Strategic Planning Analogy #368: Managing Losses

THE STORY
Once upon a time, there was a man named Bill who liked to bet on horse races. After years of experimenting on ways to beat the odds at the race track, Bill finally found a way to assure that he would always make the winning bet.

His solution? Place a bet on every horse in every race. That way, no matter which horse won the race, Bill was 100% guaranteed to have placed a bet on it.

There was a slight drawback to this system, however. In addition to a 100% guarantee that he would have a bet on every horse that won, this system had a 100% guarantee that Bill would have a bet on every horse which lost. As it turns out, the losses on the losing bets were greater than the winnings on the winning bets. The system left Bill bankrupt.

Bill loved to boast that his system always picked the winners, but the boasts didn’t impress his friends after they learned this system was also path to bankruptcy.

THE ANALOGY
In horse racing, only a small handful of horses win on any given day (only one per race). The vast majority of the horses end up being losers. Therefore, if you bet on every horse, you will end up losing your money, even though a few of the bets will be for winners.

Although Bill’s system is obviously a foolish way to bet on horses, it is not that different from the way many companies bet on their future. Many companies like to make lots of bets on lots of future growth projects, be that in R&D research, new product offerings, acquisitions, brand extensions, and other such investments.

And just as most horses fail to win their races, most new products, acquisitions, brand extensions, and R&D research fail to make a profitable return on investment. Sure, a few of the bets in these areas will produce winners. However, the losses on all the other bad investments can be so high that they wipe out the profits on the few winners. Worse yet, because so much money was poured into the losing bets, there is not enough money left to fully optimize the potential of the few winners. The potential winners become starved for lack of resources.

Yes, if a company bets on everything, they can boast like Bill that they have created some winners. However, if all the bad bets destroy the company (or destroy the ability to optimize the potential on the winners), then it is a rather hollow boast.

THE PRINCIPLE
The principle here is that since most of a business’ strategic activities deal with failure, the strategic process should have a rigorous way to minimize the negative impact of failure.

Living With Failure
What do I mean when I say “most of a business’ strategic activities deal with failure”? Well, strategies are typically about finding and implementing the changes needed to reach a larger and more prosperous future. Many of the tactics used to create that change are associated with activities like those mentioned earlier:

a) Mergers and Acquisitions
b) Research and Development
c) New Product Introductions
c) Brand Extensions
d) Reaching out to New Customer Bases
e) Innovation Activities

Lots of studies have been done which measure the failure rates for these types of activities. Depending upon the research, the failure rates tend to be somewhere in the 75% to 95% range. In other words, the key tactics used in strategy usually fail.

The strategic path is a path dominated by opportunities to create negative returns on investment. It naturally comes with the territory, since most opportunities fail. The only way to avoid running into failures is by deciding to do nothing. But just as betting on every horse leads to destruction, betting on no horses will not lead to success, either. So we need to get comfortable living in a world where we use tools which usually fail.

Therefore, the strategic process needs to find a way to minimize the impact of inevitable failure while a company tries to find and nurture the few opportunities out there for success.

Learning From Research
Fortunately, recent research lends some insight into how to do this. My good friends at the Corporate Executive Board have been studying the characteristics of “elite” companies. These are defined as companies which performed above their industry median in both EBITDA margin and growth rates between 1995 and 2008. In other words, these companies successfully managed both the top line and the bottom line over an extended period of time and different parts of an economic cycle.

Starting with a list of more than 1,500 firms, they determined that there were 143 elite companies (less than 10% of the total). The Corporate Executive Board discovered a lot about these elite firms—more than we can comment on here. There was a good summary of some of their findings recently at Businessweek.com. Right now, we will focus on what they learned about how to succeed while living in a world of failure.

In general, we can learn two things.

1) Time Your Bets
The return on investment is a ratio. The return is the numerator and the denominator is the investment. Elite companies have found a way to optimize the numerator and the denominator by timing their activities relative to the business cycle.

The timing is as follows—buy at the bottom of the cycle (when the denominator is lowest) and sell at the top of the cycle (when the numerator is highest). This process will get you reasonable returns on even weak investment opportunities. And the losers will be less of a loss.

Yes, I know it can sound like a cliché—buy low and sell high—but elite companies actively monitor business cycles and proactively try to make the cliché a reality. Their strategies take into account the context of where they are in the business cycle. They boldly buy when the rest of the world is selling and sell when the rest of the world is buying.

This process has the added benefit of improving cash flow. Buy selling high, the elite firms have more money to invest when prices are low. You can afford the risk of a few more failures when flush with cash and buying when the cost is the lowest.

2) Exit Quickly
Instead of being like Bill in the story who bet all the time on every horse, elite companies are also quick to cash out when failure appears inevitable. Patient money is used for the potential winners, but the funding quickly stops for the losers.

This is done in two ways. First, elite companies set up specific, measurable criteria for success prior to making an investment (early warning signs). If the criteria are not met in these early stages, funding stops.

Second, these companies actively monitor investment performance throughout the entire lifecycle of the investment. This has two benefits. On one hand, it lets the elite firm quickly know when an investment is turning into a failure (so that investment can stop). On the other hand, it lets the company learn what works and what doesn’t work, so that they can make more intelligent investments in the future (ones that are less likely to fail).

SUMMARY
Since most strategic activities fail, managing failure is the key to strategic success. The idea is not to avoid failure completely, but to make sure the impact of failure is minimal. This can be done by building strategies around business lifecycles and by actively monitoring investment performance against predetermined criteria throughout the entire investment lifecycle.

FINAL THOUGHTS
Those who bet on horse races do not have the ability to cancel their bet halfway through the race, when they can obviously see the mistake in their original bet. Businesses, however, can back off from their bets if they see failure in the early running of the investment. When things look bad, cut your losses early.

Strategic Planning Analogy #346: Right to Play

THE STORY
Poker chips have value…but what kind of value? Some peg their value at their exchange rate—you can cash in poker chips for money at a pre-determined rate of exchange. However, that value can only be realized if you turn in your chips. In other words, this value in the chips can only be realized if you stop possessing them.

Since very few business places allow you to spend poker chips like money, that value can only be realized when you have real money. So the real value, in that case, is in the money, not the chips. If people stop exchanging your chips into money, the value in those chips vaporizes.

To me, the more powerful value in the chips is what they allow you to do while you still possess them. The unique value of poker chips is that they allow you the opportunity (i.e., give you the right) to play poker. Before you can play poker, you need to have first made an investment in poker chips. Without the chips, you cannot play. That is the true power and value inherent in poker chips.

THE ANALOGY
Poker chips are a lot like market share. There is value in having a lot of market share…but what kind of value? One type of value would be to use your power of market share to create excessive profits. In many ways, this would be like cashing in your poker chips for money. And, like poker, if you cash in your market share “chips” you can no longer use them to play the game.

The logic works like this. To create excessive profits, you need to extract excessive value out of your marketplace transactions. The more value you take out of the transaction, the less value there is for the customer on the other side of the transaction. In a competitive marketplace, there will be alternatives to your excessive greediness—alternatives which provide greater value to the customer. Customers will start switching to these alternatives. As a result, your market share will go down. In other words, when you seek excessive profits, you are typically cashing in (or losing) your market share chips.

To me, the greater value in market share is like the second value for poker chips mentioned above—the value in being allowed to continue to play the game. In this case, the “game” is the game of business. If you want a business which endures and produces a return year after year after year, you have to leave a large percentage of your chips on the table. In other words, you need to continue to invest in providing the type of value needed to hold market share if you want to continue to play the game. Otherwise, your market share will drop until you are no longer able to play.

THE PRINCIPLE
The principle here has to do with transformation. When a company is very successful and creating high levels of market share, there is a tendency to not want to transform the business model. After all, the current model is working quite well. Why kill the goose that is laying the golden eggs? Why risk current profits for the uncertainty of what would happen if you transform the business?

The Innovator’s Dilemma
Clayton Christensen wrote about this problem in the book “The Innovator’s Dilemma.” Briefly, the premise of the book is that innovation leads to marketplace disruption which creates great success for the innovator. This success makes the innovator want to cling to the status quo that his innovation produced. Unfortunately for this innovator, marketplace innovation cannot be stopped. If this innovator will not continue to innovate, others will, creating disruptions that make the original innovation obsolete. The irony is that the only way the innovator can continue to succeed is by destroying the current model of success and replacing it with successive disruptions of new innovation.

This is very similar to the poker chip analogy. Refusing to reinvest in additional disruptive innovations is like refusing to put chips on the poker table. When you have a lot of chips, the temptation to cash in (take excessive profits) is huge. But if you do, you lose the right to continue playing.

Trying to keep the high profits of the old innovation is taking excessive profits out of the game. You are no longer investing in the new innovations that will increase value to the customer. Others, who are still investing in innovation, will create greater value and take away your market share (your chips), leaving you with nothing.

Yes, it takes money away from today’s profits when you spend it on innovation. And yes, your immediate profitability may go down during the disruptive phase. BUT, if you do not ante up with these investments, you can no longer play the game. Your long-term profit stream potential goes away because you are no longer competitive once the next disruption occurs. In search of a small pot of success today, you sacrifice your ability to earn any future pots of success.

I was reminded of this dilemma when reading of a paper published on August 4th by Kristina McElheran of the Harvard Business School. This study looked at how market leadership impacted the way a business innovates. The conclusion of the study was that market share leaders may invest more in incremental innovation, but spending on truly disruptive innovation is more likely to come from non-leaders. In other words, leaders have more at stake in the status quo, so they are less willing to invest in innovations which disrupt it. The disruptions come from those who have less at stake in the status quo.

This is just the Innovator’s Dilemma all over again. The problem has not gone away. Leaders are still cashing in their chips, rather than making the investments needed to continue to play the game.

Therefore, if you are currently in a position of market share power, you need to ask yourself this question:

Am I going to use this power in a way which allows me to continue to play the game or am I going to cash out early?

Cashing Out
Even if you still choose to cash out early, by asking the question it is at least a conscious choice that you have made based on weighing the alternatives. If you do not ask the question, you may end up cashing out by accident, and have a lot fewer chips to cash in than you had anticipated.

Selling out near the peak (before the next disruption has its impact) is a viable strategy. If you do this, you can often walk away from the game very wealthy. This is a proactive strategy with careful analysis of the environment and understanding the timing of trends and inflection points. You are putting yourself up for sale while you still have leadership benefits (i.e., still have lots of chips to cash in).

This is very different from trying to cling to the status quo as long as you can and then selling as a last resort. While clinging to the status quo, your market share is being disrupted by the next innovation. You are losing your market share chips to the next innovator. By the time you get around to selling, you have very few chips left to cash in.

Staying to Play
If you choose to stay to play, then that requires a different set of actions. You need to take some of your profits and reinvest them into the game, in order to maintain value leadership. The trick is trying to optimize the balance between the current inward cash flow from the status quo with the outward cash flow needed to create the next disruption in your favor.

At least as a leader, you have the potential to orchestrate how that transformation occurs better than others (provided you do not get too greedy in the short-term). Take advantage of the opportunity. Be proactive in guiding the transformation (rather than resisting it).

SUMMARY
Markets continue to innovate. If you resist innovation and do not transform your business, you will lose to the next round of innovators. Therefore, either cash out while still at the top or reinvest in disruptive innovation at levels necessary in order to continue to play the game for a long time.

FINAL THOUGHTS
In poker, you can sometimes get away with bluffing. In business, you may be able to fool the customers for a short while, but eventually they will figure it out and shift their business to the place where they receive the best value. Innovation leads to better value. Therefore, if you want to maintain leadership, follow the innovation to the greater value.

Strategic Planning Analogy #326: All You Have to Do…

THE STORY
When I was in college, I worked as a DJ on the college radio station. The great benefit of this job was that I had access to all of the music being issued (which was quite a lot). Granted, not everything issued was great music, but it seemed to me there was a lot of great music out there that never got the attention of radio stations or became successful.

I tried to figure out what the commonality was between the music that became successful versus the music which did not. I looked at all sorts of things—the level of musical performing talent, the cleverness of the music writing, and so on. I could not see any correlation. For example, some successes were talented, some were not. Some failures were talented, some were not.

After awhile, I determined that musical success or failure was not based on any single factor. There were too many successes and failures sharing the same characteristics. Therefore, I concluded that musical success was either mostly based on luck or based on a complex equation of many factors—too complicated to be obvious. I guess that’s why so much music was issued—if what works is not obvious, then issue a bunch, hoping that there are enough successes in the mix to overcome the failures.

THE ANALOGY
If you spend much time looking at the business literature, you will find all sorts of theories on how to create a successful business. Usually, the literature focuses on getting just one thing right. If you get that one thing right, the literature says you will be a success. Of course, each article or book focuses on a different “one thing” to focus on.

For example, some focus on something related to positioning—just find a unique, winnable, untapped spot in the marketplace and you will be automatically rewarded with success. Many others these days focus on listening to the customer—just do whatever they tell you and you will automatically succeed. Others say just focus on doing good (be a responsible corporate citizen) and you will automatically do well (be very profitable). Yet others say to focus on your employees. If you put together a good team of smart people and give them freedom, they will automatically be successful.

Others said to focus on things like audacious goals, cash flow, the next killer app, leadership, shareholder value, differentiation, speed, streamlining the decision-making process, innovation, and on and on and on the list goes. Some even said the focus should be on creating a focus.

Usually, this literature would “prove” its point by showing examples of successful firms who focused on exactly that one thing the literature was proposing. The logic was that these firms did it and were a success. Therefore, if you do it, you will automatically be a success as well.

Unfortunately, this all seems a bit simplistic to me. I think the situation is more like what I found as a radio DJ. Just as I found musical winners and losers for every single characteristic, you can do the same for these business foci.

In other words, for any “just focus on this one thing” business article/book, I could find the following:

1) Companies who followed the recommendation and succeeded;
2) Companies who followed the recommendation and failed;
3) Companies who did not follow the recommendation and succeeded;
4) Companies who did not follow the recommendation and failed.

And, as many have pointed out, even companies who followed the recommendation and were successful (at least at the time the literature was published), often continued on that path and later failed. The original book of this genre, In Search of Excellence, was famous for having picked a list of successful examples of “excellence,” where most were in deep trouble (no longer excellent) only a few years later. Hence, likelihood of finding automatic success in business by focusing on any one thing is just as likely as what I saw in music—almost none.

Therefore, I think you have to come to a similar conclusion to what I discovered as a radio DJ: success is either based on random luck or a complex mix of factors, working together in a way that is not easy to discern.

THE PRINCIPLE
So here is the dilemma. If success is random, then it really doesn’t matter what you do. If success is based on a formula too complex to comprehend or apply, then having the formula does not provide much guidance, either. So what should I do to increase the likelihood of my success?

To get out of this dilemma, I will propose a middle ground. The idea is to provide a broad enough scope to encompass a lot of the complex issues involved in success, yet cull it down far enough to provide a relatively simple (and relatively easy to apply) approach for business management. Although not perfect, it is better than betting it all on just one thing or hoping for luck.

This approach is based on keeping an eye simultaneously on three broad areas, which I refer to as the three P’s: Positioning, Pursuit and Productivity. In one short blog, I cannot fully explain all the nuances to each “P,” but hopefully, you’ll get the general idea.

1. Positioning
In a nutshell, positioning is the act of getting a targeted consumer group to believe that there is a compelling reason why they should prefer purchasing your product. The battle takes place in the mind of the consumer and you want to “own” a position within that mind. The goal is to convince them that you have a superior solution to one of their problems. A good position for your brand/product/service is one that is desirable, sizable, ownable, preferable, achievable, believable, understandable, and profitable. Your key soldiers in this battle include marketing and strategic planning.

Another way to look at this is to ask yourself these questions: What is the reason why my product needs to exist? Would anyone miss my product if it no longer existed? If your product has no unique reason for existing, then do not be surprised if it fails.

Within this broad area of attention (Positioning), three concerns should be kept in mind:

a) Have I created a winning position? Is my position still relevant? No I need to modify it?

b) Are the actions of my company consistent with this position? Am I doing everything possible to accentuate and strengthen my ability to deliver on the key attributes of this position? Are resources disproportionately allocated towards building/reinforcing the position? Am I making the right trade-offs?

c) Have I adequately communicated the position so that the customer understands and accepts it? Does the consumer continue to keep me as the top-of-mind leader on that position?

2. Pursuit
Having a good position is not enough. You need to exploit it. The idea behind pursuit is to create as many opportunities to exploit the position as possible. The battleground is the place where transactions take place, where people do the buying. Your key soldiers in this area include operations and sales. This is about out-hustling the others who want to win in the same space. Many people with great ideas fail because they let someone with more hustle out-pursue them and reap the rewards from that idea.

Within this broad area of attention (Pursuit), three concerns should be kept in mind:

a) Have I built up enough relevant competency/expertise in order to deliver on the promises of the position? Am I strongly pursuing innovations in order to remain a leader? Am I keeping an edge over competition in competency/expertise?

b) Do I have enough capacity (points of sale, types of sales channels, sales personnel, inventory, distribution) to satisfy the demands of all relevant customer segments and geographies? Am I expanding my selling/production/distribution capacity at a faster rate than competition in order to create superiority in selling (and putting competition at a disadvantage in reaching these customers)?

c) Have I pursued superiority in relationships up and down the supply chain? Have I created a competitive edge in position with these business partners?

3. Productivity
Selling at a perpetual loss is not a good long-term strategy. Ultimately, you have to provide your value at a price which is higher than your cost to deliver. Your business model needs to be engineered for profits. The battle ground is your income statement, balance sheet and cash flow statement. Your key soldiers in this battle tend to include finance, procurement, and operations.

Within this broad area of attention, three concerns should be kept in mind:

a) Am I focusing on the activities which provide the greatest return on investment?

b) Am I managing everything (costs, capital, personnel) for peak efficiency (while still enabling pursuit and position reinforcement)?

c) Am I building and leveraging my power within the business ecosystem so as to extract a larger share of the total ecosystem profits? Am I leveraging my economies of scale?

I have written many blogs about these topics in the past. Check out my keyword topic label links on Positioning, Pursuit and Productivity to learn more.

SUMMARY
Business success is not an automatic outcome of doing just one thing right. It is a complicated formula, requiring proper moves in many areas. For simplicity sake, one can categorize most of these moves into one of three concerns: positioning, pursuit and productivity. All are needed to increase the likelihood of success.

FINAL THOUGHTS
All three of these areas need attention because they intermingle to form the formula for success. For example, you cannot exploit the economies of scale in profitability if you have not pursued the capacity for scale or created a position which demands scale. You cannot pursue a position if your do not know what that position is or have not created enough cash flow to give you the funds needed to invest in the pursuit. Therefore, you need to work on all aspects of the formula in concert. Again, we’re back to the music analogy.

Strategic Planning Analogy #266: Consequences of Fame

THE STORY
Once there was a young boy who lived in poverty. All he had was the ability to run very fast. He was discovered by some sports promoters, who made him into a popular and successful athlete.

As a result of this popularity and new-found fortune, the boy was able to alter his lifestyle. Instead of running everywhere, his was driven around. He spent his evenings partying and eating lavish meals.

Eventually, he became so fat and out of shape that he could no longer run quickly. Once he lost his athletic ability, he lost his fame and fortune. He was back to where he started—living in poverty.

THE ANALOGY
I’m sure you’ve heard many variations of this story over the years. Often times, athletes, actors or musicians get caught up in the lifestyle of the rich and famous. This wild living of sex and drugs and partying destroys their ability to continue with their gift. As a result, they lose their ability to continue the fame and fortune.

The story is sad, but sadder yet, it is rather common. There’s something about fame and fortune that can often lead to self destruction.

This same concept can also happen to national economies or to individual businesses. Initial success can trigger changes which work to destroy the foundation of that success. We need to understand these factors so that we can accurately assess the future of national economies, as well as minimize the tendency towards self destruction in our businesses.

THE PRINCIPLE
The principle here is that economic success tends to naturally create aftereffects which act to weaken the cause of the original success. Unless we understand these aftereffects and work to counter them, our strategic assessments will be wrong and we will end up with a failed strategy.

The Principle at the National Level
Take, for example, national economies. Nations typically start on the road to economic success by taking advantage of their low labor costs. This is like the athlete in our story who took advantage of his ability to run fast. It is a competitive edge which provides a platform for gaining success.

Once a nation can prove that it is good at providing lowest cost production, money will flood the country to build low-cost factories. All of these factories, filled with low cost labor, begin the nation down the path to economic success.

Unfortunately, all of this success has aftereffects which work against success. First, the laborers eventually get tired of working under unsafe conditions for little pay. They demand better conditions and a bigger piece of the profits.

Second, the economic success is usually not spread evenly throughout the country. Poor, rural people begin to flood the cities where the initial success began. This creates all sorts of problems, such as inadequate housing and water, congested streets, massive pollution and social unrest. The country must now divert some of its attention from building an export economy to fixing internal infrastructure and strife. This requires increases in taxes, creating even more pressure by the workers to get wage increases.

All of these aftereffects create a situation where the country is no longer the lowest in cost of production. Like the boy in the story, the country becomes fat and is no longer competitive. As a result, all the fame and fortune starts moving to the next nation with a claim to lowest cost of production.

You can see all of this starting to happen in China. There has been tremendous pressure to build safer products in safer factories by employees who get paid a decent wage. Labor unrest builds until it explodes in places like Urumqi this past week. Already, there are some Chinese manufacturing companies that are shifting their production to Vietnam because their own country has gotten too expensive. Exports are way down. Internal strife is on the rise.

Yes, China is still a large and growing economy. But I remember when prognosticators were predicting huge, rapid growth in China seemingly forever until they dominated the entire world. I chuckled to myself, because I knew that eventually the forces behind the initial economic success would lead to natural factors (we are now seeing) which would slow down that economic juggernaut. If you bought into the distortions from these initial prognosticators, you may have made some poor economic decisions.

The Principle at the Business Level
This same situation can happen to individual businesses as well. If your success is based on having created an entirely new business opportunity, natural forces will lead to competitors flooding into the new business as well. Competitive pressure will drive down those initially high profit margins. You may not even survive the consolidation of the industry if the ones who follow you have a superior infrastructure (for more on this, see the blog “Gimme Shelter”).

If, on the other hand, your initial success comes from taking large market share away from someone else, then natural forces will cause the person who is losing share to wake up and retaliate. This retaliation will cause some of the share to go back to the original party and will probably make the entire business less profitable due to lowering of prices (for more on this, see the blog “Bombs Start Wars”).

And then, of course, there are the natural internal factors which tend to follow success. Workers will demand better wages. Leaders will want more lavish compensation. Internal bureaucracy will become bloated, costly and slow. Just look at the US automobile industry to see how initial success can start natural forces inside which tend to destroy the initial success.

The Prescription
So what should strategists do? Two things:

1) Temper Your Optimism
When making predictions about economic situations (be it internal or external), don’t become overly optimistic about early successes. Realize that there are forces in play that will work against those successes. Factor those forces into your long-term projections. Assume aggressive competitive reactions and rising costs of production, for example.

Your modeling should almost never treat “best case scenario” as “most likely scenario.” In fact, if you see a big retaliation coming, the wisest strategy may be to sell out early at top dollar, before the retaliation comes.

2) Put in Measures to Counteract the Natural Aftereffects
Although there is a natural tendency for success to breed high wages and a bloated bureaucracy, it doesn’t mean that you cannot fight the trend. If you know about the forces in advance, you can instill in your strategy measures to resist these forces. By being proactive, you can slow down or eliminate many of these threats.

Proactive, aggressive measures to fight bureaucratic bloat can help keep your core strategic success successful for a longer period of time.

SUMMARY
Initial success does not guarantee long-term success. There are natural forces which accompany success and work to destroy the principles behind that initial success. As a result, your strategies should temper their optimism around early successes and put into place measures to fight the negative natural forces.

FINAL THOUGHTS
Since competitive advantages like low labor or getting to the market first tend to be temporary, good strategies should look for advantages which are more difficult to lose, such as patents, unique skills, or synergies that are difficult to copy.

Clarity

THE STORY
Sometimes I get jealous of people who have a clear vision of what they want to do in life. I have a friend who, at the age of 5, already knew exactly what he wanted to do with his life. He wanted to be an electrical engineer.

He spent most of his childhood fiddling around with electronic gadgets. When he went off to college, he got a bachelor’s, master’s and PhD degree—all in electrical engineering. Then he went and got a job at a large company in the field doing leading edge work in electrical engineering.

After awhile, he decided to become a professor of electrical engineering at a large, prestigious university. Now he teaches and does even more leading edge electrical engineering research at the university. He has lived a rich, full life doing exactly what he had clearly determined to do way back when he was 5 years old.

Me? I’m over 50 years old and I’m still trying to figure out what I want to be when I grow up.

THE ANALOGY
It’s nice when one has a clear vision of what they want to do with their life. It allows them to focus. They don’t have to waste time searching. They know their path in life. That’s why sometimes I wish I could just get a letter in the mail fully detailing the divinely inspired plan for my life.

This is also very important for businesses. It is much easier for a business to succeed if everyone involved clearly understands the life path of the corporation. It lets the company focus on success. That’s why I’m sure many CEOs wish they could just get a letter in the mail fully detailing the divinely inspired plan for their business.

My suspicion is that there are a lot more people like me than there are like my friend, who had a clear vision since early childhood. I also suspect that a lot of businesses struggle with this issue. Although strategic planning can do many things for a company, probably its most important benefit comes from bringing clarity of purpose to a business.

THE PRINCIPLE
The principle here is the importance of clarity to success. McKinsey and Company recently did a large study to determine what are the most important factors to success in business. They analyzed about 100,000 questionnaires to uncover the practices at 400 business units in 230 companies around the world.

McKinsey discovered that there were three factors which caused a dramatic improvement in performance. Nothing else came close in its impact. The three major factors all had to do with clarity:

1) Clarity of Goal (or as they put it, a compelling vision of change or direction);

2) Clarity of Path (an unencumbered internal process to reach the goal, or as McKinsey put it, an environment that encourages openness, trust and challenge—i.e., the right culture); and

3) Clarity of Expectations (or as McKinsey put it, clear roles for employees and clear understanding of who it accountable for what).

If you know where you are heading, you clear away the bureaucratic obstacles, and then let everyone know what is expected of them, then you have the highest potential for success.

Over the years, I have spoken with large numbers of people about strategy. A common problem I find is people fretting about trying to find the perfect strategy. They have narrowed down the list of options to a few choices, but they are having difficulties narrowing down the list to the single best alternative.

What I usually tell these people is that it is more important to just pick something and get a clear focus around it than to fuss and fret over whether you have made the absolute best choice. Usually, most anything on their short list has the potential for success if focused on. However, if you waver and go after too many options at the same time, you will probably fail. Picking which path is not as important as shedding the light of clarity on whatever path you pick.

Perhaps my friend could have also been successful if he had focused on a different career path. However, because he picked a path early in life, he was able to focus and succeed on the path that was chosen. If he had procrastinated about his future, he may have had no success at all.

The best way to tell if your strategic planning process is a success is not by the quality of the binders or the speeches. No, the best way to determine success is by the amount of clarity it brings to the organization. When you are done:

1) Does everyone clearly understand the goal?
2) Does everyone clearly understand their role and are willing to be held accountable to achieving it?
3) Is everyone so fixated on the larger picture that internal barriers and petty politics are gone and is replaced by openness and cooperation?

Strategy without clarity equals disaster. Strategy with clarity equals success.

I am reminded of an old episode of the TV show Star Trek: The Next Generation. Captain Jean-Luc Picard and Dr. Beverly Crusher are captured by the enemy. The enemy puts a device on them which has the side effect of letting them sense what is on each other’s mind. Captain Picard and Dr. Crusher eventually escape from the enemy. The problem is that they do not know where they are, so it is difficult to know which is the best escape path.

Being the leader that he is, Captain Picard makes a number of decisions as to the best way to go. Each time, he sounds very convincing about the correctness of his choices. However, eventually Dr. Crusher speaks up. She says that for all these years when she has heard Captain Picard give commands, she always though he was very certain of what was the right thing to do, because he always sounded so confident when giving the order. However, now that she was able to read his mind, she discovered that he often only has a vague notion of what is correct, and sometimes he is just guessing.

The captain replied that this is what leaders do. They struggle internally with tough decisions, but externally they give the confidence needed to rally the troops behind the decision. They make the commands clear and unwavering, to give the appearance of being the obvious best choice.

In many ways, this is what strategic planning should do. It needs to tackle some tough issues. However, once the tough decision-making is done, the process must clearly and confidently communicate the decision in a way which gets the troops focused on making it succeed.

The job is not over when the choice is made. One also needs to make sure it is understood and embraced.

In addition, one needs to clearly assign responsibilities, with individual consequences if not carried out. In other words, strategy should not just be stated as a nice thing and then hope that people will do something. Clear accountability needs to be spelled out. Perhaps individual accountability contracts need to be written out. Compensation needs to be tied to carrying out one’s portion of the strategy. Do not assume things will magically happen. Make it clear who is responsible for what.

Finally, one needs to incorporate corporate culture into the strategy, so that internal bureaucracy does not block the path to victory. Although there may be individual responsibilities, one cannot let individualism get in the way of the combined effort. Clear away anything in the culture which prohibits the cooperative effort needed to achieve success.

SUMMARY
Although strategic planning serves many functions, its most important function should be to provide clarity to an organization. Clarity has three aspects: clarity of goal, clarity of path and clarity of responsibility. Without this comprehensive clarity, strategy is little more than some interesting ideas that end up going nowhere.

FINAL THOUGHTS
Although you may never get that letter with the divinely inspired detailed plan for your business, you can write that letter for the rest of your business.