Strategic Planning Analogy #514: Working the Wrong Mine

THE STORY
Let’s assume there are two miners, named Bob and Jason. Bob is a big believer in analytics and measurement. Bob has KPIs (Key Performance Indicators) for every part of his mining operation and measures them often. Bob receives spreadsheets every day, showing in precise detail exactly how everything is going in the mines. Using that data, Bob can make minor adjustments to improve productivity on an ongoing basis. Everyone in Bob’s mining business is trained in how to improve their KPIs.

Sure, all that time, money and effort into analytics leaves little left for anything else, but Bob is happy. After all, he attributes his devotion to analytics with allowing him to eke out a small profit from a poor mine. Bob believes that without that devotion, he would lose money at that low-yield mine.

Jason, on the other hand, takes a different approach to mining. Rather than fretting about having the latest mining equipment filled with gadgets to measure productivity, Jason just carries a simple pick axe to his mine.

And every day, Jason extracts trainloads of valuable ore from his mine. Jason is making a large fortune on his mining business.

And why is Jason doing so much better than Bob? Well, while Bob was focused on incremental improvements via analytics, Jason was devoting his time, money and effort on locating the best place to do mining. And, as it turns out, great productivity at a poor mine is less profitable than average productivity at a high-yield mine which is bursting with pure ore.

THE ANALOGY
It’s common sense that—all other things being equal—a mine full of high quality ore will be more profitable to operate than a mine with very little (and low quality) ore. Yet Bob was so fixated on improving operations at his current low-yield mine site that he never stopped to consider that maybe he’d be better off looking for a better place to mine. His head was down looking at spreadsheets rather than up and scanning the geography for better sites.

Jason, on the other hand, realized that the highest determination of mining profits was in the quality of the mining location. Therefore Jason spent his effort on what was the high determination factor. Jason first searched for a superior place to mine and was rewarded handsomely.

As obvious as this common sense may appear, it seems that there are a lot more people like Bob in the business world today than Jason. Look at all the current buzz in strategic planning. It’s about big data, analytics, and KPIs. Job descriptions for strategic planners today talk more about statistical analytic prowess than big picture positioning. I recently saw where a company was placing strategy in its M&E department (Measure & Evaluate).

Now I’m not against measurement or productivity efforts. But that’s not the major source of growth and profitability. As we will see later in this blog, positioning yourself in the right place is a greater determinant of success. Therefore, positioning should be of higher importance, since decisions there will have greater impact. We need to be more like Jason and less like Bob.  

THE PRINCIPLE
The principle here is that leaders need to focus their time and energy on activities which produce the highest impact. Positioning is one of those high impact areas. Therefore, positioning should be a high priority of leaders and their strategy group…higher than low impact issues such as analytics.

The facts back this up. The latest came this week in an interview on McKinsey.com.  McKinsey’s Chris Bradley and Angus Dawson were talking about the Art of Strategy and what we’ve learned over the last 15-20 years about the topic. In the interview, Chris Bradley said research shows that “80 percent of growth is explained by decisions about where to compete or by market selection.”

Based on this research, if 80% of growth is determined by position—where to compete, who to target, winning position—then that leaves only 20% for everything else, including analysis, productivity initiatives, market share wars, and KPI monitoring. Shouldn’t we be focusing on the 80% rather than the 20%? In other words, wouldn’t we be better off spending time finding the right place to mine rather than getting more productive in the wrong place to mine?

Chris Bradley went on to say that:

“Companies should be just as focused about positional improvement as they are on performance improvement. [The research] reveals the importance of strategy in that light, not as a method of how we gain market share or decide what our edge is going be in the next quarter, but as a way to fundamentally position the company against the right trends, catch the right waves, and put our bets on the right markets.”

As Chris implies, positioning is where strategy adds the most value, so all those other strategic tasks (like productivity, market share, or near-term KPI targets) should not be sucking up all of one’s focus.

Example

I can illustrate this principle using a company I worked with. This company had a portfolio of retail brands. One of the brands was doing poorly, so I helped investigate the cause of the problems and potential solutions.

One of the things we learned was that there were a lot of areas where productivity could be improved. This included areas such as labor, inventory, distribution, marketing and merchandising. We investigated what it would take to improve these areas of inefficiency (time, effort, money) and what the impact might be if efficiency was improved.

But we did not stop there. We also spent significant time looking at the big picture position of this retail brand. What we learned was that the position of this retail brand was a lot like Bob’s mine—a poor, low yield position. In particular:

1. The sites of the stores were inferior to competition.
2. Nearly every store was in an economically depressed market with declining population.
3. Past actions had so confused the customer that one would essentially have to start over in building a compelling reason for customers to prefer the brand.

Because of the enormity of these positioning negatives, the productivity initiatives would have only a limited ability to improve the business. Even a highly efficient store will struggle if it is in a bad location in a declining market with a confused customer. It would have been like Bob’s effort to improve his poor mine—much work with little benefit—because productivity focuses on the 20% factor rather than the 80% factor.

The only way to create the big leap in improvement would have been to fix the position (the 80% factor) by relocating the chain to better sites in growing markets with a dedicated effort to rebuild loyalty. The cost and risk on that was very high.

Therefore, rather than put in all the time, effort and money needed to incrementally improve the productivity of that retail brand, the company sold the brand and put all that time, effort and money into a different brand which had a much better position (more like Jason’s high-yield mine).

That was the right move, because it focused first on positioning (the 80% factor) before determining decisions on where to create incremental improvements (the 20% factor). By putting the effort behind the brand with a better position, it improved the return on that effort.

SUMMARY
Incremental improvements via analytics, statistics, KPIs, Six Sigma, Lean and other such productivity tools has its place. But it is not the place of prominence. The big rewards come from getting the overall position right. Positioning needs the place of prominence in the strategic planning process. This is because if the position is wrong, then all those other efforts are constrained by the lack of potential within the poor position. You can only get so much ore out of a bad mine, no matter how productive you are. Better to focus on getting the position right, so that subsequent efforts are focused on place where the potential rewards are high.

FINAL THOUGHTS
Now some of you may be thinking that you can afford to focus almost exclusively on productivity issues now, because you already have a great, winning position. The problem is that environments change. The great positions of today may become lousy positions tomorrow. Decades ago, that poor retail chain I talked about had a great position (before the cities went into decline and the consumer position was compromised). So one can never ignore the positioning issue. It needs to be consistently monitored to ensure that it remains in tune with the marketplace and relevant with the customer.

Strategic Planning Analogy #259: Quant Jocks

THE STORY
The term “Quant Jock” refers to people who earn their living by being excessively good at developing complex analytics via the computer. Quant Jocks have been an integral part of the Wall Street financial community for years. However, in the past year or two, their reputation for financial wizardry has become a bit tarnished.

First, it was the quant jocks who helped develop all of those sophisticated repackaged mortgage bundles, which nobody really understood and which were a major factor behind the recent housing crisis. Second, it was the quant jocks who developed sophisticated computerized stock trading programs. These sophisticated stock trading programs helped to increase the negative impact of stock melt-down in the fall of 2008.

The irony is that the quant jocks had claimed that all of their sophistication would help to reduce downside risk. Instead, it now appears that their models actually increase risk, particularly if events fall outside the programmer’s narrow assumption parameters (which inevitably will happen).

THE ANALOGY
There are many similarities in the goals of Wall Street and of business strategists. Both are trying to find a way to optimize the blend between profitability and risk. The goal is to create as much profitability as possible within a particular risk tolerance.

For years, Wall Street has used a lot of quant jocks in the attempt to achieve that goal. Now, we are seeing more and more of that complex analytical approach being applied to strategic planning’s goals. Planning techniques like Scenario Planning and Real Options seem to be falling under the influence of quant jocks.

At its worst, overly-quantified scenario planning can become similar to those mortgage-backed securities which helped bring down the housing market (if the quant jocks are allowed to go wild). You bundle up all these scenarios into one massive computer program and come out with some sort of bundled scenario risk formula that doesn’t quite match any particular scenario. This makes it hard to know what to do.

The same can happen to a Real Options approach to minimizing risk—lots of math leading to conclusions that tend to mask what is actually going on in a strategy. If the parameters are in the assumptions are off by too much, they whole thing can collapse.

It’s not that math or analytics are bad per se. Scenario planning and real options can be valuable tools. The knowledge and insight coming from rigorous analysis can be useful—on Wall Street and in strategy. But taken too far, analytics can obscure your view. Instead of knowledge and insight, there are incomprehensibles and too much blind faith in the cold, unthinking calculations of formulas inside a black box. And, as we saw in the story, rather than reducing risk, it can lead to increasing risk—and creating melt-downs. Is this what you want for your strategy?

THE PRINCIPLE
The principle here is that strategies need to be far more than just numbers and formulas. In fact, an excess of “quant jock” thinking can actually increase the risk of failure for your strategy. The logic behind this point of view are as follows:

1. Continuity Vs. Discontinuity
Quant jocks tend to live in a world of continuity. The idea is that the world operates by a set of rules. The role of the quant jock is to model those rules and optimize the nuances for the benefit of the company.

By contrast, good strategists tend to focus on discontinuities. Nearly all great strategic moves are done in a way that totally destroys the rules of the status quo. For example, the great success of the Ipod comes from more than just the creation of a device. It was a reinvention of the rules for the entire industry—of how music was sold (itunes), organized and listened to.

The same was true for the iphone—creating an entirely new apps-based business model. Amazon was not just another outlet for selling books—it was a new way to think about shopping, with lots of new tools and information to create a wholly different shopping experience.

As we saw with the housing crisis and the stock market melt-down, the quant jock systems failed miserably when there was great discontinuity. They weren’t built for such rapid change. I fear the same is true in the strategic world.

Rules-based models don’t help you discover a new set of rules, nor do they tell you how to react when the old rules no longer apply. Rather than overanalyzing the world of today, strategists should be dreaming of how to destroy the world of today for their benefit.

Instead of modeling the world as it is, we should model potential new realities. Yes, there is still some analytics involved, but the analytics are only as good as the dreams being analyzed. Great dreams are more important than great analytics, because the dreams are what create the new business models to be analyzed. Analytics without these dreams is just random noise.

2. Beating the System Vs. Being the System
In the stock market, the goal of the quant jock is to find little holes in the rules, so as to beat the system on very narrow deviations. Unfortunately, what happened was that a large number of firms adopted these models and started trying to beat the system in pretty much the same way.

When that happens, you are no longer beating the system. Instead, you become the system. The herd mentality caused so much trading to be done in this similar analytical manner, it became harder to make the models work (too many people chasing too few holes). Then, when the market fell apart in the fall of 2008, the models all worked in unison to force prices down further and faster.

A similar situation occurs in strategy. “Me Too” strategies, where you try to copy the leader, rarely lead to great riches. The leader usually stays the leader and you fight over the few crumbs left behind.

If the herd mentality takes over and everyone tries to win in the same way, it tends to commoditize the business. This usually leads to price wars, where the prices drop just like those stocks did (and so will your profits).

Analytics by nature tend to mimic others, because they are trying to model the world that exists. Quant jocks may come up with original ways to push around the math, but they rarely come up with original new strategic options. If you truly want to beat the system, you need to create a new position, working under a new set of rules—a place where you can be the leader and the rules work in your favor. Brainstorming, not whirring computers and complex spreadsheets, are the priority.

3. Creating Vs. Measuring
Quant jocks like to measure things. The problem is that when you are creating a brand new business model in a brand new space operating under a brand new set of rules, there isn’t much to measure beforehand.

If you wait until the market is fully developed, so that you have more to measure, it is usually too late. The market leaders have already established themselves and the rules are already working in their favor. The game is over.

Apple succeeds by blazing new trails, doing new things—be it the Ipod/Itunes model, the Iphone/Apps model or the Apple Store model. It doesn’t wait until the market is fully developed and measurable. It takes calculated risks. Sure, calculated risks are still calculated, but the strategy is not put on hold until perfect information is available.

Sometimes, a little consumer research can help. But even here, if the concept is too radical, the customers may not at first be able to internalize how they would behave in that new world, thereby making the results unreliable. Small beta tests may be better than analytical modeling.

Well, if the new world is not yet available to measure, we can always still measure the current model, right? Unfortunately, overemphasis on measuring the business model you are trying to destroy usually will not tell you the best way to destroy it. That’s a lot of effort for questionable reward.

SUMMARY
Strategy is primarily a creative act—building a new business model that did not exist before. A “quant jock” mentality/focus typically is not the path to get there. Instead, it tends to keep one mired in the past. Sure, a little analytics can help fine-tune the creative idea, but it won’t develop it. Therefore, rather than obsessing on analytics, obsess on creative model building and then use analytics as a secondary support mechanism.

FINAL THOUGHTS
Sir Isaac Newton did not discover gravity through analytics. It was a creative burst prompted by watching apples fall from trees. The analytics came later. Strategists should probably spend more time pondering things like falling apples and less time pouring over computer printouts.