Analogy #162: Use Your Muscles

THE STORY
About three times a week, I work out vigorously at Bally Fitness. On a typical workout, I burn up about 1,000 calories on the elliptical machine, then do some weights for the upper body, and finally cool down by swimming about 10 lengths in the pool.

When I tell people this, I get odd looks from them as they consider how much I say I exercise and they look at the shape of my body. I don’t exactly look like a body builder. For modesty’s sake, I hide my muscles under a layer of fat.

However, for a person of my age, I’m in reasonably good shape. So the other day, my wife wanted to rent a U-Haul truck and bring a bunch of furniture to the house. Aha! A chance to show off my strength. But then she asked me to see if I could find some friends to do the furniture moving.

What’s the point of exercising if you never take advantage of the strength and endurance you build?

THE ANALOGY

I don’t particularly enjoy exercising a Bally Fitness, but I do it as a means to an end. I do it to have a healthier body, one that weighs less and is less susceptible to catching the cold or the flu. I also do it to give me better strength to do chores around the house. If the exercising did not have these benefits, I would stop doing it.

When my wife wanted me to have others haul the furniture, it made me feel a bit as if all that exercising was a waste of time. I had built up that strength and endurance, so why not use it?

Athletes exercise as well. They train for hours upon hours, building up muscles and endurance. Do they do this because they like to train? In most cases, no. The athletes train because it will make them perform better in their chosen sport. Similar to me, they do it merely as a means to an end.

What would you think as an athlete if you trained very hard but were never allowed to play in the game? What if you were told you had to sit on the bench for every game, and the coach would pick a fan at random out of the stands to play in your position? These fans don’t work out as hard as you do, but they get to play in the game.

Not only is that not fair, but it is foolish. Because you, as an athlete, have been in constant training, you are better equipped to play the game. There is more risk of something going wrong if you put an untrained fan into the game. Why would a coach want to take that added risk when there is someone far less risky sitting on the bench?

Going through the process of strategic planning is like exercise for the corporation. It helps build knowledge and insight. The more you exercise the “muscles” of strategic planning, the more knowledge and insight you will have. Yet, as we will see below, many firms keep strategic planning “on the bench” and make their toughest decisions without it.

What’s the point of having a strategic planning process if you do not apply the knowledge and insight? Why increase the risk of making a less than optimal decision by ignoring the skills you have sitting on the bench?

THE PRINCIPLE
The principle here is that strategic planning is not to be done because it is a nice thing to do. Getting a strategic plan developed is not the end in itself.

Just like exercise, planning is merely a means to another end. The primary purpose of doing strategic planning should be to reduce risk. The fate of one’s business has a lot to do with the quality of one’s decisions. Strategic planning can reduce the risk of making a weak decision because of the knowledge and insights it provides.

Unfortunately, businesses often do not take advantage of the risk reduction capabilities inherent in strategic planning. On many of the most important decisions, strategic planning is left on the bench.

Back in 2006, McKinsey & Company conducted a survey of business executives. They were asked a number of questions regarding their company’s use of strategic planning. What McKinsey found out was that most companies go through the “exercise” of strategic planning. In fact, more than three-quarters of the executives said their firm had a formal strategic planning process.

However, the study found that less than one quarter of the companies use their strategic planning process to make their most important decisions. Instead, typically top leaders just make the decision (often alone, but sometimes with a small senior group).

With strategic planning often frozen out of the decision-making process, it is no surprise that the study found that over half of the executives were not satisfied with their company’s approach to making strategic decisions. Conversely, the more that strategic planning was utilized, the greater the level of satisfaction.

The areas where executives were most dissatisfied with the decision-making appeared to center around:

1) Not enough alignment between individual decisions and the overall strategy.

2) Not enough monitoring of where a company is heading versus where the strategic plan
wanted it to go.

3) A lack of focus on what is truly important from a strategic perspective.

In other words, when strategic planning is left on the bench, decisions become isolated events. They are disconnected from any continuity to other decisions because there is little regard for any strategic context in the decision making. Without this strategic context, one can lose focus on the big picture and sub-optimize when making the decision.

With each decision sub-optimizing based on different criteria (lack of common focus), what happens is that instead of moving the entire company in the direction of the strategic plan, portions of the company are moving in all sorts of different directions.

This would not be so bad if a company had a process to monitor when a company gets off track on its strategy and a means to get back on course. Unfortunately, about one-third of executives in the McKinsey survey think their company lacks an effective method to monitor progress against the plan. In other words, not only are decisions often made in isolation from strategy, their outcomes are not measured against strategy.

This would be like making a flight plan, but once the airplane is in the air make every decision in isolation without referring to the flight plan. Then, on top of that, ignore the all the instruments on the airplane because you do not want to measure performance versus the flight plan. Under such circumstances, you would be lucky to actually land the plane safely. And if you do, I doubt you would end up at the destination placed on your flight plan.

Why take so many needless risks? Strategic planning can reduce these risks. Exercising is done for a larger purpose. If you are going to the trouble of doing strategic planning exercises, you may as well use those muscles to reduce the risk of making less than optimal decisions.

SUMMARY
Strategic planning should not be an isolated project which has no bearing on day-to-day decision-making. Instead, strategic planning should be integrated into all major decisions. By ignoring the strategy at the time when decisions are made, one increases the risk of sub-optimizing and not reaching one’s ultimate strategic goals.

Strategic planning reduces these risks by providing knowledge, a strategic context/focus, and a means to monitor effectiveness early enough to get back on course.

FINAL THOUGHTS
Some people build muscles just for show. That’s nice, but if I’m going to work that hard at getting them, I want to use them. Is your strategic planning department just for show or do you put those muscles to use?

Analogy #161: Buy My Food

THE STORY
My daughter spent many years in the Girl Scouts. As a result, I have many years of experience helping to sell Girl Scout cookies.

Back when my daughter was very young and a Daisy/Brownie scout, it was easy to sell those cookies door to door. People would see that sweet little 6 year old girl and be more than willing to buy cookies from her.

However, it seemed that as my daughter got older, the door to door selling became less productive. By the time my daughter became a teenager, it became a waste of time to go door to door. Apparently, people would much rather buy cookies from a cute little 6 year old than a 15 year old.

Therefore, as she got older, my daughter turned to other activities in order to raise money for Girl Scouts.

THE ANALOGY
Things change over time. Early successes do no imply that success will last forever. My daughter had early successes in selling Girl Scout cookies. However, over time, her success in selling cookies door to door diminished, until it was no longer worth doing.

Was it because my daughter became less capable of selling cookies? No. As she got older, she had more strength and stamina to walk to more doors. Also, she became less bashful and could make a better sales pitch.

Was her declining ability to sell door to door because nobody wanted to buy Girl Scout cookies anymore? No. The Girl Scouts still sell an enormous amount of cookies.

The problem was that my daughter matured from a little girl to a young woman. As it turns out, people are more sympathetic towards cute little girls and feel more inclined to buy from them. By contrast, it is easier to say no to a teenager.

Just as people mature, so do industries. Maturity/decline can reduce one’s potential. You may become more productive and more efficient over time (just as my daughter became better at selling skills over time). But being better at what you do does not automatically make your performance better. If the maturing industry is working against you, there is only so much you can do.

If you want growth, you may need to shift to a different (less mature) industry, just as my daughter had to shift to different fund raising strategies.

THE PRINCIPLE
The key principle here goes back to a prior blog where I quoted a study from McKinsey. That study said that if you want to be a high profit, high growth company, the best thing to do is become a company which sells high profit, high growth products (see “Dip Your Ladle in the Right Stew”). In other words, if you want success as a growth company, keep adjusting your portfolio to have products in growth industries.

We can see this by comparing two companies: Procter & Gamble (P&G) and Kraft Foods. In recent years, the business press has been far more glowing about P&G and far more critical about Kraft. Now there are a lot of reasons for this, but one major reason is because P&G did a better job keeping its portfolio centered in growth.

Both companies have a long heritage in food processing, stretching back over most of the 20th century. Both companies created or acquired strong, well known food brands with a large following.

However, the problem was that by the end of the 20th century, the food processing business was becoming highly mature. Some of the problems in maturity were the following:

1. It was harder to differentiate name brand food products from each other or from private label products. As a result, they were becoming more like commodities, which squeezes profitability.

2. The rapid growth from consolidating the industry was pretty much over. Instead of the big companies growing at the expense of little firms, they now had to battle each other for tiny share gains.

3. Discretionary spending was moving away from processed food to the restaurant industry.

4. Innovations were harder to come by, more rapidly copied, and smaller in scope.

Proctor and Gamble could see this coming, so they decided to transfer the portfolio out of industries that were less mature (like food) and into industries that were less mature (cleaning products, health care and beauty care). The facts were on P&G’s side. According to the US Economic Census, between 1997 and 2002, the value of shipments in food manufacturing grew only 8.6%. By contrast, home cleaning products grew at 16.2% and pharmacy/medical products grew at 53.7%.

So here is what P&G did to reduce its food portfolio:

1. Sold Duncan Hines cake mixes to Aurora Foods in 1997.
2. Sold Jiff peanut butter and Crisco to J.M. Smucker Co. in 2002.
3. Sold Sunny Delight to Sunny Delight Beverages Company in 2005.
4. Announced the intention of getting out of the Folgers coffee business in January 2008.

To get stronger in health care and beauty care, P&G did the following:

1. Purchased Richardson Vicks in 1985 (obtaining Vicks healthcare brands and Oil of Olay beauty products)
2. Purchased Noxell in 1989 (Cover Girl cosmetics and Noxzema)
3. Purchased Max Factor in 1991
4. Opened a health care research center in 1995
5. Got US FDA approval for its prescription drug Actonel in 2000,
6. Purchased Clairol in 2001
7. Introduced ThermaCare heat wraps in 2002.

During this same time, Kraft stuck to having basically a portfolio of food products. Even then, it was late and slow in adapting to the few areas of growth in food processing, such as organic and low cal.

As a result of this one simple difference in strategy, there is a big difference in performance. As you can see in the chart below, over the last seven months Kraft has struggled to try to keep its stock price up with the S&P 500. By contrast, P&G is performing much better than the S&P 500.


So what have we learned?

1. Don’t Just Rely on Being Better
P&G was pretty darn good at running food processing businesses, but they realized that doing an excellent job in a slow growing mature business doesn’t get you very far. More could be gained by migrating to a better industry, like health care or beauty care. It’s important to do well, but a strategy which only looks at improving execution may miss a greater opportunity that could come from shifting the product mix.

2. Get The Facts
There are many independent sources of information for determining if your portfolio is entering maturity/decline as well as point to industries on the way up. Earlier, I quoted the US Economic Census. Another great source is all of the data accumulated by Stern School professor Aswath Damodaran (look here). Understanding trends will allow you to maximize your portfolio within those trends.

3. Make a Choice
If the trends point to a need to shift, then make the choice of what to let go of and what to add on. But choose carefully. Just because an industry is growing does not mean you will do well there. Move into areas where you can add significant value. For example, in the case of P&G, they were experts at building strong national brands through mass channels. They applied that skill to health care and beauty care.

4. Make the Move
Although it may be difficult to sell off a product core to your history when it is still making money, remember this. It is easier to sell off something when it still is seen as strong by the buyer. Early action will make the sale quicker, at a higher price. In addition, the sooner you start the transition, the less pressure there is to hold a fire sale to dump old things or pay way too much to quickly get into the new things. A moderate pace, started early, allows for more rational decision-making. Rash moves are minimized.

Because Kraft waited longer, it may be more desperate in trying to quickly fix its portfolio mix. This may create less value-added in the transition.

SUMMARY
Being a good operator is nice, but operating in a good space may be even more important. The definition of what is a good space changes over time. Therefore, your portfolio may need to change over time.

FINAL THOUGHTS
My daughter couldn’t bring back the past make herself young again. She eventually had to leave the Girl Scouts and do what adults do. You cannot bring back the past, either. Get over it and move on.

Analogy #160: Hire My Strategy

THE STORY
One time I was interviewing a candidate for a real estate analyst position. The purpose of this job was to analyze potential new store sites to help determine the likelihood of success if a store were built there.

One of the key responsibilities for this person would be to fly out to potential markets and then drive around to observe the area. These drive-around observations would be used to help determine the quality of the site, the type of neighborhood it is in, and how easy it is to drive to the site.

Near the end of the interview process, the candidate for the position asked a question: “Do you think the fact that I am declared legally blind and unable to drive a car would cause any problems?”

Needless to say, this candidate was not hired for the job.

THE ANALOGY
Trying to land a new job is a lot like trying to land a new strategy. However, in the case of a strategy, one has to do it twice—once to convince the company to “hire” the strategy and once to convince the consumer to “hire” it.

In the story above, the candidate failed to get the job. Since there are usually far more people applying for a job then there are openings, most people who apply will fail. With such a high level of competition, one needs a good plan of attack in order to get hired.

Similarly, consumers usually have many choices of who to patronize. If your strategy does not resonate with them, you will fail to be chosen. Hence, you need a good plan of attack as well.

THE PRINCIPLE
In this blog, we will look at four key principles used by candidates looking for a job and apply them to landing a strategy with your company and your customers.

Principle #1: Make Sure there is a Fit Between Capabilities and Qualifications
One of the best ways to increase your chances of getting a job is by having a close match between your capabilities (what you are good at) and the job’s qualifications (what they are looking for). The tighter the fit, the better the odds of getting the job.

In the story above, there was not a good fit. The job was highly dependent on strong observational skills and the ability to drive well in unfamiliar markets. Unfortunately, the capabilities of the candidate did not match up well to these qualifications. He was legally blind and unable to drive.

Now you may be saying to yourself, “Why would somebody so mismatched even apply for the job?” Yet it is not that uncommon for companies to do that with their strategies.

For example, let us suppose that the market leader in your industry is winning based on a low cost strategy. You might then conclude that a low price strategy is the ideal strategy for your industry and embark on building a low price strategy for your company.

However, your situation may be hampered by the fact that your company is not a low-cost operator. In fact, the market leader has such a cost advantage that you are not even close and could not catch up, let alone surpass them in low cost efficiency. At best, you will be inferior to the entrenched leader on price.

In such a case, your ability to land a low price strategy in the marketplace would have about as much a likelihood of success as a blind person applying for that real estate analyst position. The company should not even be trying to “apply” for that strategic position based on low price. Instead, it should have applied for a strategic position closer suited to its capabilities (Service? Quality? Convenience? Uniqueness?).

If you want to land your strategy, people (both internally and externally) must believe that the company has the capabilities to be the best at delivering what the strategy promises. Then, once you land the strategy, one has to deliver on the promise in order to keep the position. Therefore, only seek out strategic options where you have a chance of actually achieving superiority.

Principle #2: Keep the Resume Clear and Concise
Experts in the field will tell you that there are so many resumes out there, that there is not enough time for recruiters to analyze them all in detail. At best, you only have a few seconds to get your point across. If the recruiter cannot figure out who you are (based on your resume) in a few seconds, your resume is tossed out. Hence, the mandate is to make your resume clear and concise.

The same can be said about a business’ vision/mission/business statement. If it takes more than a few seconds for a person to figure out what you stand for based upon one of those statements, then you have lost the battle. You will be tossed out.

As mentioned in a prior blog (see “Play it Backwards”), fuzzy statements filled with vague platitudes are worthless in pointing out who you really are and what you are trying to accomplish. That makes them too hard for the internal troops to execute and too hard for the customers to embrace.

As marketing guru Al Ries likes to point out, successful companies can get the essence of their position down to a word (or two). For example:
Wal-Mart = Low Price
BMW = Ultimate Driving Machine
Apple = Cool Design
Disney = Family Fun

Can you boil your winning strategy down to a handful of words?

Principle #3: Look the Part
When you go in for an interview, rest assured that the interviewer will not only be paying attention to the words you say. He or she will also be paying attention to how you look. There’s a reason why experts recommend going to the interview in your best outfit, with shoes shined and hair cut.

To get the part, you need to look the part. If you look like a bum, you will be thought of as a bum (regardless of what you say), and few people want to hire a bum.

The same applies to your strategy. It is not just words on a piece of paper. It is the way you interact with all of your stakeholders. To be accepted as having a strategy of quality and service, everything you do must have the appearance of quality and service. Looks need to mirror strategy.

One of the keys to success for the Four Seasons hotels is the fact that everything you see reinforces the position of quality and service. Sometimes quality can be hard to scientifically calibrate as a consumer, because you cannot see all of the workings behind the scenes. Therefore, you look for visual cues to fill in the blanks. Therefore, make sure those visual cues shout out the message that reinforces the strategy.

When the warehouse club concept was first taking off, they sometimes put their stores in previously occupied buildings. I know of instances where the warehouse club operator spent extra money to covert a nice interior to something that appear cheaper in order to give the appearance of a better value.

Similarly, I know of a supermarket operator who did studies and found out that paying baggers to bag your groceries was as cost efficient as having the customer bag their own (since they were faster, so you could have fewer checkout lines). However, the company did not hire the baggers because it would create the appearance of being higher priced, even though it was not higher priced in reality.

Target is currently suffering in this recession, because its appearance in stores and advertising make it appear more expensive than it really is. In reality, Target’s prices are only about 1 or 2% higher than Wal-Mart on comparable items. Yet their appearance makes that gap seem larger.

Principle #4: Get Frequent Exposure
Job hunting experts will tell you that you need to keep your name in front of the hiring influencers. Don’t just send a resume. Also follow up with phone calls. After the interview, follow up with letters and phone calls.

Headhunters can easily forget who you are over time. Therefore, you need to put reminders in front of them on a periodic basis.

The same is true of strategy. If you only pull out the strategy once a year and then put it back on the shelf, it will not become ingrained into who you are and what you do. The essence of the strategy needs to be a part of the everyday conversation. The strategy will be forgotten if there are not frequent reminders.

SUMMARY
Landing a strategy is like landing a job. If you want your strategy to be successful, use the same principles as in job hunting: fit job/strategy to capabilities, have a concise resume/mission statement, look the part, and get lots of exposure.

FINAL THOUGHTS
Once you land a job, the work is not over. You need to keep building your skills and looking for ways to advance your career. Similarly, the job does not end once the strategy is crafted. You need to keep building on your strategic strengths and leveraging your position.

Analogy #159: Choosing Your House

THE STORY
When it comes time to choose a house, my wife and I have a problem. She is allergic to new houses and I am allergic to old houses.

More specifically, my wife is allergic to many of the chemicals used in modern home product manufacturing, like formaldehyde (which is in a lot more products than you would first imagine). I, on the other hand, am allergic to certain molds and dust, which are common in many older homes.

Of course, the current housing crisis is making everyone a little sick to their stomach.

THE ANALOGY
Choosing the place where you live is an important decision. You don’t want to end up in a place where you are sick all of the time.

The same is true of businesses. You don’t want to position your business to be operating in places where performance will be continually sick.

Different people have different tolerances. I can tolerate the problems that come with new home construction. My wife can tolerate the problems that come with older homes.

This is similar to business lifecycles. Business problems are different depending on the age, or stage in the lifecycle. Business startups, for example, are different from mature firms. Rapid growth provides different challenges than businesses in decline.

Some business cultures, or management styles, are better suited to particular stages in the lifestyle than others. A manager, for example, may be very good at starting up new businesses, but miserable at managing through a decline phase. In a sense, that manager is “allergic” to decline-phase businesses, just as I am allergic to musty old houses.

A company is far more likely to be successful if it chooses places to live that avoid their allergies. Therefore, strategies should take these natural allergies into account when decided which businesses to live in.

THE PRINCIPLE
There are four key principles related to finding the right house for your company.

1) Understand Your Allergies
You cannot avoid your allergies if you do not know what they are. Take the time in your planning process to understand your strengths and weaknesses. And when you are discovering your weaknesses, get specific.

For example, I said earlier that my wife is allergic to new houses. More specifically, she is allergic to many of the chemicals used in new construction, like formaldehyde. An all-natural new home, like a log cabin, would be something my wife could tolerate. Similar for me, I said I was allergic to old houses, but specifically I am allergic to certain molds that can form in old houses. If a house was well maintained and the humidity controlled, then an old house wouldn’t bother me.

The more you know about the specifics of your weakness, the more you can plan around it or compensate for it.

2) Avoid Toxic Houses
In general, a company will best succeed if it goes with its strengths. Therefore, your corporate portfolio should be skewed towards businesses in the portion of the life cycle you are best at. For those portions of the life cycle you are not suited for (your allergies), avoid them in your portfolio.

For example, let’s say your strength is in knowing how to squeeze more profits out of a mature business and your allergy is in start-ups. Now there may be a great opportunity in some new start-up industry. You may see a lot of your friends investing in this new business. You may say to yourself, “This is a great new opportunity. I should invest in it.”

However, if this is not an area of your strength, such a move could be a disaster for you, even if it is a success for others. Because your natural inclination is to squeeze profits out of a company, you might destroy your start-up my asking it to be too profitable, too early, and starve it of the necessary start-up capital. And even if you can nurse it along, there will be others in this start up industry who are much better at it. In the long run, only a small percentage of the people who enter a start-up industry are truly successful. I would bet that the ultimate winners would tend to be those who have natural strengths at doing start-ups.

Just because a new house may be wonderful for me, it doesn’t mean that it is wonderful for others. It might be toxic for my wife. You have to discover which houses are toxi for you, and then avoid them.

3) Minimize the Threat
In a perfect world, you may be able to avoid all toxic houses. In reality, you may end up with a few, anyway. What to do? In the case of house allergies, I can take an anti-histamine. What is the equivalent in business? It is delegation and separation.

When IBM wanted to get into the pc business, it knew that its core business was allergic to this type of a start-up and that the normal culture would kill it. Therefore, it used delegation and separation. The team given the task of developing the PC was placed in a remote location where the rest of the business would not interfere. Power was delegated to this team so that they could do the start-up the right way, rather than the IBM way. If this had not been done, the PC would never have come out of IBM.

Different phases in the lifecycle have different needs and different challenges. If you try to treat them all identically, you will not be optimizing the performance at each phase. Therefore, if you portfolio has a mix of businesses in different stages, separate them and manage them differently. Back in July of 2007, I did a series of blogs on these differences (see “Same Title, Different Job,” “Management By Yelling,” “Management By Dreaming,” and “Management by Growing”). It would be wise to understand these differences when dealing with the different phases of the lifecycle.

4) Be Prepared to Move
In my case, I may be able to tolerate a new house, but as the house gets older, I may not be able to tolerate that house as much any more. It’s the same house. What has changed is that the house aged. With the aging came a growth of mold which I am allergic to. At some point, it may make sense for me to sell the house and move to a newer house again.

The same thing can happen in business. You may be great at running a small start-up. However, your success could end up creating a large, mature business which you are not well suited to running. Your business moved from your comfort zone into a place where you are allergic. What to do?

One thing you can do is replace management with a team better suited to the new environment. I have great respect for what Dave Thomas did at Wendy’s. When his company evolved to a certain point, he realized that it was entering a phase to which he was allergic. Therefore, he voluntarily stepped down from leadership and handed the company over to management better suited to the new environment.

The other thing you can do is sell the business. There are many people in the high tech dotcom space who are good at starting businesses, but not running them once they become big and bureaucratic. Therefore, they tend to sell the businesses and then go and try their hand at another start-up.

GE is strong with late growth/early mature businesses. When businesses look like they are going into late maturity/decline, they sell them. When they are looking to replace these businesses, they typically don’t start from scratch (where they are allergic), but instead buy established businesses entering the phase they are best at.

It is not a mark of defeat to admit that a business has moved into a phase where you are allergic. It shows that you are smart enough to know when change is the right thing to do.

The worst thing you can do is ignore the inevitable. Business will move through the lifecycle, whether you want them to or not. In today’s environment, the movement through those phases seems to be accelerating. To not include this in your plan is a travesty, because it robs you of the opportunity to properly prepare for all of the changes which come with moving to a new phase in the life cycle.

According to a survey which the Sage company did in Ireland, 53% of the businesses did not have a plan for moving their business to the next stage in the life cycle. Just as it takes time to move to a new house, it takes time to change management or get your business prepared to be sold. This should be a part of your overall plan if your company is moving into toxic territory.

SUMMARY
Business units progress through various stages of a lifecycle, from start-up to growth to maturity to decline. Each stage has different challenges. Your company may be much better at some stages than others. This should be accounted for in your planning process, so that you can take advantage of your strengths and avoid your weaknesses.

FINAL THOUGHTS
As people age, we try to fool ourselves and others through plastic surgery, makeup, hair pieces, hair dyes, etc. We can try to do the same thing with businesses and try to put on a show that we are still a growth company, even when we are no longer in the growth phase. The tricks might fool a few, but eventually living in denial of the truth will hurt you.

Analogy #158: It’s in the Bag

THE STORY
I love those brown paper bags from the supermarket. When I was a young child, they were my favorite toy. I liked to cut them open, lay them out flat and draw miniature cities on them. Then, I’d get my little toy cars and run them up and own the streets. Other times, I’d draw a board game on the back and try to get my sister to play the new game with me. You could also turn the bag into a mask.

When I got a little older, I used the brown grocery bags to cover my school books. They were great. Not only did they protect my books, but they gave me lots of space to doodle on.

As I became an adult, the bags were very handy for covering packages that I wanted to mail. I also loved to use them when packing for long car trips, because the bags wouldn’t tip over.

Now, I use the bags to sort out my recyclable bottles and cans. When the supermarket asks me if I want paper or plastic, I usually say paper, because paper bags have so many more uses around the house. Sometimes, however, I get the plastic bags because my cat likes to sleep on them.

ANALOGY
From the point of view of the supermarket, the bags are nothing more than a cost to be minimized. Plastic bags are cheaper and more efficient for the baggers, so that’s what they want to use.

For me, those bags are a valuable resource around the house. Sure, they help me get the groceries home. But after that, I still find additional uses for them. That’s why I tend to prefer the paper bags.

So there is a disconnect on perception regarding the bags. The store sees it as a cost, while I see it as a valuable resource. This explains why they push plastic while I prefer paper.

Perceptions can impact all sorts of strategic decisions. Depending on how we perceive something, we will make different strategic decisions. If something is perceived as a cost, the attempt will be to minimize it or eliminate it. However, if we look at the situation differently, we may see a new source of value within that cost. Now, instead of trying to eliminate the process, the goal is to extract a monetary return out of that newfound value.

THE PRINCIPLE
The principle here is that strategic planning needs to do more than just examine the current sources of profit. Concurrently, a good strategic plan should look for additional profit sources within the system. Often times, things that are currently perceived as burdensome costs could actually be untapped sources of profit if we were just to look at them a little differently. For example, if you want a valuable bag when shopping for groceries at Aldi, you have to pay for it.

Since “burdensome costs” would be treated differently in a strategy than “untapped sources of profit,” it is important that we label things properly when creating our strategy. With “untapped sources of profit” sounding a lot more desirable than “burdensome cost,” it may be worth your while to ponder ways to convert costs into profits.

In this blog, we will look at a few examples of this principle in action.

Example #1
Australians drink a lot of beer. In the process of brewing beer, a waste product is developed, called a yeast extract. At first, this would be seen as a wasteful byproduct of brewing—something costly to dispose of. Fred Walker, however, looked at the situation differently.

Fred realized that this yeast extract had nutritional value. It is extremely concentrated in B vitamins. The trick was to find a way to exploit this hidden value in the waste product. So, in 1923, Fred’s chief scientist, Dr. Cyril P. Callister, added a few ingredients and converted the yeast extract into a sandwich spread. It was named Vegemite.

In the 1930s Fred Walker’s company teamed up with Kraft Foods and really started to promote Vegemite. In the 1940s, Vegemite was a key part of an Australian soldier’s rations. There are songs and poems about Vegemite. Australian children get in the habit of eating it at a very early age.

Today, over 22 million jars of Vegemite are sold by Kraft every year. That is more than one jar a year for every man, woman and child in Australia. So much for yeast extract being a wasteful byproduct.

Example #2
Tyson Foods is one of the world’s largest meat processors. In the process of preparing meat, a lot of byproduct waste is produced. Much of that waste is in the form of meat fat. Instead of just viewing this as a wasteful cost to be disposed of, Tyson Foods looked for a way to make this fatty byproduct more valuable.

What they discovered was that ConocoPhillips had found a way in Ireland to convert fat into fuel. Therefore, on April 16, 2007, Tyson announced an alliance with Conoco Phillips to convert their fatty by-product into biodiesel fuel.

The expectations are that by 2009, this byproduct will produce 175 million gallons of biodiesel per year. That would represent about 3% of the diesel produced by ConocoPhillips in the US.

Later, on June 25, 2007, Tyson Foods made another announcement. They had formed a 50/50 joint venture with Syntroleum, a synthetic fuels technology company. The new venture, called Dynamic Fuels LLC, would use the byproducts from Tyson to create diesel, jet and military fuel.

The first facility would produce about 75 million gallons of synthetic fuel annually. Construction would start in 2008 and fuel production would begin in 2010.

By using a new set of eyes, Tyson has converted its fatty waste into usable fuel. Their new strategy has allowed them to diversify from food processing into renewable energy development.

Example #3
On any given day, Wendy’s fries a lot of hamburgers. If a meat patty is left on the grill too long, it starts to get dry and hard—unsuitable for use as a hamburger. Sometimes, Wendy’s will fry up more than they can sell, creating this unsuitable hamburger meat.

So what do you do with this waste, throw it out? Looking at this situation differently, Wendy’s converted this cost into a profit center. They found a way to remoisten the meat by putting it into a chili sauce. Now, instead of having to throw the meat away, they have another profit center, Wendy’s Chili. This was then extended into even more profit centers by putting the chili on baked potatoes and salads.

Example #4
There was a period of time when HEB Supermarkets in Texas had a reputation for running a state-of-the-art information technology department. HEB was always getting requests from other firms who wanted to tour their IT facilities. Eventually, HEB decided to charge a fee for these tours. Then they started to do a little IT consulting for other firms at an even higher fee. It may not have amounted to a lot of money, but it helped subsidize the IT department and helped HEB continue to afford to be state-of-the-art.

Example #5
One of the biggest costs for McDonald’s is real estate. The rent cost on all of those restaurant sites is huge. So the question is—how can McDonald’s convert that cost into another profit center?

Well, those restaurants tend to be in places near a lot of houses and a lot of people. Not only is there a lot of demand for burgers in these locations. These are also places where cell phone usage demand would be high. However, these also tend to be neighborhoods where the local folks do not want to see ugly cell phone towers near their houses.

So, McDonald’s pondered this concept—could we design our restaurants in such a way that you could hide a cell tower in them that would not create an eyesore? AT&T is supposedly working with McDonald’s on this solution. The upside potential for McDonald’s in collecting fees from AT&T is enormous.

SUMMARY
One of the objectives of strategic planning should be to help executives take a fresh look at the business. By doing so, one may find that items which today are seen as burdensome costs can actually be new sources of profit. These types of discoveries can help create new strategies for growth and expansion that would otherwise have been missed. The beauty is that because these new ventures are already related to your core processes (and often turn waste into profit), the returns should be fairly good.

FINAL THOUGHTS
This idea of turning waste into profits plays well with the green movement. Therefore, not only may you find new sources of profit, but you may also improve your image as a green citizen. What more could you ask for?