Strategic Planning Analogy #276: Bias to Stop

THE STORY
Ford invented the minivan, but refused to build them. Why? First, Ford was #1 in the sales of station wagons at that time. Ford feared that the minivan would cannibalize the sales on all those station wagons. Second, the truck division thought it might cannibalize some truck sales, as well.

Ford saw little benefit in spending all the money needed to gear up production for a new vehicle (the minivan) if all it was going to is steal business from their other profitable lines. Therefore, they did not introduce the minivan. It seemed like a wise financial move at the time. Why needlessly spend all that extra capital to get sales you already had?

Of course, when Lee Iacocca left Ford and went to Chrysler, he found himself at a company that was weak in the station wagon and truck businesses. There wasn’t much at Chrysler to be cannibalized by the minivan. Therefore, Chrysler introduced the minivan. It was a huge success, mostly at Ford’s expense.

Ford was correct about one thing. The minivan did make the station wagon obsolete. Ford lost nearly all of its station wagon sales. Too bad Ford did not factor in a competitive introduction of the minivan into their business model. In the end, Ford did not save the expense of introducing a minivan (as they had hoped). They had to do it anyway, as a response to Chrysler. However, because they let Chrysler get a head start, Chrysler got most of the benefit of the minivan.

THE ANALOGY
As this story illustrates, one can create logical arguments to kill a new project, as Ford did with the minivan. One can even back up that argument with solid financials. However, that does not always mean that the new project should be killed.

Logical arguments and financial models can be flawed. A natural bias to kill new initiatives can exist in an organization. This bias can cloud one’s judgment, leading to a flawed analysis.

Due to a bias towards past success, Ford failed to take into account the inevitability that station wagons would eventually become passé. By not proactively planning for their replacement, they allowed Chrysler to replace them.

Businesses need to be aware of the potential for this bias, so that they do not fall into the trap which hurt Ford.

THE PRINCIPLE
In the last blog, we looked at how a bias to “go” on new ventures can hurt a company. In this blog, we will look at how a bias to “no go” on new ventures can also hurt a company. We will look at the causes of the “no go” bias, how it can distort our analysis, and questions to ask ourselves in order to keep the bias from causing us to make the wrong decision.

1. Bias Source #1: Avoiding the Hammer
The old saying is that the hammer hits the tallest nail. If you stand out too much, you are vulnerable to attack. New ventures have high visibility and stand out. If they fail, you run the risk of being attacked. Their failure becomes your failure. By contrast, it is easier to hide in the bureaucracy of the established businesses.

2. Bias Source #2: Avoiding Accountability
If you say “go” and the new business fails, there is hell to pay, because a highly visible loss is right there on the books for all to see. However, if you say “no go” and the business would have been great, there is less of a backlash, because it is all subjective. Hence, if you want to avoid accountability for your decision, it is easier if you say “no go.”

3. Bias Source #3: New Game Threatens My Game
You’ve been working yourself up the corporate ladder playing by the old rules associated with the old way of doing things. The new ways could make your “game” obsolete. To protect your personal future, you need to protect the ways of the past.

4. Bias Source #4: Short-Term Pressure
There tends to be more pressure on hitting the targets for the current month or current quarter than for long-term profits. Since new initiatives usually have a near-term drain on profits, there is a tendency to put them off, so they won’t hurt near-term earnings.

5. Bias Source #5: Not on My Watch
The remaining tenure for most CEOs is relatively short—shorter than the time for a new initiate to have a positive impact. The leaders may be retired or have moved on by the time the new initiative pans out. As one CEO put it, “Why should I invest in something that hurts earnings on my watch, but provides benefits for my successor that he will take credit for?”

6. Bias Source #5: Fear of Cannibalization
As we saw in the story, new projects often cannibalize older businesses. The thought is that by avoiding the new businesses, we can protect the old ones while at the same time avoiding all that new investment.

These factors can cause a bias to say “no go” to projects which should move forward. They can even distort the financial analysis, to make “no go” look better than it should.

1. Distortion #1: Old Cash Flow Will Go On Forever
New initiatives are often compared to the status quo. If you assume the status quo will always be strong and healthy, then it is hard to justify change. However, it is a fact of life that all strategic initiatives eventually fail. Customer desires change and innovations from others change demand. Product lifecycles eventually reach maturity and decline. The “next big thing” eventually becomes “that obsolete thing.” 8-Track players were once the rage in music. Now they are junk.

The cash flow on the old business will not go on forever. If you don’t replace it, another company will. Either way, there is inevitable decline. Make sure you put it in the model.

2. Distortion #2: Things Won’t Change if I Don’t Change
Ford thought that if they didn’t build the minivan, the minivan would not be built. This, as we saw, was not the case. Innovation is going on all over the place in your industry. If you can see the potential in the new venture, so can others. Just because you like the status quo and don’t want change (because right now you are the leader) does not mean that everyone likes the status quo (especially the non-leaders). Change is inevitable. Either you can take advantage of it (by action) or be hurt by it (through inaction). Therefore, your modeling should assume changing conditions caused by others.

3. Distortion #3: Old Beasts don’t Need to be Fed
To keep older businesses vital, one needs to reinvest in them. For example, I know of a retailer who built a lot of stores in the 1970s and 1980s and then hardly ever reinvested in those locations. Eventually the stores looked rather shabby. In addition, over the next 30 years, those neighborhoods changed and became less desirable locations for stores. People wanted to shop the newer, nicer stores of the competition which were closer to their new homes, rather than drive into the dangerous inner-city locations where these old shabby stores were. By not reinvesting in the old business and refusing to relocate those stores to better locations, the company eventually went bankrupt. In the near term, those relocations looked more expensive than staying in the older locations. Over time, however, the lack of reinvestment killed the old business. Does your business model include reinvestments in the status quo? The old beasts still need to be fed, or they will die.

So how can we avoid this bias and resulting distortions? If helps if we ask ourselves the following questions before making a decision.

1. If you were assured of a promotion regardless of the success or failure of the new initiative would you still want to kill it? (This unlinks your fate from the fate of the project, so that you can look at it more objectively)

2. If near-term pressures were eliminated, what would you do? (near-term is biased towards status quo) Keep in mind that astute investors value your firm based on future cash flow potential, not history. If you can convince them that these are good long term investments, they will support you. It helps if incentive programs de-emphasize near-term and also reward good long-term decisions.

3. What if another company says “go” to your “no go” decision? Can you survive the impact to your core businesses? (This provides a more realistic way to evaluate cannibalization)

4. In your model, are you adequately feeding the old beast to keep it relevant or are you choking it? Either the modeling needs to include lots of cash to invigorate the old, or the future prospects for the status quo need to be significantly reduced. Make sure the residual value on the status quo does not overstate its potential.

SUMMARY
Since all current initiatives will eventually fail, there is a need to continually reinvent a firm with new initiatives. Otherwise, your company will fail when all the current initiatives fail. Unfortunately, it is often difficult to justify the cost of reinvention while the old initiatives are still cranking out healthy cash flows. This creates a bias to kill off new initiatives. The more we are aware of this bias, the more we can avoid its disastrous consequences.

FINAL THOUGHTS
Just as the station wagon did not live forever, it appears that the minivan is now in decline. Crossover vehicles are starting to take its place. And guess what? Ford has aggressively gone after the crossover business, because they do not have many minivan sales to cannibalize. By contrast, Chrysler has been slow to get into the crossover business, in large part due to not wanting to cannibalize the most profitable piece of their portfolio (the minivan). Times may change, but the mistaken logic appears to live on.

Strategic Planning Analogy #275: Bias to Go

THE STORY
I worked with a company that desired to have a new corporate headquarters building. The company at the time was spread over several buildings around the city, making things inconvenient. Not only would a new headquarters get rid of that problem, but many thought it would be fun and a boost to the ego to work in a flashy new building.

The problem was that the new headquarters was difficult to justify based on financials. New headquarters can be very expensive, and the benefits to the rest of the business are difficult to quantify.

To make the financials more appealing, two assumptions for the model were changed. First, the resale value of the old headquarters was increased in the model. In other words, if we moved to a new building, it was assumed we would get more when we sold the old building (to help pay for the new building).

Second, it was assumed that the company’s unusually rapid growth rate would continue for awhile. This meant that the current infrastructure was even less adequate moving forward (we’d have to add more office space anyway). It also made the cost of the new headquarters more efficient, since a bigger headquarters costs less per square foot to build.

These changes gave the new headquarters scenario just enough of an edge so that it looked slightly better to build an impressive new corporate headquarters building than work with the current hodge-podge of buildings. So the decision was made to “go” with the flashy new headquarters.

Well it takes a year or two to get one of these headquarters built. Between the time of giving the go-ahead to build the new headquarters and the time it opened, two particular things occurred. First, the bottom dropped out of the real estate market, meaning that the old headquarters sold for a lot less than what was put in the model. Second, internal growth had stopped and the company had actually shrunk the headquarters staff. So the new headquarters opened up as about half empty. At this point, it would be difficult to justify that new building. But it was really cool and people still liked the prestige of being there.

THE ANALOGY
At the end of the day, that huge new headquarters was not built because it was the wisest financial move. It was built because people wanted a cool new building to work in. That bias of desire overtook common sense. The financial model had been unjustly modified to make it look like a wise move, but in the end, reality told a different story.

In the business world, there are all sorts of similar types of business decisions. They are some variation of this question: Do we stick with the old and familiar or go with the new and different? This applies not only to headquarters, but to potential new product offerings, brand extensions, acquisitions, diversifications, and the like. The sexiness of the new initiative lures people in like the songs of the Sirens.

People seem to forget that most new initiatives fail. They think that this one is the exception to the rule. So they push forward on the new initiative and create one more disaster, confirming one again that most new initiatives fail.

THE PRINCIPLE
The principle here is that when it comes to “go” vs. “no go” decisions on new initiatives, there are many internal biases towards “go.” If we don’t understand the impact of these biases, we can become blinded into making less than ideal decisions. Therefore, this blog will look at three things: Sources of a bias to “go,” distortions to the decision-making process which come from the biases, and the questions we need to ask ourselves to unmask the bias to “Go.”

In the next blog, we will do the same thing for the biases to “No Go.”

1. Bias Source #1: Fun Factor
Let’s face it. It’s fun to work on the “new” project. It sure beats working on the old routine stuff. You get to go to lots of committee meetings (and eat lots of yummy donuts). If you keep saying “yes” the fun continues. If you say “no” the fun ends.

2. Bias Source #2: Freedom
The old routine stuff has all sorts of tight budgets and short performance deadlines. There is a clear line of authority and accountability. It’s a hassle and you get yelled at a lot if budgets are missed. By contrast, the new stuff is usually more open-ended. There is a lot more freedom and less accountability as it is being set up.

3. Bias Source #3: Career Enrichment
The new stuff is highly visible. If you can make the new project a success, you can quickly become a hero in the organization. That can lead to all sorts of bigger titles, promotions, perks and money. Your rise in the organization tends to be faster if you work on the new stuff (and succeed), so you are biased to work on these projects and promote them so that you have a chance to succeed with them.

4. Bias Source #4: Linkage of Person and Project Image
Of course, this also works in the other direction. If the highly visible new project fails, your “failure” is very visible. The more a person sees their personal success as linked to the project success, the more likely they will push the project forward. After all, saying “no” to the project is viewed as being like saying “no” to the people working on it. This creates a strong bias to avoid shutting a project down, no matter how bad it looks.

5. Bias Source #5: The Panacea Phenomenon, or the Optimism of Ignorance
We all tend to know the shortcomings of our current businesses. However, when we venture into new territory, there are more unknowns. Given all of the other biases, we tend to take a more optimistic slant to those unknowns. After all, we have expectations to grow corporate sales and profitability. We know we cannot hit those aggressive goals with our current ventures. Therefore, the gap has to be filled by new ventures. If we say “yes” to the new ventures, we have a shot at filling the goal (our panacea for our problems). If we reject the new ventures, we run out of options for filling the gap.

So, given all of these biases, there is a tendency to create financial models which are biased towards moving the new ventures forward, even when they should be halted (whether we are aware of it or not). Some of the ways the models get distorted are as follows:

1. Distortion #1: Forget about Life Cycle Impacts
New ventures are often very profitable in the beginning. This is because it tends to be in an uncontested space with little competition. However, once we show that profits exist in the space, others will jump in. Competition will erupt and profits will go down. In addition, all that new business is probably coming to us at the expense of someone else’s old business. As soon as they see their business being attacked, they will fight back and get some of that business back. This is all part of the natural rhythm of the product life cycle. Eventually the industry matures and profitability drops to something near the cost of capital. If you only project the good, early times into your model, you will distort the model to be too optimistic. This is particularly true if there is a large residual value at the end of your model’s time frame.

2. Distortion #2: Forget about Transition Costs
The models for the new business often look at the venture once it is up and operating smoothly. That’s nice, but there is usually a costly transition to get there. For example, I’ve seen lots of people model out the benefits of an acquisition and only look at how the acquired company will perform once acquired. They leave out all sorts of very expensive costs associated with doing the acquisition, like investment banker fees, legal fees, PR fees, severance costs on the people let go, and so on. When you factor in all of these transition fees, a supposedly “good” deal can become a money loser. There are also substantial transition costs in new ventures. It takes a lot of time and money to get them up and running, which may not get into your model.

These two distortions can make your models biased more towards the new venture than they should be. They reinforce the bias to “go” which was already there, increasing the likelihood that you will vote to “go” when “no go” is the better response.

To help avoid the consequences of making poor decisions due to the bias to “go”, ask yourself these questions:

1. If it were your money, would you still do it? (We tend to have less of a bias to “go” when it is our own money at stake)

2. If you were assured of a promotion regardless of the success or failure of the project would you still want to go forward? (This unlinks your fate from the fate of the project, so that you can look at it more objectively)

3. Can the new venture overcome the competitive reactions and the copycats that will naturally occur as part of the life cycle? (Put it into the model and see)

4. Can the new venture absorb all of the transition costs and still work? (Put them in the model and see)

SUMMARY
Since most new initiatives fail, there is reason to be skeptical when new initiatives are proposed. Double check to see if the new initiative is truly worthy of a “go” vote. Don’t just assume the analysis is telling the whole story, since the bias to “go” can distort the analysis (even if you are unaware of it at the time). And check out your own biases to be sure you are choosing based on reality not some irrational emotion.

FINAL THOUGHTS
According to the book Parkinson’s Law, “During a period of exciting discovery or progress, there is no time to plan the perfect headquarters. The time for that comes later, what all the important work has been done. Perfection, as we know is finality; and finality is death.” So when people are pushing for a luxurious new headquarters, it may be time to get out of there, before it is too late.

Strategic Planning Analogy #274: Painting a New Name on the Ambulance

THE STORY
I used to live in a city where the citizens were upset with the ambulance service. The ambulance drivers were accused of being incompetent and dangerous, causing far too many accidents.

In response to citizen protests, the city suspended the license of this ambulance company and replaced them with a different ambulance company.

Unfortunately, this new ambulance company did not have any other operations in the immediate vicinity. Therefore, they needed to hire ambulance drivers in order to serve this city. As it turns out, pretty much the only people in the area who were qualified to drive an ambulance were the former drivers for the ambulance company which just lost its license. Consequently, most of the drivers for the new ambulance company were those same “incompetent and dangerous” drivers that worked for the old company.

So, other than a new name painted on the outside of the ambulance, we were pretty much back to where we started. So much for progress.

THE ANALOGY
In the story, the city tried to improve the performance of the ambulances. To do so, it changed ambulance companies. Unfortunately, what didn’t change were the people driving the ambulances. Since the poor drivers were the cause of the problem, the change in ambulance companies did not solve the problem. The only thing that changed was the name painted on the ambulance.

Many businesses fall into the same trap as this city. They develop strategies intended to change things for the better. However, because the underlying people and processes stay essentially the same, the situation does not get any better. It’s business-as-usual under a different label. These company strategies are about as useless as the idea that painting a new name on the ambulance is going to make those drivers any safer.

THE PRINCIPLE
The principle here is that significant changes in performance require significant changes in how things are performed. I know this sounds obvious, but actions like what happened with those ambulances seem to occur all the time. We put a new label on something and expect miracles. Concentrate more on labor (what they do) than labels (what they’re called).

This problem seems most acute under two situations: acquisitions and revitalization initiatives.

1) Acquisitions
When you are acquiring a company, you typically have to pay a significant premium price (over current market value) in order to get the deal done. This leads to an important question: What is your company going to do with those assets that is going to make them so much more valuable in order to justify that premium price?

Let’s face it. The current owners probably know a lot more about the company than you do. They are typically already working very hard to extract as much value out of it as they can. And, except for maybe a few people at the top, you are going to keep the same basic people that worked there prior to the acquisition. So why do you, as an outsider, think that the same basic organization is going to perform so much better just because you painted your name on the building?

Sure, people talk about all the “synergies” of putting the acquired company together with their own. My experience is that one never gets as many synergies as hoped for. Either the cultures don’t mesh or fewer things can be eliminated than planned. As mentioned in an earlier blog, using common shared services across multiple divisions quite often causes more net costs than savings. Unless you are planning on running the company significantly differently than before (and I truly mean SIGNIFICANTLY different), you won’t get much of a significant improvement.

Take the recent acquisition of Marvel by Disney. Disney paid a ton of money to get the company (a 29% premium over current value). Will Disney run the company significantly differently than the prior owners? Well, Marvel already was exploiting the value of its characters in movies, merchandise and theme parks (the very things Disney would do). In fact, one could argue that those prior contractual arrangements could make it more difficult for Disney to exploit them under the Disney umbrella.

And is Disney going to get rid of all the Marvel people? Of course not! Disney wants their creativity.

So, other than perhaps executing the prior strategy a little bit better, has Disney done much more than just “paint their name on the ambulance”? Even if they make Marvel 29% better, all they will have done is break even on the deal.

Let’s assume for second that Marvel was horrible at exploiting their assets, leaving huge potential for Disney. Typically, when a company is not doing well in exploiting their assets, astute investors assume that potential acquiring companies will also recognize this potential. These investors assume that eventually one of these firms will acquire the company to better exploit those assets.

As a result, the investors will often bid up the current price of a company ripe for acquisition to include a “potential acquisition premium.” Hence, when the acquirer pays a premium over the current value, they may be paying a premium on top of a premium already embedded in the stock price.

Make sure that when you put an acquisition into your strategy, you specifically outline in that strategy enough changes to that company in order to create enough value to justify the price. Otherwise, all you are doing is painting your name on their ambulance. For more on this topic, see this prior blog.

2) Revitalization Initiatives
In addition to acquisitions, strategies also often deal with revitalizing problem areas in a company’s current portfolio. These revitalization programs are often given fancy names, like “Vision 2020” (If you don’t believe me, just Google “Vision 2020” and see how many firms use that label for their strategic initiative).

The goal is to revitalize performance. However, these initiatives often try to create this revitalization using the same basic people whose poor performance created the need for revitalization in the first place. As we saw in the ambulance story, often times the people are one of the main causes of the original problem. Unless the people (or the culture surrounding the people) are radically changed, why should one expect revitalization?

This reminds me of an interesting story. Years ago, I worked for a firm that was having a sales slump due to a recession. The president of the company asked every employee to send him suggestions on new ideas to improve sales. One person replied, “Do you really think I was holding back on good ideas to increase sales until you asked for them? I’m already doing everything I can to increase sales.”

The point is that most employees are not worthless bums. They are generally good people already trying to help the company do well. Putting a new label on what they do is not going to suddenly make them significantly better. They are already putting in the effort. Unless you significantly change the quality of the people or the nature of the work process, you will get only minimal, short-lived improvement. All you have done is paint a new slogan on an old ambulance.

SUMMARY
Significant gains require significant change. If one has the same people doing essentially the same work, one should not expect much of an improvement. Just changing the label doesn’t change the results.

FINAL THOUGHTS
A pig is still a pig, not matter what you call it.

Strategic Planning Analogy #273: The Back of the Coin

THE STORY
If you take a coin and hold it close to your eye at a perpendicular angle, it no longer looks like a coin. All you see is the edge, and the edge looks like a straight line. It is only when you change the angle in which you look at it that you can see it is a circle.

I’ve used this concept to help explain some of my political observations. In the political world, people like to describe things on a one-dimensional line. At the left end of the line is liberalism. On the right end is conservatism. People are judged politically by where they are on that line—left, right or center. The thinking is that the further you are to one of the extremes on this line, the further your political thinking is from those folks on the far other end of the line.

However, in my observations and discussions with the really radical extreme conservatives and liberals, I see something different. The really radical extremes on both ends start looking more similar to each other.

- Both tend to highly question the abilities of the general public to be able to comprehend the “truth.” They do not trust them to make good choices.
- Both tend to have little faith in current political system to solve problems and are willing to take drastic steps to bring down the status quo.
- Both seem more inclined towards the idea of benevolent dictatorship (although they may define benevolence a little differently).
- Both tend to use populist rhetoric.

This is where the concept of the coin comes in. As you move further to the extreme on the political line, what you are really doing is moving along the edge of a coin. As you get more extreme, you start moving around the edge of what you see to the back of the coin. As a result, the radical, extreme elements of both conservatism and liberalism are so extreme that they are both moving to the back edge of the coin, and moving in a direction where they are now getting closer to each other.

In other words, politics is not on a line, but on a circle. We just can’t see it because we are looking at the coin from the wrong angle.

THE ANALOGY
In the business world, we also like to position ourselves as being on a one-dimensional line. However, instead of using the terms Liberal vs. Conservative, the extremes on our line could be:

Low Price Vs. High Service

Mass Vs. Niche

Multi-Purpose Vs. Specialized

Fashionable Vs. Pedestrian

High Quality Vs. Low Price

Efficient Vs. Customized

With this mind-set, we position one extreme against the other. The idea is that if you become more of one end of the continuum, you are by necessity less of the other. In other words, the more mass you are, the less niche you can be; or the lower your prices, the worse your service or quality needs to be. It becomes an either/or proposition.

This mindset is like looking at the edge of the coin. All you see are linear opposites.

But what if we change our perspective and look at the entire shape of the coin? We may find that if we throw away conventional thinking and get very radical, there may be a way to get to the back of the coin, where both extremes can co-exist. The “either/or” becomes a “both/and.”

Maybe there is a way to be both mass AND niche, or to provide high service AND low prices. All we need to do is find a path to the back of the coin.

We, as strategists, need to sometimes look at things from different angles, so that we can see possibilities that appear impossible from the original point of view. We need to change from thinking lines to perhaps thinking circles.

THE PRINCIPLE
The principle here is that so-called opposites can possibly co-exist successfully if we take a more radical approach to how we look at things. We will illustrate this by looking at a handful of U.S. retail companies.

1) Home Depot
The thinking in the hardware/home improvement industry used to be that one could either be high service or low price. You could not be both. This was the conventional linear thinking.

In the late 1970s Bernie Marcus and Arthur Blank started looking at things differently. They could see a circle, where low price and high service could co-exist. To do so, they had to get radical and rewrite the business model for the industry. Rather than small departments in a low price discount store or small, high service hardware stores, Marcus and Blank built huge stores that encompassed every imaginable home improvement need.

The large stores created enough demand and efficiency that they could offer unheard of low prices and still have money left over for high service. The early stores were staffed with former hardware store owners and part-timers who still worked in the skilled trades of plumbing, painting and the like. They even held seminars to teach the skills to the customers.

Bernie and Arthur had found the path to the back of the coin, where low prices and high service could co-exist. They called it Home Depot. It was very successful.

Unfortunately, when Robert Nardelli took over as CEO of Home Depot, he returned to linear thinking. He wanted to lower prices, so he cut back on service, thinking that to get one (low price), you had to cut back on the other (high service). This point of view severely damaged the prospects of Home Depot during the past decade. It wasn’t until Nardelli was replaced by insider Frank Blake (who understood the back of the circle) that things started to turn around. Service returned, and so did market share.

2) Amazon
Jeff Bezos used the internet to rethink a lot of the old linear ideas in retailing. Through the creation of Amazon, he was able to develop a mass retail site that had every imaginable customization tool, so it could also cater to every conceivable niche. Both mass and niche feel comfortable using Amazon.

Because of the efficiencies of internet technology, Bezos made Amazon both a slick, efficient low cost operator as well as a high service operator, providing recommendations, reviews, wish lists, easy ordering, and so on.

All of these services and customizations came with the convenience of shopping at home 24 hours a day. Yet, at the same time, Amazon was able to provide very low prices. Never before had so many linear “opposites” successfully coexisted in a single retail brand.

Jeff Bezos used the internet as a tool to radically redefine what one can do in retail. He saw the circle and got to the back of the coin, where all these so-called opposites come together. To Jeff, the internet was not just another place to do conventional retailing. It was a tool to redefine retailing.

3) Target
Target is known for its “Cheap Chic” image. Before Target, no retailer would have considered the combination of cheap and chic. These were supposed to be linear opposites. However, Target was originally owned by a sophisticated department store company which understood fashion well. This background gave them a different perspective as to what was possible.

By taking some of the tools from department stores and some of the tools of discount stores, they were able to fashion a new type of store which could provide both chic and cheap. They got to the back of the coin.

Once Target showed that you could have both, another wave occurred. By using the radical supply chain innovation of “fast fashion” (small batches of Apparel knockoffs made quickly—while the fashion is still hot—and sold quickly—without markdowns), chains such as H&M, Zara and Forever 21 are also finding a way to combine cheap and chic.

SUMMARY
Sometimes the way we look at a problem limits our ability to find the solution. If we see attributes as linear opposites, it is hard to picture them as successfully co-existing. However, if we are willing to change the angle we use to look at problems (and are willing to consider radical departures in our business model from the status quo), we can find ways to combine these so-called opposites into a hugely successful strategy.

FINAL THOUGHTS
Almost everything about the way we live and think today was at one time considered a very radical departure from the status quo. Therefore, don’t be afraid of thinking radically. All you may be doing is just redefining the future status quo.

Strategic Planning Analogy #272: Exercise Your Mind

THE STORY
Last year, the exercise club I was using declared bankruptcy and shut its doors. There was no advanced notice—just a note taped to the locked doors. Well, it was getting close to the Christmas season, so I decided to enjoy the holidays and not look for a replacement exercise club until the following January.

Apparently, I must have “enjoyed the holidays” a little bit too much. When I got to the new club in January, I was woefully out of shape. I had gained a bunch of weight and could not exercise anywhere near the same levels of intensity I could at the old club. Even my blood pressure was higher.

It took several months of intense work at the new club to get back to the level of physical abilities I had before taking the time off. It was amazing how just a few weeks of neglect caused many, many months of effort just to get back to where I was before, let alone make any progress.

THE ANALOGY
Without continual exercise, muscles suffer atrophy. They whither back to a weaker state. Unfortunately, it takes more time to get them back into shape than the time it took for them to get out of shape.

It’s sort of like a balloon. It is a lot faster and easier to let the air out than it is to later put the air back into the balloon.

As a result, the best way to exercise is on a continual basis—a little bit done frequently—rather than binge exercising every once in a great while. Continual exercise keeps the muscle tone in shape, so that you are always ready to use them when needed. I regret not having kept up my continual exercise through the Christmas season. I paid the price.

Although this concept seems logical for our physical muscles, it seems to be ignored by many when it comes to our strategic mental muscles. During the recent economic crisis, there have been many companies that have taken time off from strategic thinking, just as I did with exercise at Christmas. If any strategic thinking is going on, many of these companies are doing it on a binge basis, at infrequent strategy sessions.

Strategic thinking has a lot in common with exercise. If you don’t do a little bit on a frequent basis, those skills go into atrophy. And it takes a lot longer than you think to get good at it again.

THE PRINCIPLE
The principle here is that strategic thinking is more important than strategic planning. What good is it to have a great planning process if the participants have let their strategic thinking skills go into atrophy? Great outcomes depend on great input. Great strategic input comes from those who are exercising those muscles on a regular basis.

When companies use excuses like the current economy to abandon strategic thinking, several things happen. First, the time horizon for framing issues shrinks. It’s all about getting through the next week/month/quarter. Long-term implications of short-term decisions stop being considered. That skill goes into atrophy.

Second, short time horizons cause people to look at the world as a snap shot rather than as a moving picture. Wayne Gretzky famously attributed his hockey success to skating to where the puck is going to be, rather than where it currently is. He instinctively knew that his world was in motion and that the way to win was to anticipate the motion and use it to his strategic advantage. That is strategic thinking.

However, when you get too focused only on the here and now, you lose the skill of anticipating the motion. The world becomes a snap shot. You focus on where the puck is now, rather than where it is heading. By the time you get to that spot, the snap shot has changed, so you enter a new crisis of getting to that new position. This leads to a cycle of perpetual catch-up crisis thinking, rather than proactive, anticipatory strategic thinking.

Third, abandonment of strategic thinking usually results in incremental thinking. Improvements are only seen as coming from small, incremental changes to the status quo (what you know and are focusing on), rather than bold, sweeping change (which is no longer being pondered).

Small incremental changes to film photography will never get you to digital photography. Small, incremental changes to carbon paper will not lead to photocopying. Itunes did not come out of little tweaks by the recording industry, but by bold, radical moves by an outsider not bound by the industry’s status quo.

Revolutionary ideas come from revolutionary thinking. Revolutionary thinking is not something you can conjure up on a whim. It is a way of life that you must practice on a regular basis.

Finally, abandonment of strategic thinking tends to minimize all sorts of other thinking. The mindset is focused on getting the “task of the day/week/month/quarter” accomplished. No time to question the validity of the move—just “git r done.” Motion becomes more important than direction. It doesn’t matter where we are headed as long as we are progressing on the task at hand.

Soldiers may be great at following orders, but their success depends on having the proper orders to follow. Proper orders come from good strategic thinking. Take that away, and all the great action of the soldiers is wasted effort. If all of your daily time is spent focused on following orders, you never develop the skill to develop what the next order should be.

Formal strategic planning meetings get a very small percentage of management’s time. If strategic thinking is not exercised on a regular basis, management will not be prepared to take full advantage of those meetings. All the time will be spent trying to unthink the thinking process of the rest of the year and getting geared up to think in a different way. And since those muscles are not used very often, they will not be functioning at peak form.

Worse yet, since the rest of the year seems to abandon strategic thinking, it makes whatever occurs at the planning meeting seem irrelevant to the rest of the year. It is no wonder that many strategies just sit on a shelf and don’t get put into practice. If you do not value strategic thinking all year long, why should someone pay attention to the results of a one-week effort in strategy put together by people not in peak strategic shape?

The solution?

1) Incorporate long-term strategic thinking into the daily routine. Make sure that people get into the regular habit of considering the strategic implications of all their decisions, all year long. Continually ask “How does this decision impact our strategy? What are the greater implications of this move?” Ask it so often that people mentally prepare an answer in advance because they know the question is coming.

2) Make sure people keep “watching the movie.” If strategy is about anticipating future movement, spend time throughout the year looking into where the future is heading. Stop focusing just on the snap shot and have regular discussions/presentations on where you think the “movie” of your industry is headed. Talk often about where you think your “hockey puck” is going to be—changes in consumer desires, changes in regulatory environment, changes in economy, and so on. Educate people about trends throughout the year, rather than just at an annual planning meeting. Let it soak in, so that it becomes a natural part of the ongoing dialogue.

3) Match incentives to desired behavior. People tend to act in ways that maximize their incentives. If you want strategic thinking, reward that behavior. If all compensation is based on near-term results, all you will get is near-term thinking.

SUMMARY
Strategy loses its effectiveness if it is compartmentalized into only one week in the year. Good strategic plans come out of good strategic thinking. Good strategic implementation comes out of good strategic thinking as well. Therefore, spend time throughout the year building up those strategic mental muscles so that you are strong and capable for the task ahead of you and can execute well on a daily basis. Otherwise, all your strategic planning efforts are for naught.

FINAL THOUGHTS
Exercise helps you lose fat in two ways. First, the activity burns up calories, which comes from burning your fat. Second, the activity builds muscles. The bigger your muscles, the more calories it takes to move them. Hence, future exercise is made more productive because those muscles make your body more efficient at burning calories faster. The same is true with strategic thinking. Not only does continual strategic thinking make your current decisions better (less negative “fat”), it places your company in a better overall strategic position (stronger “muscles”), which provides a better and easier launching point for more strategic opportunities.