Strategy Planning Analogy #558: Counting People

TWO STORIES

1. High School Survey

The US government used to do an annual survey of high school students. The objective of the survey was to track things like the levels of drug use and sexual activity in that age group. Because the writers of the survey were afraid that high school students would lie about their own personal activities, the government asked the students to estimate what percentage of students in their high school they felt were doing each of these types of things.

At first, the government would average all of the responses for each question to get an estimate of how prevalent various activities were. But then, someone dug deeper into the results. What they found was that although the average percentage number was somewhere in the middle, very few of the individual students ever answered with a number in the middle. Instead, there were two clusters of answers on each question—one cluster of students which gave a very high percentage answer and one cluster of students which gave a very low percentage answer. This caused the government to take a second look at the results.

As it turns out, the researchers found out that most students do not hang out with a large percentage of their fellow students. As a result, the students had no idea of the drug and sexual activity of the greater student body. Instead, they only had the reference point of their small band of close friends. 

And these close bands of friends tended to behave similarly to the others in the same band. So, if a student participated in these activities, most of their friends did also, so they concluded that most of the people in the school must also do these things. Similarly, if a student did not participate in these activities, most of their friends also did not, so the student would assume that most of the students in the entire school also did not.

Based on these insights, the government shifted its emphasis from tracking the change in the averages from year to year to tracking the relative sizes of the high and low clusters from year to year.

2. Amazon Music Reviews
Before buying music, I like to read the reviews in Amazon. Over time, I realized that the vast majority of all the music on Amazon has an average ranking of 4.5 out of 5. With nearly everything rated equally, it became impossible to use these average ratings to decide which music to purchase.

But then, I started thinking. The problem with Amazon music ratings is that they are voluntary. This is not a random sampling. People only turn in a rating when the mood hits them. And typically, the mood only hits them if something they hear is especially good or especially bad. And it in the vast majority of cases, the review came from people who thought the music was especially good.

Once I figured that out, I stopped looking at the average rankings of the review and instead started looking at the number of reviews in total for a particular piece of music. My logic was that if only the ones who loved the music send in a review, then the more reviews sent in, the more people loved that music.

This has turned out to be a far more effective way to use the Amazon review process.

THE ANALOGY
Companies like to base their strategies on facts. Sometimes, they try to get their facts directly from the consumer. This tends to happen most often at three phases of strategic planning:

1.     At the beginning, when trying to understand the market place.

2.     In the middle, when testing concepts

3.     At the end, when assessing whether the strategy is working.

The good news is that in today’s interconnected world, there are lots of ways to get consumer input.

The problem is that these sources can often have flaws like the ones mentioned in the stories. Complainers and the people who rate companies online are not a random sample. They are biased towards people who like to rate or towards people with extreme views (like the Amazon music ratings). If you just look at the average ratings and comments, you will most likely come to the wrong conclusion. It may be better to count the reviews, rather than average them.

And even well designed surveys can with random sampling can have flaws. After spending decades in consumer research, I discovered that people will try to honestly answer all of your questions well, but they often just don’t know the answer, so they guess—and often very wrongly (like the high school survey). I have found this to be particularly true when asking people to predict their future behavior in areas where they have little experience (like how they would react to a new strategic scenario).

Therefore, we need to be careful in how we interpret this data.

THE PRINCIPLE
The principle here is that one cannot run a strategic planning process based solely on research, especially if you only look at averages. Part of this is due to some of the research flaws mentioned earlier. Another part is due to the nature of strategic planning itself.

Strategic planning is looking for ways to build a new and better future. It can be about finding new white spaces which have never been exploited. It can be about inventing solutions which never before existed. It can be about building business models that break all the old rules. It can be about finding uncharted “Blue Oceans” of opportunity. In other words, strategy is a lot about trying to get ahead of the curve and be an early adopter of the next big thing.

Of course, if you are trying to lead the way into the future, you may be several steps ahead of the general population. Questioning the general population may not be very useful at such an early stage. 

However, if you wait to move until the consumers can speak as experts, it is too late to be at the front end of the strategic revolution. That’s one reason why Steve Jobs didn’t believe in consumer research. He knew that consumers can’t speak meaningfully about a future not yet envisioned.

But that doesn’t mean that research is useless. As seen in the stories above, there are creative ways to look at data to get insights. But may mean you cannot take the initial results at face value. For example, we saw that instead of averaging out what people say, it may be better to just count how many say something. Therefore, be careful when looking at your results. Don’t necessarily take it at face value. Search deeper for the true implications—especially as the questioning looks into the future or is not randomly sampled.

Other things to keep in mind:

1. Although consumers may be unable to articulate how they will act in an inexperienced future, they can articulate what irritates them in the current state. Knowing the irritations of today can help you when designing the newer future.
2. Some people may be living closer to the leading edge than others. Focusing research on leading edge people may give better results.
3. Even though solutions my change over time, attitudes/concerns/desires regarding the problem may be more stable. If you focus on researching the more stable problem issues, it may give insights into how to develop better, innovative, new solutions.

But probably the most important thing to understand is that strategy is not pure math or pure science. It also has an element of artistic creativity. Creating the future is, by definition, creative. Eliminate the creative and you will never find what you are looking for.

SUMMARY
Although we may want a data-based approach to strategy, relying only on data—or taking the data at face value—will probably lead you in the wrong direction. The future is not precise, so you cannot take just a precise approach to get there. The consumer is not always very helpful or knowledgeable in looking beyond incremental change. Therefore, one will need to also rely on artistic creativity to get to the future. In fact, the creative part is likely be more important than the scientific part.

FINAL THOUGHTS
You cannot find the future if you are only looking backwards. And looking backwards is where the consumers are. Sometimes you have to look forward, to the places where the customers have not yet arrived. Creative insight, rather than research, may be more useful.

Strategy Planning Analogy #557: Procedurals Vs. Chapters

THE STORY
One of my favorite strategic planning stories is an interview of Steve Jobs by Richard Rumelt, a professor in strategy at the UCLA business school and a leader in his field. At the time of the interview, Steve Jobs had just returned to troubled Apple with the task of turning the company around and saving it from a path towards bankruptcy.

Rumelt was not sure there was a viable turnaround path for Apple. After all, Apple at the time had less than a 4% share of the personal computer market. The Microsoft/Intel business model (called “Wintel”) had a virtual monopoly on the space. There isn’t much you can do when your position is so insignificant.

So when Rumelt asked Jobs what the long term strategy was, Jobs just smiled and said, “I am going to wait for the next big thing.”

THE ANALOGY
Jobs’ answer to the question would be hard for most boards of directors to take. In essence, Jobs was saying:

1. I don’t know what the strategic direction should be right now.
2. All I know is that it will come from exploiting the next big thing, whatever that is.
3. And I don’t even know when the next big thing will show up. Our main task now is to wait.
4. All I know is that sticking to the status quo is a path to destruction.

Does that give you warm feelings of confidence in the future of the company? As a board member would you accept that strategy?

Well, in retrospect, we know that the next big thing was the iPod and the next big thing after that was the iPhone. Jobs pounced on them and created one of the most valuable companies the world has ever seen.

So, when your company is stuck, perhaps waiting for the next big thing is not such a bad strategy after all.

THE PRINCIPLE
The principle here is that some strategic positions are so weak that they cannot be repaired by merely adjusting the status quo. Sometimes you have to accept defeat in the status quo and move on to the next big thing, even if you do not know what the next big thing will be. All you can do is watch and wait. Then, if you pounce on the next big thing faster and more aggressively than the others, you can own the future and leave the former leaders in the dust.

This is what Apple did. And more recently, this is what NBC did.

A few years back, NBC’s position in prime time TV was not that different from Apple’s position when Steve Jobs came back. It was small and weak. CBS dominated the ratings. There was no easy way for NBC to tweak itself out of its downward spiral. So NBC borrowed the approach used by Apple—it waited for the next big thing.

Procedurals

When NBC was at the bottom, the key to ratings success tended to revolve around having the best “procedurals.” A procedural is a television drama with two distinct features:

1.     Each episode has a relatively independent plot that can stand on its own.

2.     What holds the series together is that fact that each episode follows essentially the same procedure—they all tend to be structured in a similar manner.

CBS was the king of the procedurals, with shows like CSI and NCIS. This helped put CBS at the top of the ratings. When a producer had an idea for a new procedural, they tended to take it to CBS first, because they knew it would be a stronger show inside that CBS lineup. This made it hard for NBC to catch up in getting its own good procedurals. And NBC had the problem that since very few people were watching their current shows, they had fewer opportunities to show viewers promotions for new shows. Hence, NBC was in a bit of a death spiral while CBS was in a sort of virtuous cycle.

At the time, viewers liked procedurals because it fit better with how they watched TV. People didn’t always have time to watch every episode in sequence and remember the plot line from week to week. Hence, they preferred shows where each episode stood on its own.

The networks liked procedurals because they did a lot better in summer reruns. Shows with connected story lines like the original version of Dallas did terribly in summer reruns because once you know how the plot worked out over time, an old episode from the middle was less compelling. By contrast, shows that stand on their own can be seen in any sequence without difficulty (and did better in the summer).

The producers liked procedurals because they were ideal for the secondary market of cable TV. Cable TV channels loved buying rights to show procedurals. They showed procedural shows at all hours of the day, sometimes clustered in blocks and sometimes one episode at a time. This made it almost impossible to follow the shows on cable in sequence. Therefore, the fact that procedurals did not need to be seen in sequence was desirable.

 

Chapters

Procedurals are not the only way to make TV dramas. Another approach is called “chapters.” In chapters, a TV season is seen as being like a complete book and each episode is like a chapter of that book. This approach is very different from the procedural in two key ways:

1. The plotline is connected from chapter to chapter. You have to see the episodes in sequential order for them to make sense, just like you need to reach chapters in sequential order in a novel.
2. The nature of the way the drama unfolds varies a bit from episode to episode, depending on what is necessary to move the greater plot of the season along.

A good example of a chapter show is NBC’s The Blacklist.

NBC could see that the environment was changing in favor of chapters and away from procedurals. For example, more viewers were getting access to DVRs like TIVO so that they could watch prime time according to their schedule rather than the network’s schedule. Now, they would miss fewer episodes and could re-watch them prior to the next episode. This made chapter shows easier to watch.

The summer rerun issue for chapters was becoming less of an issue, because now nearly all shows did poorly as summer reruns and the networks had switched to alternative programming for the summer.  

The prime secondary market was switching from cable TV to digital services like Netflix, Hulu and Amazon Prime Video. Unlike cable, these services allow you to watch what you want to watch in the order you want to watch it. This lead to the phenomenon of binge TV—watching an entire season of a show back to back over a weekend. Binge watching is more powerful when watching chapters than procedurals.

So NBC jumped on loading its prime time with chapters. The hope is that procedurals will soon become obsolete and that NBCs aggressive move into chapters will allow them to capture the future, just like Apple did with the iPod and iPhone.

Waiting is Not Sleeping

When waiting for the next big thing, you don’t just take a nap and wait until opportunity knocks. Waiting is still a strategic activity. Waiting involves doing a lot of watching and speculating. The next big thing usually starts out small. You won’t find it if you are not actively looking for it.

As we saw in the NBC example, NBC had to observe the changing viewing environment to see where the new viewing favored new program styles. For Apple, they just so happened to be talking with their supplier community when they say saw a new type of processor which made would make the iPod possible. In both cases, they saw change and then figured out how to exploit it to create the next big thing.

Another thing to keep in mind is that NBC and Apple did not jump to new things in areas outside their expertise. Apple stayed in consumer technology and NBC stayed in TV entertainment. Leadership needs both the new idea and a way to bring it to life. If you don’t have the skills, you cannot bring the next big thing to life. So part of waiting for the next thing is knowing how to redeploy your competencies to exploit something new.

SUMMARY
Sometimes a strategic position is so poor that it is not worth the effort to try to fix it. Instead, the best strategic move is to move on to the next big thing. Even if you do not yet know what that is, make that your strategy and start looking for it.

FINAL THOUGHTS
If your board of directors or leadership balk at the idea of declaring a strategy to move in a new direction which is still unknown, just show them how that strategy worked out for Apple.

Strategic Planning Analogy #556: Position Vs. Proof

THE STORY
Imagine this conversation with an entertainment promoter. We’ll call him Bob.

Bob: I’m so excited! I just booked a night to use the stage at Carnegie Hall. This is such a great venue to perform in. Some of the greatest performers in the world have had some of their greatest performances at Carnegie Hall. This is the place where winners perform. Success is mine.

Me: So who will you have performing at Carnegie Hall? What will they perform?

Bob: I have no idea. That’s just a minor detail. The important thing is that whatever it is, it will be on that successful stage.

Me: If you don’t know what the act is, how do you plan to sell tickets?

Bob: I’ll just say that great stuff happens at Carnegie Hall. Come see the greatness.

Somehow, I don’t think Bob has this thing fully figured out.

 

THE ANALOGY
In my long line of strategy blogs, one of my favorite topics to talk about is positioning. Dozens of times, I have talked about the necessity for businesses to choose a position if they want to succeed. They need to find a place where they can win.

Perhaps I have focused so much on the importance of positioning that people think that strategy is little more than choosing a position. But strategy is far more than just finding a position in the marketplace. In fact, if all you have is a position, you are likely to fail.

Consider the story above. Bob the promoter found the ideal position—a place where he could win. That place was Carnegie Hall. A lot of performers have won at that position.

But just because Bob had found the ideal place to play does not mean he would automatically succeed. To succeed, he needs to sell tickets. And to do that, Bob needs to figure out what to perform and how to convince people to pay to see it. Owning an empty stage will not draw crowds. Just saying “come see the greatness” won’t work.

In the same way, businesses only succeed if they convert their positioning into preference—a proposition that causes consumers to actually give their money to you (rather than someone else). Being on the right stage only matters if people pay to see it. Therefore, strategy needs to not only find they place where you can win, but a reason for customers to choose to support it.

  

THE PRINCIPLE
The principle here is that positioning is mostly an internal strategy. It tells a company where to play. It talks about the solution it will own and how to structure the company to achieve it. A second strategy, which we will call “the compelling reason”, is needed to get customers as excited about the position as the company is—enough to spend their money with the company. That is the external strategy. Both are needed to win, just as Bob needed both the stage (the position of Carnegie Hall) and the compelling performance for that stage (a reason to come to Carnegie Hall).
   

It is easy to get confused and think that the position and the compelling reason are the same. After all, a position must be desirable to a consumer if it is to be successful, right? Yes, but in reality, what it takes to win internally is not the same as what it takes to win externally.

Trust Issue

Positions tend to rest on owning some idealized superiority, such as highest quality, most luxurious, easiest to use, coolest, cheapest, “ultimate driving machine”, and so on. This type of positioning is what Les Wexner of LBrands refers to as answering the question “What are you Best At?”

Yes, customers like things that are the best. The problem is that customers are jaded. They’ve been hearing claims of superiority their whole lives. After all, how many brands try to claim a position of mediocrity? No, everyone shouts about their superiority. They can’t all be best. Hence, there is a trust issue. You cannot just claim a position of superiority. Nobody will believe it merely because you claim it. No, you have to prove it in order to overcome their lack of trust.

There’s a reason why user and expert opinions/ratings are so sought after on the internet. It’s because consumers don’t blindly trust claims made by the brand. They want them verified by others. They want proof.

So “positioning” determines the claim to be made (what am I best at) and “the compelling reason” determines how to prove to the customer that the claim is true. The two are not the same.

Two Components of Proof

There are two components to the compelling reason. Without them, there is not enough proof to make the claim of the position believable.

The first component is difference. You have to prove that you are different from the alternatives. The logic is simple: If are seen as doing the same thing as others, then you cannot be seen as superior…only the same. You must do something different in order to be perceive as different from the others.

And to make the difference believable, it needs to be easily understood and verifiable.

The second component to the compelling reason is linkage. You need a way to link the difference to the position of superiority. Just saying we’re different because we wear green shirts won’t work, because there is no linkage between wearing green shirts and producing a superior product. The difference needs a direct link to the superiority—proof that the difference causes the superiority.

For example, Dove soap has the position of being “the best beauty soap.” Their point of difference is in saying that their soap is one-fourth moisturizing lotion (and the others aren’t). The linkage is that moisturizing lotion is associated with beauty, so soap with moisturizing lotion can be the superior beauty soap.

Back when Oxydol was the #1 laundry detergent, the position claimed was superiority in cleaning. The difference was putting little green crystals inside the detergent (which others didn’t do). The linkage was that the little green crystals supposedly added bleach to the detergent. And customers could believe that combining bleach to detergent would cause superior cleaning.   

Linkedin’s position is to be the best place for professionals to connect. The difference is that they have far more active professional people in their network than anyone else. The linkage is that you are more likely to make the professional connections you need in the place where the most connections with professionals are possible.

Uber’s position is to provide transportation as reliable as running water, everywhere for everyone. Their point of difference is that their business model abandons all of the conventions of taxis and public transportation. All the rules have been reinvented, including the mobile interface. The linkage is that these changes have dramatically increased the numbers of people providing transportation and improved the interaction with them, making transportation more reliable and more everywhere.

Two Messages

So, as you can see, the positioning message and the compelling reason messages are not the same. In fact, they move in different directions. The positioning message moves towards the broader, more generalized, more universal concepts and solutions. The compelling reason is more specific to a particular company and the “unique ingredients” in its offering.

The position lets you know if the company is relevant to your needs. The compelling reason lets you know if this particular brand is the best alternative in that space (compared to others claiming the same relevancy).

Positioning is about ideals. The compelling reason is about proof.

Both messages are essential. Both need to be a part of the strategy process.

SUMMARY
Although positioning is a key component of strategy, it is not the only key component of strategy. Another key component is the compelling reason. A position is merely a claim that is made concerning where you have chosen to play to win. A compelling reason is the proof as to why customers should believe your claim. Although they are similar concepts, they are not identical. Therefore, if you have only created the position, you are not yet finished with the strategy process.

FINAL THOUGHTS
The problem with claiming a stage like Carnegie Hall is that it is not the only stage. Consumers have other alternatives. So even if Carnegie Hall is the best stage, consumers will go to another stage it they think they will enjoy a better performance. Therefore, you need to work on two fronts: finding your platform/stage AND making sure you are perceived as having the preferred performance.

Strategic Planning Analogy #555: Managing the Full Cycle

THE STORY
A friend of mine recently explained to me how his parents survived a lifetime of farming. He said their farm tended to run on a five-year cycle. In general, over that five-year span, one of the years would be extremely profitable, two would suffer big losses and two would be about break-even.

So this is what his parents did. When they had that one great year on the farm, they would shrewdly invest the windfall into the stock market. This investment would have enough of a return to get them through the four years of breakeven and losses. Then, when the next great year came again (about five years later), they’d start over again, investing the windfall in stocks to cover the next four years.

Over time, they got to be very good at stock investing. It makes you wonder if their true occupation was really farming or investing.

  

THE ANALOGY
This family was able to survive a lifetime in farming because they did not think in terms of individual years or growing seasons. Instead, they planned their business around the full five-year cycle. They knew there would be highs and lows across the five-year cycle which they did not have a lot of control over. For example, commodity prices would swing wildly and weather would change dramatically. You can compensate for a bit of this in the short term, but not most of it. Hence the highs and the lows in farming were pretty much a given.

Therefore, my friend’s parents needed a bigger plan—one that invested during the high points, so that they would have supplemental income to get through the low points.

Other businesses tend to be no different. Margins rise and fall based on all sorts of market pricing issues outside a business’ control. And, like weather, the external environment for businesses can also dramatically change. Fickle customers can abandon your business category for the next fad and cause as much damage as when the rain stops falling on the farm and goes somewhere else.

Hence, all businesses should consider their actions in terms of the full cycle. They need to reinvest the highs in order to be prepared for the lows. Unfortunately, as we will see below, not all businesses do this.

THE PRINCIPLE
The principle here is that if you try to optimize individual years rather than the full multi-year cycle, you will be on a path to destroy the business. First, if good years are optimized on their own, you end handing out the profits to all the stakeholders. That will not leave any money for the lean years. So then, the only way to optimize the lean years on their own is to cut back on everything (R&D, service, quality, etc.).

This starts the death spiral. The cutbacks in lean times make the company less viable when the good times return, so the highs get progressively smaller. Debt piles up in the lean years until it is unsustainable. None of the money ever gets reinvested for the long term, so the business gets old and unfit for the changing times. Bankruptcy is almost inevitable.

I was reminded of this principle when I saw a recent article online from Fortune. It was a list of the ten largest bankruptcies in U.S. retailing over the last few years. As I thought about this list, I realized that in a majority of these cases, the retailer failed because it did not plan for the full cycle. 

Bankruptcy usually came from a combination of:

1.     Taking out too much money in the good times (usually via a leveraged buyout)

2.     Taking on too much debt that could not be maintained when the bad times came.

3.     Was not ready when “bad weather” came (a negative change in the external environment).

4.     Did not invest the money from the good times into projects that would pay out in the future (adapting to the “new weather”).

Here are a few examples, which I’ve simplified for the sake of time.

Circuit City

Circuit City sold low margin electronics products. The margins suddenly got a lot lower when Wal-Mart and online retailers like Amazon aggressively went after the business. Circuit City did not have enough cushion to absorb the drop in prices. Then, Circuit City made matters worse in the lean times by cutting way back on sales service. It was the aggressive sales service team which was able to talk customers into buying the more profitable attachments and extended warranties for the low margin basic goods. Without the sales people to aggressively boost the margin in the shopping basket, the margins got even lower. Eventually the losses got too great to be sustainable.

Linens N Things

Linens N Things was almost identical to its competitor Bed Bath & Beyond. The only major difference was that Bed Bath and Beyond operated on a lower cost structure (a structure designed for lean times). When the lean times came, the lower cost structure allowed to Bed Bath & Beyond to still make money when Linens N Things could not. Bed Bath & Beyond became more aggressive with its coupon promotions, making it even harder for Linens N Things to compete in the lean times. Finally, Linens N Things sold out to leveraged buyout, which created a debt level that could not be maintained.

A&P

A&P is an example of a supermarket company that could not keep up with the changing weather. It had old stores, run the old way, with old union contracts. When the good times were there, A&P did not reinvest and modernize or build a lot of stores in the growing markets. Instead, it took the profits out of the stores. That left A&P with the oldest stores in the oldest neighborhoods without the changes needed for the modern grocery business. When the bad times came, A&P kept cutting back. But due to their old union contracts, they were forced to first lay off the younger, less expensive (and more productive) employees. This left them with even higher costs relative to competition. It’s hard to survive when you have a combination of the most outdated offerings and the highest cost structure.

Sbarro

Sbarro had most of their pizza restaurants in malls. They thrived in the good times by taking advantage of the traffic already created by the mall. Unfortunately, the weather changed. Malls became far less popular. Mall traffic dropped significantly. Eating in malls dropped significantly. Sbarro did not have a business model designed to draw its own traffic or survive on lower traffic. So when the mall traffic dried up, it was like when a farmer’s land dries up…profits evaporate. It didn’t help that Sbarro had also gone through a leveraged buyout, which drained them of the extra cash needed for lean times.

Blockbuster and Borders

Blockbuster and Borders were two retailers who sold tangible media (Blockbuster: movies; Borders: Books). The digital revolution changed their weather. When movies and books became digital, customers did not need brick and mortar stores any more. Plus, the price of digital movies and books were so low, that Blockbuster and Borders couldn’t compete on price. These company's failures wasn’t inevitable. Others invested to adapt to the new weather of the digital world. Blockbuster and Borders, however, did not make those heavy investments in a timely manner. Hence, they failed. They, like A&P, did not do like my friend’s parents and invest during the good times. You cannot live off the investments you do not make. And without investments into the new, you become obsolete.

Quicksilver

Quicksilver is a retailer specializing in clothing and gear for the surfing culture. Teens paid a premium to shop at Quicksilver because appearing to be part of the surfing culture made you look cool. But then the weather changed. Cool transferred from surfing culture to smartphone culture. The Apple store was now the cool destination. Money that used to go to clothes went to technology. The clothes still bought tended to come from cheaper stores, like H&M, because the money you saved on clothing could be used to buy more cool technology. Quicksilver could not adapt its cost structure and merchandising for these leaner times.

SUMMARY
Business life is not a straight line of consistency. Instead, there are periods of ups and downs. Many of the ups and downs are influenced by external factors that are not completely under your control.

Therefore, if you want your company to last over the long haul, it must be built in such a way as to survive the entire cycle of good times and bad times. That means, that in the good times, you should:

1. Put some money aside for the bad times.
2. Invest some money in things that will improve your relevancy as markets evolve.
3. Not let your cost structure rise to levels that can only be supported in good times.

Then, in the bad times:

1. Live off some of the money set aside in the good times rather than destroy your offering (and image) through overly excessive cost cutting.
2. If it looks like the weather has changed permanently for the worse, be ready to make radical moves to become relevant again. Don’t just try to wait it out if it looks like business is not ever coming back to your business model. In the best case scenario, you would have started investing in these changes back when times were still good.

FINAL THOUGHTS
To be a good farmer, my friend’s parents had to know more than just how to farm. They also had to be good investors. Similarly, good businesses cannot just be managed by people who only know how to operate the current business model. They also have to know how to invest in what will replace the current business model.

Strategic Planning Analogy #554: Organizing the Closet

THE STORY
Jessica and Amanda both owned a huge amount of clothes—so many that it became hard to find the right thing to wear. Therefore, Jessica and Amanda decided to get more scientific about how they organized their walk-in clothes closets.

Because having a color-coordinated outfit was so important, Jessica organized her closet by colors. All the reds were put together, all the blues were put together, and so on. Jessica was proud of her decision. “Now, putting together a coordinated outfit should be a snap,” said Jessica.

Amanda took a different approach. First, she separated her clothes by season. Then within each season, she separated dressy clothes from casual clothes. “This should make it easy to find an appropriate outfit for the season and occasion,” thought Amanda.

So who do you think had the easier time finding an outfit?

As it turns out, Jessica had the more difficult time. Sure, all the reds were together, but there were so many of them to wade through. There were summer wear in reds, winter wear in reds, dressy clothes in reds, casual clothes in reds and so on, all mixed up together. Most of what she had to sort through in reds was inappropriate at any particular time or occasion. It was difficult to find the appropriate red items at any particular point in time.

By contrast, Amanda’s approach to sorting made finding an outfit much easier. She knew what season and occasion she needed an outfit for before entering the closet. Then, she went to the appropriate area where those types of clothes were located. It was easy to make the right choice.

THE ANALOGY

Just because you organize your closet does not mean that it will help make your life simpler and more organized. Some organizational methodologies are just more helpful than others. Amanda, who organized by end use, had a superior system of clothes segregation than Jessica’s, which sorted by color.

The same is true in business. Businesses are told that things will be better if they segregate and specialize. However, not all segregation approaches are equally effective. Some are far more efficient than others. If a business chooses the wrong segmentation approach, it may deceive itself into thinking it is better off, merely because it went through the act of segmenting.

However, it may find itself in a situation like Jessica, with a segmentation scheme that provides no benefit, because it organized around the wrong factor (like color).

Therefore, before running your business through a complicated segregation and specialization program, make sure you are segregating and specializing on the most effective factors.

THE PRINCIPLE
The principle here is that a segmentation system based on end use and occasion (like Amanda) is almost always better than a segmentation system based on people/customers. At first, this may sound like heresy. After all, the majority of publications on targeted business segmentation will focus on how to target particular customer segments. But, as we will see below, that is not the best system for these times.

Push Vs. Pull

The targeted customer approach was developed a long time ago, before the advent of social media and consumer empowerment. The idea was that you would choose a particular customer segment and then pitch your product to that segment. It assumed that the business controlled the conversation, both in terms of who was involved and what the message was. It was called “push” marketing, because the manufacturer was pushing the conversation to its intended target. It was a controlled, one-way discourse. In such a controlled environment, segmenting by customer made sense.

However, that world has pretty much disappeared. Customers now want a dialogue, which includes not only a two-way conversation with the manufacturer, but also adding in other voices, like blogs, independent reviews, consumer ratings, and the opinions of their friends. The manufacturer no longer controls the conversation. It is merely one voice among many.

Now, we are in a “pull” environment, where the customers decide whether they want to get involved or not. If they decide to opt-in, then they pull the product towards them. If the customers don’t want to opt-in, the manufacturer is left out. Because the company has pretty much lost the ability to control who wants to be in the conversation, it seems a little silly to think they can control the segmentation of customers.    

Customers Have Multiple Occasions

But even if you could still segregate customers, it’s not the best choice. This is because people do not act the same in all situations. Take food, for example. Your choice for the most appropriate place to get food can change based on the situation/occasion:

• At the beginning of the month, when flushed with cash: A stock-up store.
• When out of a couple of perishable items, like bread or milk: A convenience store.
• When trying to impress a date or a boss: Higher-quality, more expensive food.
• When trying to stretch your money at the end of the month: a hard-discount cheap store.
• When needing a quick snack at work during a break: a vending machine.
• When in a hurry: a fast food restaurant.

As you can see, the person stayed the same, but the best option did not. The best option for the same individual varied by occasion. So if you target a particular consumer segment, what are you supposed to offer, since it varies by occasion? Am I to be a combination large stock-up, small convenience, high price, low price store inside of a vending machine that is also a restaurant? There really is no way to capture a consumer segment, because the consumer segment is not consistent across occasions. It really isn’t a meaningful segment.

Occasion Segmentation

This is why occasion-based segmentation is a much better choice. It was a better choice for Amanda’s closet and will be a better choice for your business. There are three reasons for this.

First, it allows a company to specialize and become “best at” offering the solution to a particular occasion. Rather than trying to be that combination food mess mentioned earlier, you can focus on just one of those occasions and truly become the best. That way, when someone is looking for a solution to the problem associated with that solution, you will stand out as the best option and get the business.

And this leads directly into the second reason to segregate and specialize based on a solution. In a pull environment, the customer is the one making the choices, and they make their choice at the time of the occasion. They will go out into the social media space to figure out what is the best option for that occasion and then pull in the best option. The only way they will choose you is if you have specialized in such a way as to be the best at that particular time and occasion. So to win in the new environment, you need to own the occasion.

The beauty is that you are now open to all modern customers, not just a segment. Whenever anyone falls into the occasion you are specializing in, they can be yours. And given the modern digital tools, they will find you. Isn’t that better than proactively telling people you don’t want their business because they are not in your “customer segment”?

Take the Kia Soul. It was originally targeted to a young “first car” consumer segment. However, one of the largest segments buying the car is retirees. As it turns out, retirees drive less, need to save money (on fixed incomes), and don’t haul around a lot of stuff or people. The Kia Soul is a great solution to the majority of the occasions retirees fall into. Why write off retirees and all of their business because of a push marketing segmentation directed to youth?

Finally, a specialization based on occasion typically leads to operational efficiencies. By not trying to be all things to a consumer segment, you can save all the expenses associated with that. Hence, the occasion-based focus can be a more profitable approach.

SUMMARY
In general, specialization and focus are good things. However, the benefits of specialization and focus vary depending on what you choose to focus on. In most cases, focusing on owning an occasion segment is more powerful than trying to own a consumer segment. Occasion-based segmentation is more in tune with pull marketing and the way consumers behave today. In addition, consumers vary their choices based on the occasion at hand, which implies that there really is no single way to please a consumer segment. Therefore, instead of focusing your business based on consumer demographics, focus on solutions for particular situation.

FINAL THOUGHTS
Every time you pick out your clothes to wear, remember that your choice is made based on the occasion for which you are wearing them. That way, you will never forget to run your business the same way—designed to be the best at providing a solution to a particular occasion.

Strategic Planning Issue: 3 Pieces of Paper

BACKGROUND
There has been a lot of discussion about how we have entered a “new economy” or a “post-capitalism business environment.” The idea is that businesses can no longer be managed like they used to. Profit has become less important. Being a good corporate citizen has become more important. A new relationship with employees is needed. And on and on the list goes. If you want to be successful now, you have to abandon the old rules and embrace the new rules. Traditional capitalism is passé. Embrace the new economy.

A lot of sophisticated reasons are usually given for the need to change. They usually include factors something like these:

1. Changing Customers: The internet has shifted the balance of power from the company to the customer, and the customer isn’t all that interested in how profitable you are, but rather how nice you are.
2. Changing Employees: The Millennial generation expects more from its employers than mere profit machines. If you want to hire the best of the Millennials, you have to satisfy their more diverse requirements for an employer.
3. Changing Approach to Problem Solving: The world is full of serious global problems. Individual governments have not proven themselves to be particularly effective at solving them (they just talk and squabble with each other). However, if you point large international businesses at these problems, you may get a more effective outcome.

These all sound so noble and sophisticated and academic. And there is some truth in all of this. But I think the main reason why business is changing is a lot less noble, sophisticated and academic.

I think the main driver of change is the change in the type of paper we use to compensate employees.

THE OLD PAPER: CHECKS
In the middle of the 20th century, most of one’s compensation came in the way of a check. The vast majority of it was in the form of a regular paycheck. Then, at the end of the year was a bonus check.

The most important thing one needs to know about checks is that they only have value if there is enough money in the checking account to cover the check. Therefore, to keep the employees from rioting, you need to ensure that money is flowing into the checking account at levels to cover the checks.

In the middle of the 20th century, the primary source for the money in the company’s checking account was either profits or standard bank debt. And you couldn’t get standard bank debt unless you could prove to the bank that the company was on a path to create enough profits to pay off the debt.

Therefore, success at that time required a high focus on creating profits and significant cash flow on a regular basis. And the best way to do that was via traditional capitalism. It was all about profit, so that you could keep writing those checks.

THE TRANSITIONAL PAPER: STOCK CERTIFICATES
As we moved towards the later portion of the 20th century, compensation practices were changing. For executives, the percentage of their total compensation from their base of paychecks was shrinking. Non-base compensation as a percent to total was increasing. And instead of just being a bonus check, the non-base compensation was increasingly coming from stock or stock options.

Now stocks are different from checks. You don’t need a lot of money in the bank to issue stock. In fact, you don’t need any money at all in the bank to issue stocks. I had a lot of friends who worked at Best Buy in the early days, when the company always seemed to be on the verge of bankruptcy. The company couldn’t afford to write bonus checks, so it kept giving everybody tons of Best Buy stock. 

Although the stock had little value at the time, there was at least the hope that it could become very valuable in the future (which is better than a bounced check). And, in the case of Best Buy, eventually that stock did became extremely valuable (and made many of my friends very wealthy).

In a compensation world full of stock paper rather than check paper, management priorities start to change. It is no longer about focusing on keeping the checking account balance high through growing today’s profits. Now, it was about finding ways to increase the value of the stock.

Yes, the economists will tell you that there is a correlation between profits/cash flow and stock price. In other words, if profits keep going up, stock prices tend to go up. But the correlation is not as close to 100% as it is with check balances. Other things now start getting in the way.

As it turns out, there are a variety of other tools to increase stock price beyond activities to increase current profits. They include activities like:

1. Changing People’s Perception of the Future: If you get people to think to that the future will get a lot better for your company, the stock price will go up, even if nothing is different in profitability today.
2. Making the Company Bigger via M&A: At that time, growth through acquisition tended to increase stock prices, because the combined bottom line was larger. However, if you paid too much for the acquisition without meaningfully changing the rate of profitability, you were actually destroying value. But this was sometimes overlooked by the market at that time.
3. Stock Buy-Backs: Earnings per share is a ratio. There are two ways to increase the ratio: either increase the numerator (earnings) or decrease the denominator (number of shares). So by buying back shares, I can increase the price per share without having to deal with profits.

So, as you can see, by shifting the paper from checks to stocks, I’ve moved a bit further away from pure capitalism. The profit motive is diminished a bit and other things are coming into play.

Probably the best example of this transitionary period would be to look at Enron. Enron was one of the most extreme at using stock as a compensation tool. It dominated the total compensation package, it was administered quarterly, and it was the driving force behind Enron’s everyday decision-making.

The extreme focus on raising stock prices at Enron lead to far less focus on profits. In fact, in the final years of Enron, they typically weren’t paying taxes, because they weren’t really making profits. But the stock price kept skyrocketing, making the employees wealthy, because of the stock tricks they were using.

Of course, eventually they lack of a profitable business model eventually caught up with them and the company collapsed (along with the stock price).

THE NEW PAPER: DEAL PAPER
The new economy of today tends to be more about start-ups in the social media and technology space. There are a couple of things worthy of note in how these companies operate.

First, their checking accounts are not filled with money from profits or standard bank debt. They are filled with money from firms that invest in start-ups. In other words, the start-ups are writing checks that draw from someone else’s source of money, not their own.

Second, nearly all of the compensation comes from when the start-ups cash in, by either going public with an IPO or by selling at some outlandish price to someone like Google, Facebook or Apple. Regular payroll checks are an insignificant percent of the total compensation. The work is done to get to the point of cashing in. You’re looking to sign the deal paper that makes the cashing in possible. Practically your whole life’s earnings come from that single point in time when you sign the deal paper and sell out.

In this scenario, profits have moved from being less important to almost being non-important. Since the money at first comes from private equity investors and later from whomever you sell out to, profits are never a big part of the equation.

If the profit prognosis in the early stages becomes too dire, you typically don’t try to fix it. Instead you shut down the start-up and try again. That is why I sometimes refer to this as the “Lottery Economy”: You just keep trying start-ups until you luck into a winner.

When the whole operating model is built around getting to the “cash in” deal paper, you naturally have moved quite far away from traditional capitalism.

It is like people who flip houses for a living (buying houses with no intent of living there, but only to sell at a profit). They don’t invest in improving the foundational issues in the house. They invest the cosmetic issues that make a house more appealing to the next buyer without having to spend a lot (called curb appeal).

In the same way, the start-ups in the new economy don’t build the foundation for profits but work on the cosmetics that make it more appealing when it is time to cash in.

IMPLICATIONS
The implications here are that although there are some noble, sophisticated reasons for why the economy has changed, that is not the whole story. It may not even be the main story. The main story may be about how people are getting compensated.

Knowing the primary cause of the change is important because of what it implies. If the new economy is primarily a result of a changing environment, then we have to adapt to the new environment. But if it is primarily due to a change in compensation tactics, then perhaps the old rules of capitalism are not as obsolete as we think.

My fear is that extremism in the Deal Paper economy may lead to the same thing as extremism in the Stock Certificate economy. We may end up with a repeat of Enron, where the abandonment of profit as the focus eventually catches up to us and everything collapses.

SUMMARY
Yes, the economy appears to be operating under new rules. But until we fully understand the cause, we may want to be careful about the extent to which we embrace them. The dominance of profits in business may not be completely dead—just asleep.

FINAL THOUGHTS
This only briefly touches on the subject. It is too much to cover in a single blog. But hopefully this can get the conversation started.

Strategic Planning Analogy #553 Part 5: Investment Statement & Putting it All Together

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In this blog, we will look at the fourth and final one of the documents to use in their place—the Investment Statement.

THE INVESTMENT STATEMENT
The purpose of the Investment Statement is to provide a strategic framework for understanding corporate overhead. “Investment” consists of spending for items which provide benefits for multiple years Yes, the balance sheet and cash flow statements also have lines describing various costs related to investments. However, the income statement doesn’t tell you why these numbers were chosen, how they relate to strategies, or what benefits are expected from these benefits. That’s why I designed the Investment Statement.

Since there are so many different types of business models out there, the Investment Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Investment Statement is used to carry forward the investments already made.  This should be fairly easy to do, because these investments are already recorded in a company’s financials.

2) Strategic Investments

The next step is to outline all of the investments needed to complete each of the strategic initiatives. This would include the upfront costs, depreciation/amortization impact, and return on investment (typically based on a discounted cash flow analysis or other, similar type of measure).

3) Net Results

The third and final section looks at the net impact of the first two sections on investments, including the total level of investment and the total impact to depreciation/amortization.

BENEFITS

The benefits from using an Overhead Statement are as follows:

• It proactively links all of your strategies to specific investments.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.

PUTTING IT ALL TOGETHER
Now that we have looked as all the documents separately, we can put it all together into a single process. It is illustrated in the figure below. The process has four parts:

1. Baseline Assumptions: First we do internal and external research to determine two things:
1. Where the market is going; and
2. How we will play in that space if we do not change our status quo.

The result of this work will be our baseline assumptions.

2. Strategy Development: Next, we devise strategies and strategic initiatives/tactics to optimize our performance and position in the future. This is your basic core work of strategic planning. 
3. Quantification/Validation of Strategies: This third step is where we get specific on the expected costs and benefits associated with the strategies and tactics. To do this, we use the statements mentioned in this and the prior four blogs—the Revenue Statement, Operations Statement, Overhead Statement and Investment Statement. There is a sort of circular process between steps two and three. As we start quantifying the strategies, we may see a need to modify our strategies a bit to improve their impact. Also, as we look at the four statements (revenue, operations, overhead, investment), we may see some gaps that weren’t covered by our original list of strategies. This may require adding additional strategic initiatives. We keep up this circular approach until there is agreement on the final list of strategies and their quantifications.
4. Translating to Standard Statements: Once the strategies and their quantifications are approved, one takes the data and translates it into the standard financial statements (income statement, balance sheet, cash flow). Now, you have the documents you share with the rest of your stakeholders. 

SUMMARY
Future projections in income statements, balance sheets and cash flow statements are only as good as the assumptions behind the numbers within them. To make sure the assumptions are solid, a lot of prior work needs to be done to properly quantify not only the tasks associated with those figures, but also the specific financials attached to each task. To help quantify the tasks and financials associated with them, I have devised the Revenue Statement, the Operations Statement, the Overhead Statement and the Investment Statement. When used properly, they can provide the missing link between what needs to be done and what outcomes are expected.

FINAL THOUGHTS
These forms were left a little bit vague, because each industry has its own nuances which will impact how the forms should look. But that doesn’t mean you should leave them vague. Your role is to customize them to your industry.

Strategic Planning Analogy #553 Part 4: Overhead Statement

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In the past, we looked at the Revenue Statement and the Operations Statement. In this blog, we will look at another one of the documents to use in their place—the Overhead Statement.

THE OVERHEAD STATEMENT
The purpose of the Overhead Statement is to provide a strategic framework for understanding corporate overhead. “Overhead” consists of those activities NOT directly related to producing or marketing/selling what you sell. These are already covered in the operation and revenue statements (mentioned in earlier blogs).

Yes, the income statement also has lines describing various costs related to overhead. However, the income statement doesn’t tell you why these numbers were chosen and what the strategies are to reach these numbers. That’s why I designed the Overhead Statement.

Since there are so many different types of business models out there, the overhead statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Overhead Statement is used to determine the baseline. This is what overhead costs would be if nothing changed and there were no new strategic initiatives.

As a result, the baseline is more or less a continuation of what you have done in the past.

2) Strategic Changes to Overhead

Over time, one’s overhead structure can become outdated. This could be due to internal factors like a change in the company’s business portfolio. Or it could be due to external factors, like new technologies or new approaches to management. Either way, change is change, and if you don’t change, your overhead will not be as efficient or as effective as it could be.

Strategies will be needed to determine how best to change and adapt the overhead.  That is why the second part of the Overhead Statement looks at the impact of strategic goals on operations.

a) Cost Control (Becoming More Efficient): One of the simplest strategic goals is to reduce the cost of overhead. If that is a goal, then you would place here what the cost control strategy is and how much you expect it to lower overhead expenses (by individual overhead line). Some of these cost reductions may require up-front capital investments. This amount gets transferred to the Investment Statement (which we will talk about in a later blog). If you plan on using the cost reductions to support price reductions, then those price reductions would be reflected on the Revenue Statement.

b) Management Improvement (Becoming More Effective): There are lots of ways to improve the effectiveness of one’s overhead. This might include delayering (or adding layers). Or it could be a major reorganization. Or it could be technology and system improvements. Or maybe it includes outsourcing a function. Whatever the strategy to improve overhead effectiveness, it needs to be captured. In this section, one would explain what the strategy is and how it impacts the overhead. Then, the incremental overhead costs associated with each strategy would be calculated and listed by line item.

If there are any ripple effects from these changes to overhead that would impact sales or operations, those changes would be transferred to the revenue and operations statements. This is highly likely, since one would typically not change overhead unless it improved these other areas. Similarly, if the changes to overhead required major capital investments, you would want to transfer that cost to the investment statement.

c) Compliance: Sometimes, you just have to change the way you do things in order to remain compliant with the ever-changing regulatory environment. You would capture the overhead impacts from that here as well.

3) Net Results

The third and final section looks at the net impact of the first two sections on overhead expenses. Basically, you take the baseline overhead expenses (by line) and add to it changes from cost reductions, management improvement, and compliance. The end result is your estimated costs per overhead line item for baseline PLUS changes.

BENEFITS
The benefits from using an Overhead Statement are as follows:

• It proactively links all of your strategies to specific overhead activities.
• It quantifies how the implementation of each strategy will impact the costs of overhead.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.
• It separates overhead issues to its own document, making it easier for those in charge of overhead to see what they are being held responsible for.
• It forces one to consider issues beyond cost control when looking at changes to overhead.

SUMMARY
To more comprehensively understand the operations portion of a strategic plan, it is recommended that some form of an Overhead Statement be used. An Overhead Statement has three sections:

1. Calculation of Baseline Overhead
2. Calculating Impact of Strategic Initiatives on Overhead
3. Net Results

FINAL THOUGHTS
Overhead might not be the most exciting part of the business, but it is an important part of the business. A little bit of strategic effort in this 

Strategic Planning Analogy #553 Part 3: Operations Statement

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In the last blog, we looked at the Revenue Statement. In this blog, we will look at another one of the documents to use in their place—the Operations Statement.

THE OPERATIONS STATEMENT
The purpose of the Operations Statement is to provide a strategic framework for understanding operations. “Operations” consists of those activities directly related to producing what you sell. Yes, the income statement also has lines describing various costs related to operations. However, the income statement doesn’t tell you why these numbers were chosen and what the strategies are to reach these numbers. That’s why I designed the Revenue Statement.

Since there are so many different types of business models out there, the Operations Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Operations Statement is used to determine the baseline. This is what operating costs would be if nothing changed and there were no new strategic initiatives.

As a result, the baseline is more or less a continuation of what you have done in the past. It would be tweaked to correspond to the projected baseline sales volume created in the Revenue Statement (which we talked about in the last blog).

2) Strategic Changes to the Operational Business Model

Strategy is often about change, about adapting to the future. This adapting usually requires business model changes which impact the operations. Change is not just done for the sake of change, but in order to achieve strategic goals. Therefore, one must first understand the strategy goals before embarking on operational changes. Otherwise, you may end up making changes with move you further away from your strategic goals and objectives. That is why the second part of the Operations Statement looks at the impact of strategic goals on operations.

a) Cost Control: One of the simplest strategic goals is to reduce the cost of operations. If that is a goal, then you would place here what the cost control strategy is and how much you expect it to lower operations expenses (by individual operational line). Some of these cost reductions may require up-front capital investments. This amount gets transferred to the Investment Statement (which we will talk about in a later blog). If you plan on using the cost reductions to support price reductions, then those price reductions would be reflected on the Revenue Statement.

b) Quality Improvement: Perhaps a strategic goal is to do a better job of owning the “quality” position in the marketplace. Increasing quality may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of quality improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

c) Service Improvement: Perhaps a strategic goal is to do a better job of owning the “service” position in the marketplace. Increasing service may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of service improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

d) Speed Improvement: Perhaps a strategic goal is to do a better job of managing the speed to market (reducing cycle time and getting to market faster). Increasing speed may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of speed improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

There are many other strategic goals (besides the ones listed above) that could impact operations. They would be handled in a similar manner to those mentioned above. In all of these cases, the important parts to be included on this statement would be:

1. What is the strategic goal?
2. What changes will occur to operations to achieve that goal?
3. What are the incremental financial impacts from these changes:
1. Impact to Operations
2. Impact to Sales (Transferred to Revenue Statement)
3. Impact to Investments (Transferred to Investment Statement)

3) Net Results

The third and final section looks at the net impact of the first two sections on operations expenses. Basically, you take the baseline operational expenses (by line) and add to it changes from cost control, quality improvement, service improvement, speed improvement, or any other new strategic initiatives. The end result is your estimated costs per operational line item for baseline PLUS changes.

BENEFITS
The benefits from using an Operations Statement are as follows:

• It proactively links all of your strategies to specific operational activities.
• It quantifies how the implementation of each strategy will impact the costs of operations.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.
• It separates operational issues to its own document, making it easier for those in charge of operations to see what they are being held responsible for.
• It forces one to consider issues beyond cost control when looking at changes to operations.

SUMMARY
To more comprehensively understand the operations portion of a strategic plan, it is recommended that some form of an Operations Statement be used. An Operating Statement has three sections:

1. Calculation of Baseline Operations
2. Calculating Impact of Strategic Initiatives on Operations
3. Net Results

FINAL THOUGHTS
You wouldn’t undertake a new strategic initiative unless you believed there was some benefit to doing so. Usually that benefit is either some form of improved external marketplace positioning (which would improve sales), and/or some form of internal efficiency improvement (which would reduce costs). This form helps you incorporate these improvements into your financials. If you are having trouble finding sales or cost benefits from a strategy, you may want to ask yourself why you are bothering to do the strategy at all.