Hometown Bias

THE STORY
At the height of the popularity of the Dave Matthews Band, I saw a documentary about the history of the band. The documentary makers went back to where the band started in Charlottesville, Virginia. They interviewed some of the people who remembered the early beginnings of the Dave Matthews Band.

One of the people they interviewed was a guy who used to hang out at the first little local clubs where the band played. This guy blurted out, “I knew from the very beginning that eventually the Dave Matthews Band would become hugely famous” (or something like that).

My first reaction upon hearing him was, “My, this guy has a good sense about what music will sell in this country.” Then, I started to think, “I’ll bet that every little garage band that ever started playing in some local bars had some adoring fans who said, “I just know that some day this band will become hugely famous.”

Although every one of these local bands probably had fans who “knew” they would become famous, in reality over 90% go nowhere. That Dave Matthews fan in the documentary wasn’t an astute judge of success. He just happened to be lucky enough to be living in a place that had a local band that was one of the rare groups to actually become famous.

Some of us aren’t as fortunate. Back in the 1970s when I was in college, I enjoyed the music of a local Michigan band called the Whiz Kids. Pat McCaffrey, the leader of the duo, was a highly talented musician. He would simultaneously play the bass using the bass pedals on an organ, while playing keyboards with his left hand and playing a saxophone with his right hand. It was a sight to behold. I “just knew” that the Whiz Kids would eventually become famous.

Well, it didn’t turn out that way. The Whiz Kids never broke into the big-time like Dave Matthews. I went on the internet recently to see if I could find out whatever happened to the Whiz Kids. I found out that on October 9th of 2007, Pat McCaffrey and the Whiz Kids will be performing the after dinner music at the 38th Annual Conference of the “Excess/Surplus Lines Claims Association.” It will be at the Hyatt Grand Champions Resort near Palm Springs. It was nice to see that Pat was still earning a living in music some 30 years later, but I don’t think the “Excess/Surplus Lines Claims Association” conference is the same as the types of gigs the Dave Matthew Band gets.

THE ANALOGY
Strategies are used in businesses in order to help them determine where to place their “bets” on the future. Businesses have limited money, people & time, and they want to invest these limited resources where they believe they will get the best return.

As a result, the strategic process is often used to help find where the next big success will be. They are looking for strategies that will be “winners” for the company. Trying to pick the next winning strategy is similar to trying to predict who the next great band will be.

Just as over 90% of all those local bands never make it to the big time, around 90% of new business ventures never live up to expectations and destroy shareholder value. Every company believes they are betting on the next “Dave Matthews” type of business venture, when in reality, it is more like a “Whiz Kids” outcome (or worse).

In spite of the terrible odds, companies continue to try to pick winners. Take Kraft, for example. In recent years, they have spent a fortune on a huge number of new products and innovations, most of which were duds. The real money comes from things invented long ago, like Oreo cookies (which have been around since 1912) and Miracle Whip (a recipe they bought during the depression of the 1930s for about $300).

THE PRINCIPLE
The principle here is “the hometown bias.” We tend to have a sense of pride around our home-grown ideas and strategies, just as the locals have a sense of pride for their home-grown bands. Just as it is easy to imagine how our local band could become famous, we can imagine how our home-grown ideas can hit the big-time.

This bias can blind us to reality. I spent some time as a radio DJ. It gave me the opportunity to listen to a great deal of music. I tried to analyze the situation to try to see if there were any common factors which caused some of those bands to become a big hit and why some went nowhere. I discovered that sometimes highly talented musicians made it big, and sometimes they didn’t. Similarly, sometimes marginally talented bands made it and sometimes they didn’t. I couldn’t find much of any correlation for factors which created success.

I think the Australian band Skyhooks (one of the bands I heard as a DJ and didn’t make it) put it well in one of their songs. They said that the successful bands find a “million dollar riff” (a lucky twist of music that tickles the ear).

Now I’m not implying that business success is all luck. But it is true that sometimes just as there are only small nuances between a dud riff and a million dollar riff, there are small nuances between a huge strategic success and a dud.

Here are some tips to help avoid some of the duds of strategy:

1) Be aware of the hometown bias.
Realize that there are more Whiz Kids than Dave Matthew Bands and that local pride can blind us to giving too much credit to our homegrown ideas. Stand back and look at it with a more critical eye. If your bias does not let you look at it critically, then use unbiased research to help you see how the concept will be seen in the real world.

2) Realize that pride and egos can distort our judgment.
Examine your options with a dispassionate eye. Although it may hurt our egos for a time, it is okay to stop a pet project if it is starting to look like a dud. Pulling the plug early can often be a very smart thing. It’s not an admission of failure, but rather an avoidance of a bigger failure later.

3) Sweat the Details.
Because the difference between huge success and huge failure in music can hinge on the nuance of a riff, it is really important to sweat the details. Great ideas are important, but great execution can often be even more important. Designing and selling digital music players was a great idea. A lot of companies dove into the business. Yet most of these companies have failed to catch on, in spite of it being a great idea. Ipods did catch on, however. One of the reasons they succeeded with that same idea when others didn’t was because Apple did a better job of sweating the details. They spent more time mastering the nuances of the business.

4) Spread your Bets.
In the music industry, even though the music labels had experts with the “golden ear” who had a good sense about what music would sell well, they were still often wrong. As a result, the music label would hedge their bets by investing in a large number of bands. The logic was that even if nine out of the ten guesses were wrong, the tenth would be so profitable that it would more than make up for the losses on the other nine. Similarly, businesses need to use tactics to reduce the risk, like:

a) Don’t put all your hopes into a single idea. Have multiple experiments going on all the time. That way, you stand a better chance of hitting the idea that makes you a winner.

b) Stage your investments. Don’t bet the whole thing at once. Invest in the idea in stages. If a stage fails, then you can back out before you’ve invested everything. If a stage succeeds, you can ramp up.

5) Understand that your idea will not be executed in a vacuum.
Eventually, your idea will need to be executed out in the marketplace, where competition will try to minimize your success (for more on this, see the blog, “Bombs Start Wars”). To avoid future disasters out in the marketplace, ask yourself these questions:

a) Does my idea provide a superior enough solution in the marketplace for a consumer problem to cause people to switch from their current solution alternative to mine?

b) If the big, powerful competitors also decide to enter this space, do I have what it takes to beat them in head-to-head competition?

SUMMARY
Most new ideas fail. Don’t let egos or homegrown pride cause to you to back a bad idea. Be willing to do what is necessary up-front to reduce the bias and what is necessary later to pull the plug early if the idea does not pan out.

FINAL THOUGHTS
Good decision making requires looking at an issue both rationally and emotionally. Although we need to eliminate emotional biases that blind us to reality, we do not want to eliminate emotions entirely from our thinking. After all, our customers use emotions to make their purchases.

Howdy Partner!

THE STORY
Once upon a time, there were two nearly identical companies in the same industry, called Alpha Company and Beta Company. Both companies wanted to grow, and both realized that if they increased their power throughout the entire supply chain, it would help their growth. However, both companies took a different strategic approach to reach this goal.

Alpha Company decided to reach its goal primarily through acquisitions. It started to use its resources to buy up companies in other parts of the supply chain. The logic was simple: the more companies they owned throughout the supply chain, supposedly the more power they would have within the entire supply chain.

Beta Company decided to reach its goal primarily through strategic alliances and partnerships. Beta used its resources to create superiority within the one area of the supply chain where it already operated. It then used that superiority as a bargaining chip to convince others in the rest of the supply chain to form preferential partnerships.

The results for Alpha Company were as follows:

1) Alpha could only acquire companies which were willing to sell to them. Usually, the companies who were the very best in their sector were strong enough that they did not see the need to sell their company to Alpha. Either that, or they asked for so much money that Alpha could not afford them.

2) Alpha ran out of resources before completing the acquisition of an entire supply chain network. They had more of the pieces of the puzzle than before, but the network still had many holes in it.

3) Rather than spending time improving their core business, their time was spent trying to integrate the acquisitions. This always seems to be more difficult, more time consuming and more expensive than originally anticipated. And while they were doing this, other companies—like Beta—were improving their core business. This was reducing the competitiveness of Alpha’s core business.

4) Because Alpha always demanded that its divisions work exclusively with each other, they were not always able to use the best partner in every situation. This weakened their position in the marketplace and lowered the sales in the acquired companies.

5) Many of the rest of the businesses in the supply chain no longer saw Alpha’s core business as an ideal partner, because Alpha had acquired one of their direct competitors. Therefore, the business they used to give to Alpha went to others who did not own businesses in their sector. This lowered Alpha’s sales in the core business.

6) With the lowered sales in the core as well as the new businesses, Alpha was forced to cut some costs in an attempt to save profitability. However this only served to weaken the quality of their offerings, making them even weaker in the marketplace.


The results for Beta Company were a bit different:

1) Because they had invested in making their core business superior to competition, Beta became a sought-after partner. Beta was able to use this clout to create preferential partnership deals with the best players in the rest of the supply chain. It had deals with great players throughout the entire supply chain network.

2) The preferential partnerships became more profitable than the former way of conducting business. Much of the added profitability from the preferential partnerships was plowed into the core business to make it an even stronger competitor/partner.

3) Even though Beta had preferential partnerships, it refrained from creating very many “exclusive” partnerships. Therefore, it could still work with others in the network if it made more sense for its customers.

4) Although the companies which had not formed partnerships with Beta were a little angry with them, most were pragmatic enough to understand that Beta had become so superior in its field that it still made sense to deal with them, in spite of their own anger. In addition, they felt that at least Beta had not become a traitor by buying one of their direct competitors, so they liked dealing with Beta more than Alpha.

In the end, Beta kept getting stronger within the entire supply chain, while Alpha kept getting weaker. Eventually, Alpha filed for bankruptcy while Beta became the darling of Wall Street.

THE ANALOGY
One of the key issues addressed in strategic planning is the concept of growth. Nearly all of a company’s stakeholders want to increase the growth of the company. Acquisitions are often seen as a “sexy” way to achieve that growth. Just spend a little money and—BAM!—you are instantly larger than before. It’s a lot faster than trying to diversify as a start-up. In addition, you eliminate some diversification risks versus start-ups, because you are purchasing known competencies (that you do not currently have) which are already established in the marketplace.

The problem is that although acquisitions may at first seem to be the best way to diversify and grow, they are fraught with problems of their own. As we saw in the story above, Alpha was worse off than before due to its acquisition strategy.

In today’s rapidly changing economy, it is often better to grow via partnerships, alliances and preferential agreements rather than through acquisition. This was the successful approach of Beta in the story above.

Therefore, when developing growth strategies, always make sure you consider the partnership approach.

THE PRINCIPLE
The principle here is that “control” is not the same thing as “ownership.” Often, we rush to the conclusion that the more we own, the more we control. Therefore, we try to own a lot of things.

In reality, ownership can often weaken one’s control. In the story above, Alpha’s power in controlling the supply chain was less after their acquisitions than before. It lost power as follows:

1) It lost the power of dealing with the best people in the industry. Part of this was internal because they were now limiting themselves to using the companies they acquired, which were not always the best choice for every situation. Part of this was external, because now others were less willing to work with them because they did not want to work with a firm which owned one of their direct competitors.

2) It lost power in their core business. This was due to multiple factors, including having less time and money to invest in the core, as well as a loss in productivity due to the loss in customers who did not want to deal with them any longer because of the baggage of having to deal with their other divisions.

Often times, more power can be gained through partnerships than through acquisitions. Partnerships can give you a great deal of control over how the entire ecosystem works without tying up all of your capital. Think of the medical profession, which thrives on referrals. Partnerships are a way to get a disproportional amount of “referrals” at a preferred rate.

In the story above, Beta gained power in several ways:

1) It became more powerful in its core business, because it was able to concentrate more resources on improving its performance. This made it a more desirable partner.

2) It became more powerful in determining how the profits in the entire ecosystem were divvied up. Through its negotiations, Beta obtained a preferred status, which allowed it to negotiate more favorable terms for itself. As a result, Beta tapped into a larger share of the entire ecosystem’s profit pool without having to invest in more of the ecosystem. This makes for a great return on investment. By contrast, when Alpha acquired other companies in the ecosystem, it had to pay a premium to get the deal done. Hence, the company who sold the business to Alpha extracted a great deal of the profitability through the premium price, leaving less for Alpha.

Now some of you may be saying that acquisitions are better because they bring more synergies. Perhaps this is true, but acquisitions also bring more dis-synergies from people who no longer want to work with a company who bought a direct competitor. Often times, the net synergistic benefit is higher with the partnership, because you are more likely working with a better mix of partners.

SUMMARY
Although growth is often a very good thing, not all attempts at creating growth are equally beneficial. In many cases, partnering is a better way to grow than acquisitions. Ironically, partnering usually creates greater control than ownership. And in the end, control is what typically leads to greater profitability.

FINAL THOUGHTS
People who volunteer to do a job usually do a better job than those who are forced into it. In a sense, acquisitions are like forced labor, whereas partnerships are more voluntary.

The Illusion of Precision

THE STORY
Way back when I was getting my MBA, we were placed on various teams for doing a project with an outside client. As part of our presentation, we were referencing some of the consumer research done by the client.

One of the women on my team kept wanting to present the consumer research results out to four decimal points. She wanted to put in our presentation statements like “32.1432% of the consumers” believe such-and-such. I kept telling her that I thought it was silly to go out to four decimal places, since the statistical significance of the results were + or – 3%. In other words, that 32.1432% could just as easily be 29.2% or 35%.

But she kept insisting that if we used more decimal points, we would look more precise and our conclusions would be more convincing. I replied that it would make us look stupid, as if we didn’t understand statistical significance.

We finally reached a compromise. I got her to come down to only three decimal points. (Okay, so it was only a small victory—but I claim it anyway)

THE ANALOGY
Strategic planning lives in a world of imprecision. Nobody knows exactly how the future is going to turn out—and certainly not out to four decimal points. Yet, for some reason, we feel more comfortable if we give the illusion that there is more precision our strategy than what is called for.

That is what happened on my MBA project. One of my teammates believed that if she used more decimal points, it would make the data appear more believable and the conclusions more convincing.

In reality, adding those extra decimal points did not make the data any more precise. It was still only accurate to + or – 3%. And in the vast majority of the cases, one would come to the same strategic conclusion had the number had been 30% or 34%. So why sweat the extra digits?

As I like to say, “You only need enough accuracy to get to the point where you make the right decision. Any additional accuracy beyond that is a waste of effort.” For more on this, see my blog “What’s a Few Seconds Among Friends.”

In the world of strategic planning we can create an illusion of precision by burying our vague notions about the future under a pile of numbers and/or words. Just because you can build a gigantic and highly detailed excel spreadsheets with thousands of numbers in them does not mean that it is any more precise than a small handful of “big picture” numbers. Breaking numeric imprecision into smaller pieces does not make the overall notion any more precise.

Similarly, taking a notion of where to go and filling a giant notebook full of detailed steps on how to get there does not make the notion any more precise. If your compass direction is off by 5 degrees on a 100 mile journey, breaking up that 100 miles into 528,000 individual instructions on how to move for each foot of the way on that imprecise path will not get you any closer to your destination. In the end, you will still be 5 degrees off.

So here is today’s question: Is having the illusion of precision a just useless indulgence, or can it actually damage your strategic planning process?

THE PRINCIPLE
The principle here is that the creation of the illusion of precision can actually be very damaging to your strategy. In fact, you are probably better off if you work with less precision. The reasons are as follows:

1) It can unnecessarily limit your inputs
2) It can unnecessarily limit your outputs

These are explained below.

1) The Illusion of Precision can Unnecessarily Limit Your Inputs
If you start believing that your conclusions are far more precise than they really are, then you will start believing that you have all the information you need. The thought process becomes, “Why look for additional inputs when you know exactly what is going on and exactly where you are going?”

As a result of this illusion, one stops gathering data. This can be very dangerous. The future is full of unknowns. As you move down the path, you will have the opportunity to learn more. This additional knowledge can help you make modifications to your strategy to put it on a better course. However, if you are no longer looking for data inputs, then you will miss out on that opportunity.

Usually, the initial strategy has more of a top-down orientation. In other words, the initial strategic design is developed primarily by top level executives, who then communicate the direction down to the lower level troops. If too much of an illusion of precision is given in that communication, then it tends to stifle any feedback from the troops.

The troops are your eyes and ears to the world where you business is operation. To miss out on the input your troops could give to the process is a great waste of talent and insight. However, if the precision in the assumptions appears too great and the strategy is presented as a precise manner that looks fully completed, then it is harder for the troops to feel like it is worth their while to try to add their point of view.

Conversely, if the strategy is presented in general terms and then the call is put out to the troops for input, you will get a better response. In addition, because they had a greater hand in developing the strategy, the troops are more likely to be enthusiastic about making sure the strategy gets accomplished.

2) The Illusion of Precision can Unnecessarily Limit Your Outputs (Actions)
If too much precision is given as to how the strategy is to become accomplished, then it becomes harder to improvise the action outputs. The strategy becomes like a cookbook recipe. There are precise measurements of everything that is to be done—a cup and three quarters of this, a half teaspoon of that, an oven temperature of 350 degrees for exactly 28 minutes, and so on. If your strategy reads like a recipe, then the people will act like they are using a recipe and will follow all of the directions as closely as possible.

Unfortunately, when it comes to building a strategy for the future, we’re not exactly sure what the ideal recipe is when we start. If people believe they have to follow each step exactly as outlined, then we miss out on opportunities to improve our actions as we learn more.

It would be like me having a goal to get a number of people from Minneapolis to Dallas rather inexpensively. My initial conclusion could be that the best approach would be to get everyone on a bus and drive down Interstate 35, the expressway which connects the two cities.

It is one thing to suggest the bus trip down I-35 as a possible means to accomplish the strategy of getting many people to Dallas inexpensively. It is something quite different to say that the bus trip down I-35 is the strategy.

Things can happen. For example, part of I-35 in Minneapolis was the bridge which recently collapsed. It will take over a year to replace it. If you think the strategy is to precisely use I-35, then you will be waiting over a year to start your journey.

Second, what if there is a change in airline fees, and one of your people has special connections so that you can charter an airplane for less than you could charter a bus? If you are forced to “stick to the recipe” and do not ask for input from the troops, you would miss out on this desirable alternative.

Therefore, the best approach is to make sure everyone understands the ultimate goal (get a bunch of people from Minneapolis to Dallas), but provide for some flexibility in how it gets accomplished. That way, the troops can adjust to the unforeseen (like a bridge collapse) and seek out improved alternatives which come up (like connections to get low airline fares to Dallas).

Now we don’t want to get so imprecise that they troops decide instead to go to Istanbul rather than Dallas. Randomness is not an option. But, by the same token, you don’t want to be so precise that you lock into a sub-optimizing recipe of actions which cannot be changed.

SUMMARY
Due to the very imprecise nature of the future, one should not presume to have all of the strategic answers to high precision at the beginning of the journey. By doing so, one is at risk of ignoring additional information as one moves down the path (and thereby missing out on the benefits of mid-course correction and the insights of the troops out in the field). In addition, one is at risk of locking into a “follow the recipe exactly” approach to implementation which eliminates the flexibility of adapting to a better course as situations change and new opportunities emerge.

Flexibility needs to be a part of your strategic implementation, and too much of an illusion of precision can hamper that flexibility.

FINAL THOUGHTS
When I was in Boy Scouts, they taught us that if you got lost in the woods and are looking for a way out, look for a directional marker as far out in the distance as possible and walk in that general direction. Otherwise, if you focus too close to where you are standing, you will tend to walk in circles and never get out of the woods. Similarly, to keep your strategy from moving in circles, look in the broad general direction rather than deceptive detailed precision right in front of you.

Rich Soil

THE STORY
Many years ago, my wife thought I needed a hobby, so she chose one for me—gardening. At the time, I was living in the perfect place for a garden.

1) The home was originally built prior to indoor plumbing, so the area where the outhouse used to be was very fertile.

2) There was a large aquifer of water just under the surface. It was so close to the surface that the house couldn’t have a basement. When a truck drove in front of the house, you could hear the echo through the hollowness above the aquifer.

3) The garden had a nice sunny southern exposure.

4) At the time, my children were small and we had a kiddie pool for them. When the water got a little slimy, I would put a submersible pump in the pool and use the water to keep the garden moist.

The garden was very successful. The tomato plants grew over 6 feet tall and were full of tomatoes the size of softballs. All the other produce was equally as plentiful.

When I moved to a new location and tried gardening again, I had different results. This new house was built on a drained lake bed. The ground was virtually solid hard clay. There were so many trees that the garden got little sunlight. The area was full of rabbits who would eat the young sprouts when they came out of the ground. The growing season was so short that by the time I replanted the seeds after the rabbits got the first batch, frost would come before the produce was ready to pick.

The results of this second garden were so bad that I quickly gave up gardening as a hobby. So now, about the only thing I am good at growing is my waistline, eating food from the supermarket.

THE ANALOGY
Businesses want to grow and be very productive, producing abundance like my first garden. However, the results that businesses have can often be closer to my paltry experiences with the second garden.

In both gardens, I was using similar seeds and plants, purchased at similar types of stores. But even though I was starting with the same “beginnings,” I was having different “endings.” Why? The different results were due to the fact that I was planting my seeds into different environments. One environment was far more conducive to growth than the other.

Seeds are like strategies. One can have great strategies, just as one can have great seeds. But if you plant those strategic seeds into a bad corporate environment, one can end up with awful results.

The strategic process should not end with the creation of great strategies. This is only half the battle. The other half of the battle is making sure that you have created the proper environment for those strategies to grow in.

Sometimes a strategy which is great for another company may be bad for your company because of a difference in the corporate environment. For example, one time I tried to grow okra in my second garden. Okra thrives in long, hot, sunny summer environments. I planted them in cold, shady short-summer Minnesota. It was an utter disaster because the plant was inappropriate for the environment (which makes me wonder why someone would sell okra seeds in Minnesota).

Not only does the strategy need to be appropriate for the strengths and weaknesses of the firm, but the strategy must include a clear path for how to make it succeed within he unique culture of the organization. Perhaps the strategy will even need to include steps on how to change the culture.

Successful implementation is not automatic just because the strategy is “great.” The implementation path needs to be strategized as well. Otherwise, your great strategic seeds will lead to nothing but frustration.

THE PRINCIPLE
The principle here is that a good strategic process must plan for the entire process, including the building of the proper internal implementation environment. The McKinsey organization recently conducted a survey with over 100,000 business people to try to determine which soil is best for planting strategic seeds. What they discovered was the following:

1) There is not one factor which creates a successful environment. One cannot rely on a single “trick” to turns a company into a strategic powerhouse.

2) Instead, companies need to be performing fairly well across a number of factors. This is like my first garden, which had many different good attributes going for it.

3) Once gaining competency across many basic management skills, the highest likelihood for success came from companies which excelled in three areas:

a) Accountability—People knew exactly who was responsible for accomplishing each aspect of the strategy. Clear roles make it easier to accomplish great things.

b) Direction—People had a good sense about the big picture of what was trying to be accomplished. Giving direction is not the same as giving orders. People were given freedom in making choices of how to get the work done. But there was no confusion about ultimate goals and objectives. There was a greater context surrounding all the activities.

c) Performance Culture—The winning organizations had found a way to break down silos and work as a team. There was openness and trust, which made cooperation much easier to accomplish.

So here is the question strategists must wrestle with…

When designing strategy, are you stopping at the point of the “great idea” or are you helping create the right soil for the strategy by focusing on ways create greater accountability, greater direction, and a trusting performance culture?

Strategy without such a context is like a seed planted in a dried lake bed made of hard clay. It will not be successful. I have personally experienced trying to create strategy in an environment like this—little to no accountability, vague direction, and lack of trust. It is a difficult struggle…not very fruitful.

The handoff from idea to implementation is a tricky task. Unless the soil is properly prepared, the handoff will most likely be disappointing. Just as it took years of outhouse usage to create my great garden soil, it may take considerable time to create an environment conducive to accountability, direction and trust. Time spent by leaders going to the field organizations to explain the context around the direction is important. Time spent linking strategy to tactics to the proper individuals via clear accountability is time well spent. Time spent building trust will pay back large dividends.

Don’t assume that implementation will magically occur. Make implementation as important as ideation.

SUMMARY
If you want your strategy to produce great results, it is essential to design it in conjunction with designing an organizational environment capable of putting the ideas into practice. Although many elements are necessary to create this environment, three of the most important are Accountability (knowing who’s responsible for what), Direction (understanding the big picture and how you fit in), and Performance Culture (an environment of trust and openness, where people can cross-functionally work together).

Without this environment, your ideas will most likely wither away.

FINAL THOUGHTS
It is interesting to me that the same chemicals used to make fertilizer can also be used to make bombs. They can either help produce life or destroy life. Be careful how you fertilize your strategy. If you use the concepts mentioned above, you will create life and growth. However, if you fertilize your implementation with mindless platitudes and “happy talk” B.S., then you will most likely bomb.

Soulless Capitalism

THE STORY
Shortly after Enron started to implode on itself, I started receiving a lot of resumes from recently laid off Enron employees. I interviewed a few of them.

One of the questions I had for them concerned how Enron got into the mess it was in. How could a company so lose its moral compass that it ended up making so many unethical decisions?

The answer I got was this: On the first day of orientation, you were taught about Enron’s RICE guidelines. Rice was an acronym for the following four principles: Respect, Integrity, Communication, and Excellence. Supposedly, these were the guiding principles of Enron which were supposed to direct your decision making.

However, the people I talked to said that you never heard about RICE after orientation. After orientation, this is what you saw and heard:

“You will have very aggressive quarterly goals to meet. If you exceed those goals, you will be rewarded very well with Enron stock. If you did not meet those goals, your career at Enron might very well be over.”

Consequently, people soon figured out that Rice was a sham and that the true principle of Enron was “Do whatever it takes (perhaps even questionable behavior) to make your quarterly numbers.”

THE ANALOGY
One of the tasks of strategic planning is to develop a business mission statement. Many executives I have met place very little emphasis on this process. They do not see how it creates much relevance for the day to day business. And given some of horrible mission statements I have seen over the years, I can see why they would say that. Many mission statements are useless gobbledygook. They are just a bunch of fancy words which sound impressive, but provide no guidance to the organization. (For fun you can go to Dilbert’s web site and play a game to make up worthless mission statements.)

Other times, a company may have an “official” mission statement but ignore it, as was the case with Enron. Although they handed you a paper with the words respect, integrity, communication and excellence, it was obvious that the company marched to a different mission based more on greed, deception, and miscommunication.

Given that mission statements are often worthless or ignored, it is easy to see why they are often not a business priority. However, I contend that without a well thought out and well ingrained mission statement, you can end up creating another Enron-type situation in your own company. Therefore, they deserve serious attention.

THE PRINCIPLE
The principle here is that in war, mercenaries are never as effective as soldiers who believe in the cause and are fighting for that higher objective. Mercenaries fight merely for the money they earn. If the battle becomes too intense, a mercenary may decide that they money is not worth the risk and pull back. Or, when an area is conquered, they may personally help themselves to an excessive amount of the plunder and run away with the riches for themselves rather than for the country which hired them. Worse yet, if the opposing side decides to pay them more money, they may switch sides and use their knowledge about you against you.

By contrast, a soldier who believes in the cause is fighting for something they value more than money. As a result, they are willing to sacrifice more to reach the goal. They will fight harder for the cause and be more loyal to country they are fighting for. Many are willing to even die for the cause.

When a company eliminates, ignores, or writes a worthless mission statement, they are in essence treating their employees as mercenaries. There is no higher cause worth fighting for. The employees are only there for the money. As a result, you are opening yourself up to all the problems which come with a mercenary work force.

1) Without a strong, noble corporate mission, employees are more likely to act with selfish self-interest as their motivation. Personal power and greed begin to choke out cooperation for the greater good. (After all, without a mission, there isn’t much of any greater good to cooperate or make sacrifices for.)

2) When it comes time to hire people, the good soldiers who want to fight for a cause will not apply for jobs at your company, because they want to work for companies who provide more than just a paycheck. This is especially true with the younger generation just entering the workforce. So you will be stuck hiring people who are only in it for the money and also have a more difficult time tapping into the next generation.

3) When the times get tough, the mercenaries will jump ship and go work for a different company which offers easier prospects for growth, promotions and money. Their loyalty is only to themselves and the WIIFM (what’s in it for me) motivation takes over. The costs associated with higher turnover will come into play.

4) The cost of doing business probably goes up because mercenaries probably will demand more money to do the work than a dedicated soldier. In addition, because the mercenary is less devoted to the cause, they are probably less productive. As a result, you would need more mercenaries than dedicated soldiers to get the same amount of work done.

I saw a company make the conversion from being a place with a cause to being mostly just a place to make money. Prior to the conversion, a large number of people were willing to consistently work long hours (60+ hours per week) because they enjoyed being a part of the cause. After the conversion, many of these people said that it wasn’t worth the long hours just for the money, so they cut back to working only 40-50 hours per week. How’s that for a quick drop in productivity?

5) Because you do not have the positive motivation of the noble cause to incent people to work hard, one has to rely more on negative punishment to get the work done. That is why companies like Enron reviewed an employee’s performance every three months to see if they should be fired.

During the initial war in Iraq, the front-line Iraqi soldiers were mercenaries. They were told that if they refused to fight and wanted to turn back, the Iraqi soldiers behind them who were dedicated to the cause had orders to shoot them. Although businesses might not be that harsh, mercenary-type environments have a tendency to become more repressive and punishment-oriented. Fear is more prevalent. It was a combination of the fear of reprisal if numbers weren’t met and the promise of huge stock bonus if numbers were met which caused people at Enron to make bad choices. Cutting ethical corners was feared less than the punishment when numbers weren’t met.

By contrast, a company with a noble cause can create a healthier and more productive environment. The irony is that by focusing a little less on pure profit, one creates an environment which tends to be more profitable (and less likely to be the next Enron).

Business mission statements can help crystallize that noble cause and keep it its awareness high in the organization. However, that only happens if:

1) You can get top management to believe in the higher mission and live it out on a daily basis.

2) The business mission clearly articulates a noble cause which is:
.......Relevant to the business,
.......Meaningful to employees/customers,
.......Not just a bunch of platitudes about becoming bigger and better at making money.

3) Employees see that the mission statement is more than just words, but is a meaningful part of the way the business is run.

Nearly every business can come up with a noble cause:

Wal-Mart: Saving people money so that they can live better lives.
Walt Disney: To bring happiness and joy to people’s lives.
Mary Kay Cosmetics: To give unlimited opportunity to women.
Cargill: To improve the standard of living around the world.

The Johnson & Johnson credo is a great mission statement. It can be seen at http://www.jnj.com/our_company/our_credo/index.htm. Not only is it a great statement, but it is a foundation for how the company is actually run.

SUMMARY
Although on the surface a business mission may seem like a minor thing, it can be an extremely useful tool if crafted properly and used as a guiding principle for how the business is run on a daily basis. The value in a business mission statement is that it can crystallize a noble cause for a company beyond just making money. This helps a company fill its ranks with dedicated soldiers who work harder because they believe in the cause. By contrast, without the noble cause in the mission statement, the ranks are filled with mercenaries who tend to be more selfish and can make your company more like what Enron became. And over the long run, the noble cause tends to create greater profits than just a myopic focus on money.

FINAL THOUGHTS
Before Enron imploded, I had a conversation with the President of US Operations for Enron. I told him that I had heard that Enron worked its employees very hard, forcing them to put in a lot of hard, grueling hours. His response was that they had hired a lot of people who came out of investment banking. These former investment bankers were used to these types of conditions, so they did not complain.

I saw the results of a survey which asked investment bankers if they would continue in that profession if it no longer provided the abnormally high wages. Over 80% said no. So Enron appeared to be hiring out of a pool teeming with mercenaries who though they might strike it richer at Enron. Is it no wonder that Enron imploded?