth progressions in the numbers over time. Therefore, they scrapped the huge, complex (but fairly accurate) model and built a simplistic little ditty based on extrapolating a couple of metrics. It didn’t exactly tie to all of our detailed assumptions, but all the numbers moved in smooth progressions over time and it roughly matched the macro trends of the complex model.
What these investment bankers told us was that it was better to be consistent than to be accurate. So the simple little model won out over the complex one.
THE ANALOGY
Businesses are made up of hundreds of thousands of little tasks which come together to create the financial outcomes. In addition, there are probably just as many activities in the external environment which also impact one’s financials. Depending on how all of these activities come together, one will get different results.
Trying to model all of these events and accurately guess how they will play out in the future is an extremely difficult task. It is easy to get lost in the minutiae and lose site of the big picture.
The task of strategy is not to accurately predict all of the events of the future in great detail. The task of strategy is to provide enough insight into the future so that whatever decisions you have to make “today” will have enough futuristic context so that you can properly choose a path that will improve your condition over time. Additional details do not always cause additional insight. Sometimes, they just cloud the issue and make it more difficult to see the big picture (for more on this topic, see the blog “Too Many Clocks”).
Therefore, instead of using up valuable time in building extremely complex (but potentially more accurate) models, that time could be better spent in understanding the strategic implications of the big picture (which can be derived with a simpler model) and developing the right strategic alternatives.
THE PRINCIPLE
Strategists are in the business of selling—selling visions, selling ideas and selling alternatives. For example, if you cannot sell a vision of the future, then you cannot get consensus on what to do to improve yourself in the future. Facts are a key element in the selling process, but it is not the only element. Beyond a certain point, additional facts do not increase your persuasive abilities. Other issues also come into play. That is why it can be more important to be consistent than to be accurate. In particular, there are three principles which cause this statement to be true.
1) The Principle of Focus
2) The Principle of Credibility
3) The Principle of Large Numbers
These are discussed in more detail below.
1) The Principle of Focus
It is difficult enough trying to reach strategic decisions when people are focused on the right issues. It is virtually impossible if people are focused on the wrong thing. In selling a vision of the future, what you want is to have people focused on the key assumptions which would cause you to reach a different conclusion, depending on how you think the assumption would turn out.
For example, if you were trying to create a strategy in the health care industry, you might come to a different conclusion depending upon your assumptions around how active the government will be in managing health care in the future. Therefore, discussions around expectations of government involvement in health care management would be very important in developing your strategy.
If you produce data which looked like the data that came from the complex model I referred to earlier, your added accuracy would cause your numbers to have little wiggles in them over time. Your audience could get fixated on the wiggles and start asking questions about all the nuances in you model which caused the wiggles. Then your conversation would be side-tracked into all sorts of minutiae. The big issues, like how much the government will get involved in health care, could get squeezed out of the discussion.
Models are only representations of assumptions. Their goal is to help roughly quantify the direction and magnitude of the impact of an assumption on your business model. That way, you can see the impact of the assumption on your business and then make decisions which optimize under that assumption’s scenario. If your model is so complex that it clouds the impact of the assumptions, then the model is no longer useful in helping you make decisions. Rather than focusing your audience on the key assumptions, it gets them focused on “wiggles.”
In general, most key assumptions revolve around how you think an issue will trend—for example, will it get stronger, weaker, or stay the same over time. Since we tend to think of these assumptions in terms of smooth trends, then the model is more effective in helping us understand these assumptions if it also reflects consistently smooth trends. Again, the goal is not accuracy, but usefulness in making decisions. Consistently smooth trends help keep us focused on the assumptions and their general impact. That is typically enough information to make the right decision for today.
2) The Principle of Credibility
One’s ability to be effective at selling is directly related to one’s level of credibility. If your audience believes you have credibility, then you can be more effective in selling your visions, ideas and alternatives. Conversely, if you have no credibility, it doesn’t matter what you say or do, because nobody will take you seriously.
We are conditioned to believe that life tends to move rather consistently through time. If we think of our assumptions in consistent terms (e.g., things getting gradually better or gradually worse over time), we would also expect their impact to be consistent over time on the model. If your model does not have this type of consistency, it makes people question the accuracy of the model. Complex models with wiggles in them are difficult for people to understand. If the model is so complex that they cannot assess its accuracy themselves, they are less at ease and have to trust even more in your credibility. But if the wiggles cause them to think that there must be something wrong with the model, because “it doesn’t look right,” then you have lost your credibility.
It is better for your credibility to be a little less accurate in your modeling and create models with smooth consistency over time, so that the model appears more “believable” to your audience. As long as the simpler model does not distort the facts enough to come to the wrong conclusion, the simpler model will be a more effective selling tool.
3) The Principle of Large Numbers
The law of large numbers says that it is often easier to forecast an aggregate outcome of many factors than to forecast the all of the individual outcomes of every factor. This is true because there is often more variability in the outcomes of the individual components than in the outcome of total integrated unit. When you aggregate many parts together, the variabilities of the individual parts tend to offset one another. Because the offset, they reduce the variability of the whole.
For example, if you were a retailer trying to forecast your gross margin, it may be easier to forecast the aggregate gross margin for the entire company than to forecast the gross margin on every single item you might sell and then add all of the items up. This is because the variability on the gross margin for each individual item sold is much higher than the variability over time in the aggregate for the entire company.
Therefore, building a simple model that creates smooth consistent trends on a few key aggregate outcomes might actually end up being more accurate than a model which tries to forecast all of the individual components. Hence, by concentrating on consistency over accuracy, you might end up with better consistency AND better accuracy.
SUMMARY
Effective strategy building requires effective salesmanship. Better salesmanship (and hence better strategy) usually comes from simple models that are easy to comprehend and follow smooth trends. That is why it is more important to be consistent than to be accurate.
FINAL THOUGHTS
One of the problems we can often run into is trying to make too many decisions too soon. Frequently, some of the more tactical issues are better handled when delayed until closer to the time when the tactic must be implemented. By keeping strategic models relatively simple, it keeps discussions on the strategic level (where more lead time is needed) rather than getting into the tactics too soon.
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