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

THE STORY

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

 

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

 

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

 

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

 

THE ANALOGY

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

 

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

 

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

 

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

 

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

 

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

 

THE PRINCIPLE

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

 

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

 

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

 

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

 

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

 

1. Dr. Diagnosis

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

 

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

 

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

 

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

 

2  Dr. Doom

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

 

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

 

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

 

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

 

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

 

SUMMARY

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

 

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

 

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

 

FINAL THOUGHTS

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

Strategic Planning Analogy #244: Identify Vs. Indemnify

THE STORY
How would you like it if your next doctor visit went like this?

Doctor: “According to this thermometer, you have a high fever. Don’t you know that high fevers are bad for you? Why would you go and get a high fever if you knew that fevers are bad?”

You: “I didn’t do it intentionally. I just woke up this morning feeling ill, so I came to you for help.”

Doctor: “Well my advice to you is to get rid of that fever. Until you get that temperature down to acceptable levels, you will continue to be sick.”

You: “But Doctor, how do I get rid of the fever?”

Doctor: “It’s your body. You figure it out.”

That kind of doctor we can do without.

ANALOGY
As worthless as that doctor discussion was, I’ve heard discussions similar to it take place in businesses. They go something like this…

Business Advisor: “According to this financial report, you have low sales. Don’t you know that low sales are bad for profits? Why would you go and let sales deteriorate so much if you knew that low sales are bad?

CEO: “I didn’t do it intentionally. The financials just seemed to go bad quickly, so I came to you for help.”

Business Advisor: “Well, my advice to you is to increase your sales. Until you get sales back up to acceptable levels, you will continue to have problems.”

CEO: “But Advisor, how do I get sales to rise?”

Business Advisor: “It’s your company. You are the expert, the CEO. You figure it out.”

This business advisor is no more useful than that doctor.

THE PRINCIPLE
The principle here has to do with the difference between the ability to “identify” and to “indemnify.” Both the doctor and the business advisor could identify a bad symptom (fever, low sales). Big deal. I’m pretty sure the patient knew he/she was feverish before seeing the doctor, and I’m sure the CEO already knew sales were low.

Worse yet, not only was the identification redundant, it didn’t lead to a cure. Identification of a problem is not the same thing as curing it. The doctor and the business advisor basically said “fix it yourself.” That’s pretty worthless advice.

If you want to be a useful business advisor, you need to go beyond being able to identify. You need to be able to indemnify.

According to the dictionary, indemnify has two meanings. The first has to do with insuring against future problems. The second has to do with trying to make things whole after a problem has occurred. If you want to be a useful strategic advisor, you should be providing concrete action plans in both of these areas.

1. Insuring Against Future Problems
People typically don’t just get sick. There is usually some underlying cause. Many illnesses come about due to bad eating habits and poor lifestyles. It was recently determined that even your risk of cancer increases when you overeat.

By the time the fever shows up, damage has already occurred. It would have been better if the person had been eating better, exercising more, and taking better care of themselves in advance. A good doctor would have been urging this better behavior, in order to prevent future diseases.

The same is true for business advisors. Getting companies to behave better now can help prevent a lot of bad outcomes in the future. Good eating habits are a lot like good investing habits. Are you feeding your development pipeline with lots of good projects in various stages of development? Starving the pipeline (bulimia) or stuffing all the money into your pockets as profits or bonuses (binging) will not provide long-term business health.

Eventually, the current profit machine will weaken. If there is nothing in the developmental pipeline to replace/supplement it, the company gets “sick.” A proper balanced investment diet is needed, which provides some near-term profits and some long-term investments.

Companies can also get fat and lazy, assuming that the current profit stream will go on forever—all by itself. However, as we saw in a prior blog (“Oh, My!”), all profit streams eventually go dry. We must continually exercise the company so that it can be nimble enough to react quickly to changing conditions.

Organizational structure and internal processes are fair game for strategic discussion, since unhealthy structure/processes can cause later financial diseases.
Is the business lifestyle sufficiently consumer oriented? As we saw in the last blog, ignoring the consumer eventually leads to financial illness as well.

When times were good, bad business habits were allowed to fester. But as we can see in the current poor economic environment, the weak are not surviving. It’s never too early to put in place good business behavior. Are you benchmarking to learn what healthy behavior looks like?

2. Make Things Whole After a Problem Occurs
Try as we might, we cannot prevent every disease. Business problems will occur. We need to do better than the advisor who just points it out. We need strategies that provide practical solutions to the problem.

Yes, we need our various business “thermometers,” which show us where the operational fever is. But once we identify the symptoms, we need to determine the core illness and help management provide a prescription for a cure.

In the current economic downturn, I have heard many people accurately assess the problem (“Our results are negatively impacted by the economy.”) but not everyone has a prescription to fix the problem. Abercrombie and Fitch tried to hold steady and wait out the recession. That hasn’t worked too well. There need to be action plans which try to make us whole again (or at least better than if we do nothing).

Strategists and business advisors need to get their hands dirty with the nitty gritty of the business. Lofty business missions and position statements go only so far. They are like maps, showing where you want to go. Just because you own a map of Paris does not mean you’ve successfully gotten to Paris. You still have to make the journey. After handing off the map, the strategist can’t walk away saying “job done.” There will be road blocks and detours along the way, requiring the strategist to help redraw the route.

Problems are going to happen. Course corrections will be needed to get back on track. Stay in the game, to help with the corrective action.

SUMMARY
Although the identification of issues is important, they are worthless if no action is taken to correct or prevent the problem resulting from these issues. Strategists can help a company avoid problems in the first place by helping a firm adopt healthy business habits. Second, they need to stick around to help develop specific corrective courses when problems occur.

FINAL THOUGHTS
Many financial “thermometers” are backward-looking. They tell us how sick we were in the past. It’s not very useful to give the doctor last month’s temperature. By the time we get the data, it is too late to stop the damage. Try to find leading indicators.

Strategic Planning Analogy #243: Buy My Goods

THE STORY
Imagine, if you will, that you are walking down a city street and encounter a street vendor selling his wares. The Vendor says, “Buy my goods.”

You respond, “Why should I buy it?” The Vendor replies, “So that I can make my sales quota.”

Confused, you ask the Vendor, “But what does your product do?” The Vendor replies, “It provides income to myself and my family when I sell it to people like you.”

A bit baffled by his answers, you ask yet another question, “Is it better than the competition?” The Vendor replies, “It is for me, because I don’t make any income off the competition.”

At this point, you are getting rather angry and perturbed by the vendor’s selfish responses, so you ask one final question, “What’s in it for me?” The Vendor replies, “The satisfaction in knowing that you helped me earn a living.”

At this point, you walk away without making a purchase.

THE ANALOGY
I doubt that a vendor like the one in the story sells many goods. There is nothing in his sales pitch oriented towards customer benefits. All he sees are his own personal benefits. Rather than sounding like a salesman, he sounds like a beggar asking for money.

Any business person would know better than to act like this, right? Not so fast. Although perhaps not as blunt as this salesman, it seems that many businesses these days are so pre-occupied with their internal issues that attention to the customer’s point of view is not getting the attention it deserves.

THE PRICIPLE
The principle here has to do with orientation. A lot of businesses claim to be consumer oriented, but if you look at their actions, it seems like the consumer was forgotten. The current bleak economic situation seems to be making the problem worse, as fear of bankruptcy crowds out thoughts of consumer orientation.

Look at the auto industry. All they seem to be talking about are internal issues—problems with the unions, problems with the dealer networks, problems with credit lenders, problems with regulations, and so on. To the consumer, this is just a lot of “blah, blah, blah.” The message consumers hear seems to be, “Buy from me so that I don’t go bankrupt.” …Sounds a lot like that street vendor.

The customers don’t want to hear about your problems. They just want a good car at a good price that meets their needs. If you cannot do that, then you must be a bad manager, and why should the consumers support that?

The focus on the compensation at financial institutions is sending a similarly poor message. They also sound like our street vendor, with all the talk about how much income and bonuses they make off our transactions, rather than what the customer gets. In fact, it was the ridiculous way in which compensation was given to mortgage firms that caused the housing crisis in the first place. The orientation was on how to get my personal reward for signing up another bad mortgage (internal orientation), rather than providing good financing for the consumer (external).

Circuit City decided that sales help was an excessive cost (an internal focus), so they eliminated their best sales people. Without that consumer-oriented selling force, sales plummeted and now Circuit City is bankrupt, never able to recover.

An internal orientation may look good for a short time. The mortgage firms had a few great years. Circuit City got rid of a lot of costs. However, the long-term ramifications were devastating.

Never take the customer for granted. Try to win over their business every day. And if you screw the customer now, they WILL screw with you later.

Consumer orientation is essential for long-term health. When putting together a consumer-oriented strategy, three factors should be kept in mind.

1) What Problem Am I Solving?
Consumers purchase things in order to solve problems. And the problem they are trying to solve is not how to get you a big fat bonus. Speak in the language (the context) of the customer, and show them how a purchase will solve a pressing problem they are trying to deal with. In these tight economic times, discretionary spending is shrinking dramatically. If you want to sell in this environment, show how your purchase addresses an essential need.

2) Why is my Solution Superior?
Being able to solve a problem is good. Being the best way to solve the problem (at least for some segment of the population) is even better. If you want to win, your strategy must create a point of superiority. I am shocked at how many times I’ve asked a top executive the question “why would a consumer prefer your brand over the competition” and gotten a blank stare in response. This is a question for which every executive should have a rapid and plausible answer.

If you cannot articulate a reason why consumers should prefer you over the competition (other than the silly answer from our street vendor), then don’t expect the consumer to be able to figure it out. Nobody has a monopoly. There are always alternatives. Put into your strategy a believable and defendable reason why you are the best alternative.

3) Why Should we Continue to do Business Together?
Questions 1 & 2 tend to be more rational. However, there is also an emotional element to choice. Are you creating an emotional bond that makes the customer want to keep coming back?

There are lots of ways to sell someone a product or service that will turn them off from ever wanting to deal with you again. Avoid these and build a strategy around emotional bonding.

SUMMARY
At the end of the day, businesses succeed by selling something to someone at a profit. As a result, the consumer is a critical target to orient your strategy around. If all you do is perfect internal procedures or maximize internal rewards, you may cruise along fine for awhile, but eventually the customer will figure out that they are not the focus and they will go somewhere else.

FINAL THOUGHTS
Have you ever noticed how quickly after it starts raining that the streets are filled with vendors selling umbrellas? Now that’s consumer orientation in action, reacting quickly to changing consumer needs.

Strategic Planning Analogy #242: Normally Speaking

THE STORY

Here in the United States, I am treated like an odd alien from another planet because I prefer to drink my soda at room temperature.  However, when I am in Europe, that behavior is considered to be normal.  I like mayonnaise on French fries as well, which makes me appear odd in the US, but normal in parts of Europe.  I also think US sweets are "too sweet," and prefer some of the less sweet treats from Europe.

 

Perhaps when I was a child…in the middle of the night…some mad scientist switched my taste buds with the taste buds of someone from Europe.  That might explain my cravings for food at odd hours—my taste buds are in the wrong time zone!  Of course, having transplanted tastebuds (a sort of Frankenstein-of-the-Tongue) would make me odd most anywhere.

 

THE ANALOGY

What is normal?  As we saw in the story, what is normal in food taste tends to depend on where you were raised.  Normal cravings in one place are seen as quite odd in other places.

 

But it doesn't end with just location.  Look at the usage of new media by age.  What a twenty-something thinks is normal usage of new media would seem abnormal to many older people, and vice versa.

 

And stand out of the way when many people of opposing political viewpoints start to argue.  Each sees their viewpoint as "normal" and reasonable.  They find the opposition to be odd at best, and insane or dangerous at worst.

 

Even things as mundane as brushing teeth can challenge the concept of normality.  Proctor and Gamble tried to determine the normal teeth brushing routing routine, so that they could design the ideal tooth paste.  They found no normal.  Some wet the toothbrush before putting on the paste, some wet the toothbrush after putting on the paste, some don't wet the toothbrush at all.  And that's just the beginning of the tooth brushing routine.  Once the toothbrush enters the mouth, even more variety in behavior occurs.

 

We live in a highly fragmented world.  There are so many different lifestyles, attitudes and ways of everyday living.   And the trend appears towards even more fragmentation.

 

At some point, even the notion of there being a "normal" seems quaint and old-fashioned.  We are told to "celebrate diversity" and see those who propose conformity to a norm as "narrow-minded."

 

As a business, this poses some strategic challenges.  How do you create a business strategy in a "post-normal" world—a place where the idea of normal ceases to exist?

 

THE PRINCIPLE

Business strategies are executed out in the marketplace.  If the marketplace is diverse enough to make normalcy obsolete, then strategic choice—how to win in that marketplace—becomes less obvious.   The good news is that in a diverse marketplace, there is not just a single best way to win.  If someone has already locked up a solid position in the market, it doesn't mean that you've lost your chance.  With all that diversity, you are more likely to find a different strategic path where you can also win.

 

The bad news is that fragmentation decreases the size of any behavior segment, so that when you win your audience, it may be too small to support your infrastructure.  Economies of scale are harder to obtain (although the digital world often tends to reach scale sooner than the physical world).

 

Listed below are five generic approaches for trying to reach a post-normal world.  As we will see, some approaches are better suited for this world than others.

 

1.  Fight for Average

In order to maximize scale, one can aim for offering a single solution targeted to satisfy the average within the diversity.   In other words, if diversity scatters behavior randomly in all directions, the single position which is closest to each individual would be the position in the middle—average features, average prices, average performance, and so on.

 

In a world without normal, this can be the most dangerous position to take.  There is no longer the large bulk at the center of a tall, bell-shaped curve.  The dispersion of people is more equalized, putting fewer people close to the center.

 

Average at everything means you are the best at nothing.  Trying to please everyone a little bit rarely works, because you are not competing against others who are also striving for average.  You are competing against hoards of specialists.  Although none of the specialists have broad appeal (and may actually be hated by more people than your average approach), for each demand group one of these specialists will be preferred over your average approach. 

 

As a result, an average approach may never come in last, but it will never come in first.  The average of black and white is gray.  If you offer gray, you appeal neither to the whites (you are too dark) nor the blacks (you are too light).  Middle of the road products and retailers have been losing out to specialists for years. We talked about this in greater detail in a prior blog.

 

2.  Do it All

If trying to cover everyone with a single go-to-market strategy targeted at average is wrong, then how about the opposite?  There are two ways to do this.  The first is to try to be the absolute best at everything in a single offering—the perfect product.  The second is to offer a near infinite assortment of offers, each targeted at a different fragment.

 

Lucky you if you can pull off the single perfect product.  It is extremely difficult to do because there are usually trade-offs which make this impossible.  Adding more features creates complexity, which fights against simplicity.  It is nearly impossible to best at all and be best at price.  In addition, there probably is no consensus anymore on what "best" really means.  Some may think the best design is contemporary while others may think traditional design is best.  For some, bigger is better…for others, smaller is better.  Best is no longer an absolute term in a post-normal world.

 

The reality is that if you are going to get a product out in the marketplace at a reasonable price, you have to make trade-offs.  You cannot afford to do it all at the level of perfection.  Customers are willing to make trade-offs to get what they want at a price they can afford.  They will migrate to firms who offer their ideal trade-off.  If you do not trade-off as well, you may be priced out of the market.

 

But then, to create a near infinite amount of trade-off offerings (one for each fragment) has its own set of problems.  First, you may not get enough scale for any one of those offerings to create a profit.  Second, you can create brand confusion.  It's hard for a brand to be known as best at everything.  If all these products come out under the same brand, it can confuse a customer as to what the brand really stands for.  In addition, customers will not believe that a single brand can be good at producing that many varieties of trade-offs.  Generalists are not usually viewed as powerful a brand as specialists.

 

So "Do it all" is difficult pull off in a post-normal world as well.

 

3.  Cluster Portfolio

If trying to please everyone with one product (as average or as best) doesn't work, and trying to please everyone with near infinite products doesn't work, how about something in between?  This would be to create a portfolio of a manageable number of offerings which are best or average for large sub-sectors (clusters) of the marketplace.  This tends to be the approach taken by people like Proctor and Gamble.  They have great technological expertise in paper/absorbency.  How do you exploit your full potential with that competency?

 

With toilet paper, the Charmin brand uses four sub-brands to cover the bigger niches: Ultra Strong, Ultra Soft, Basic (price) and Plus (with lotion).  With paper towels, there are three basic niches for the Bounty Brand: Extra Soft, Regular (thick and stylish), and basic (cost).  With diapers, Luvs stands for price and Pampers stands for good parenting.

 

The trick is to find the sweet spot between covering more fragments without diluting the brand.  If you can find that sweet spot, you may be able to get the best of both worlds—economy of scale plus specialized trade-offs.

 

4. Laser Focus

One strategic option reasonably well suited to the post-normal world is the laser focus.  Choose a relatively large niche in the marketplace and own it better than anyone else.  Specialize in understanding the niche and meeting its unique needs.  Essentially forget about all the other diversity.  Aldi isn't trying to please everybody, nor is Whole Foods.  Each has found its own niche in the grocery marketplace and is exaggerating its offering to the tradeoffs most desired by that niche.  They don't care that others may hate their offering and never patronize them.

 

Although the world may no longer have a normal, there is usually an agreed upon normal within the niche.  In fact, it is their version of normal which tends to define that niche.  Play to that normal (ignoring the rest), and you can win, provided the niche is large enough. 

 

5.  Enable Personalization

Rather than specializing in the final product for every fragment, how about providing the means so that every fragment can create their own?  A good example is Zazzle.com.  At Zazzle you can get the ideal t-shirt just for you.  They have an enormous number of customizing options.  And if you do not like any of them, you can create your own individual customized look and they will make it for you.  There are tons of firms like this who will customize clothing, food and other everyday needs to your individual tastes.

 

In this web 2.0 world it is easier to work with the customer, allowing them to customize and personalize their own unique solution.  Your solution is no longer the end product.  Your solution is to be the enabler that allows each fragment to find or build their own unique end product.

 

SUMMARY

In a post-normal world, a one-size-fits-all strategy is out of place.  It is better to either narrow your strategy to a single niche, pick a small cluster of niches, or enable the fragmented world to create their own unique solution.

 

FINAL THOUGHTS

Next time someone accuses you of being abnormal, just say thank you.  In a post-normal world, that is a complement.

Strategic Planning Analogy #241: Aging Athletes

THE STORY
Some athletes just don’t know when to quit. They may be old, fat, out of shape, and well past their prime, but they still try to compete.

It can be painful to watch. You remember them when they were in their prime. You hate to see them end their careers in such humiliation.

THE ANALOGY
Athletes don’t stay young forever. Eventually, time catches up with them, robbing them of their great athletic skills.

The same thing happens in business lifecycles. Growth businesses eventually mature and then go into decline. Unfortunately, some companies act like these pitiful athletes and continue to pretend they are growth companies, even though the days of great growth are well behind them.

It can be painful to watch. Every year they throw tons of money at the business to grow it (just like in the good old days), but the growth doesn’t happen like before. The glory growth days are history.

At a certain point, athletes need to realize when their time is up and they are no longer able to compete. Similarly, companies need to realize when their business has reached maturity and is no longer a rapid growth concept.

Knowing when it is time to move on is a key part of strategic planning.

THE PRINCIPLE
The principle here is about managing maturity. Don’t let it sneak up on you and surprise you. Plan it out in advance. There are three key elements to understand when managing for the shift from growth to maturity.

1. Avoid the Demon of Denial
One of the worst things you can do is live in denial and act as if your business model will be in rapid growth forever. You may end up being like the washed up athlete who still thinks he or she is in prime athletic form, but is now just a laughing stock.

When in denial, one can be pouring in capital to grow a business which no longer can justify that action. You end up destroying value, because there is no longer enough growth to justify the extra investment.

Starbucks for years kept building new cafes at breakneck speed, as if unlimited growth would go on forever. It doesn’t. First, there is limited capacity for these cafes. Second, if a business is doing well, there will be imitators who will start absorbing some of that capacity, as McDonalds is now doing in coffee.

Eventually, all those new Starbucks stores were merely stealing sales from other Starbucks already in place, which by the way were losing sales to McDonalds. The rapid growth phase was over. Now Starbucks is forced to admit that these latter stores were poor investments which needed to be closed. It would have been better if those stores had not been built. In a similar situation, Wal-Mart eventually got the message and ramped back expansion in the US., because the rapid growth phase was over. Profits and share prices responded positively.

Another problem with denial is that one can start looking for blame in the wrong places. Rather than admitting that problems are due to an obsolete business model designed for rapid growth which no longer exists, one looks elsewhere for blame. This leads to making the wrong decisions, which do not correct the core problem. You cannot fix the real problem (end of rapid growth) unless one first admits that the real problem exists.

2. Avoid the Doom of Diversification
Sometimes, people look to solve the problem of slowing growth through diversification. In other words, if one business is slowing down, add another business to the mix that is just starting its rapid growth. The logic is simple: if you want rapid growth, just buy your way into rapid growth via diversification into places where rapid growth potential still exists.

Although this sometimes works, it often leads to disaster. The problem is that mature companies and young startup companies require a different type of infrastructure and management style. If you try to mesh mature and startup companies under the same infrastructure and culture, you often end up sub-optimizing both of them.

I’ve seen this scenario play out in companies with disastrous results. Either potential outcome ends up bad. First, you can try to optimize synergies between the mature and the young by unsuccessfully meshing them together as much as possible. Neither gets the structure and style they need and both suffer. The other alternative is to keep them entirely separate and build a new “holding company” infrastructure on top. At this point, one wonders if you have added any value through diversification, since there are virtually no synergies and you have added a new layer of infrastructure which didn’t exist before.

Perhaps a better model is that of the “serial start-up” kings of the dotcom space. These entrepreneurs would start up a company. Once the company migrated to the next level, they would sell it off and then go start up another new company. This way they specialized in the start-up infrastructure/culture and did not need to mesh companies at different stages together.

3. Properly Manage the Switch
So perhaps the best way to manage the transition to maturity is through a switch. Either:

a) “Switch the strategy” to one which optimizes mature businesses; or

b) “Switch the Portfolio” by Selling/Spinning off the mature business and replacing it with something which better matches a rapid growth culture.

A good example of the switching the strategy Fuller Brush. When it became apparent that the door-to-door sales model of Fuller Brush was in decline, management totally revamped the strategy to optimize profits in a decline. The revamped strategy worked so well that Fuller Brush was able to throw off cash for a far longer period than originally envisioned.

Maturity can be a profitable time, because you start reaping the rewards of prior investments, without having to put a lot more investments back in. But to get those profits, you have to manage the business as mature, not rapid growth.

Some examples of firms who switched the portfolio are:

a) GE, which continually sells off mature businesses and adds growing businesses to the portfolio. As a result, it has moved from heavy industrial businesses to finance and entertainment businesses and now is moving to environmental/infrastructure businesses.

b) P&G, which moved out of mature food businesses and invested in growing health care and beauty businesses. In 1995, food was about 12% of the P&G portfolio. Now it is down to just Pringles snacks, which is around 2% of its business. During that same time, Health and Beauty has gone from about 29% of its sales to 51%. And even in their more mature product categories of paper and cleaning products, P&G uses innovation to find growth sub-sectors, like with Dryel and Febreeze.

c) Cardinal Foods saw the coming decline of food wholesaling, so it sold off its food distribution business and replaced it with faster growing health care distribution and other health businesses, eventually becoming Cardinal Health.

The secret here is to get the timing right. If you wait too long to make the switch, then it is hard to effectively get out of the old businesses. GM has waited too long to get out the Hummer division and cannot find suitable buyers. P&G got out of many food categories early, when there were still people clamoring to buy the brands at a good price.

Just as we like to see athletes retire when they are still on top, it is good to make the portfolio switch when the old brands still have strength.

SUMMARY
Just like the inevitability of death and taxes, all rapid growth businesses eventually mature. It is better to have a strategy which proactively manages this inevitability than to live in denial.

FINAL THOUGHTS
Just because a business model stops growing does not mean that a company has to stop growing. You just need to change the business model. And that’s the value of strategic planning…knowing how to change to the right model at the right time.