Strategic Planning Analogy #441: Leaving Early

THE STORY
When I go to a sporting event, I like to stay until the very end. I figure that I paid for the whole game, so I may as well watch the whole game. And who knows, something exciting might happen at the very end.

Usually, however, the end is not very dramatic. And because I wait until the end, I get caught in terrible traffic jams. First, the jam of the people trying to get out, and then the jam of the cars trying to leave. It seems like forever to finally get on my way home. What a mess!!

The frustration of trying to leave gets larger than the excitement of seeing the game. At that point, I wish I would have left earlier.

THE ANALOGY
For every strategic business initiative, there is an important question to ask—When is it time to leave this initiative and move on to something else? There is a tendency for executives to act like my behavior at sporting events and stick around until the very end. And just like in sports, if you stick around until the very end of a strategic initiative, you end up in a mess.

Usually nothing very exciting happens at the end of a business initiative life cycle. Sales slowly fall away and losses begin to mount. You could leave early without missing any excitement (and avoid the losses).

And, if you leave this business sector ahead of the crowd, you can avoid the mad rush to the exits of everyone else later on. At the end of the cycle, when everyone is trying to leave, there is virtually no value in what is left behind (everyone is selling and nobody is buying).

Therefore, we should resist the temptation to stay until the end of the game and leave early. After all, there is always another game to play, and the sooner you leave the old one, the sooner you can prepare for the new one.

THE PRINCIPLE
The principle here is that a retreat or exit from a business is not necessarily a sign of failure. Often times, leaving early is the more successful alternative.

1. ALL Strategic Initiatives Eventually Die
The first thing to remember is that ALL strategic initiatives eventually die. Again, ALL strategic initiatives eventually die. Strategic initiatives follow a lifecycle of growth, maturity, decline, then death. If your company’s strategy is to ride an initiative all the way to the end, then you will die as well. If you don’t want to die along with that strategy, then you’d better leave early and move on to a replacement strategy.

Just because all strategic initiatives die is not to say that everything dies. Consumer desires for solutions to problems does not die. Consumer desires for status, comfort, performance, convenience and value do not die. The problem is that the way consumers satisfy these desires changes over time. New and better solutions (or business models) come about which are superior to the old ones. If you want consumers to continue getting their solutions from you, then you’d better keep advancing to the initiative with the superior solution.

Kodak stuck with analog film all the way to the end and died with the initiative. Had they left earlier, they would have had the opportunity to continue to thrive. After all, the consumer desire to capture memories still lives. The desire for visual imaging still lives. The desire to share experiences through pictures still lives. The only thing that died was the analog film initiative…and the companies who stuck with it until the end.

A large part of the entire social phenomenon on the internet is just a superior business model for solving the problems that Kodak used to solve—the sharing of experiences. By sticking around too long at the old game, Kodak got caught in the mess at the end and missed out on the new game of the social revolution (not to mention the whole digital imaging thing).

Don’t get caught into believing that you are the exception and that your strategic initiative will never die. At one time, Sears was by far the largest and most successful retailer on the planet. Consumers loved them. They seemed invincible. It looked like they would be successful forever. But times changed and Sears didn’t. Superior solutions appeared. Sears is now near death. Consumer purchasing did not die, but the Sears way of selling did.

2. Wanting to Win in the Worst Way Usually is the Worst Way
Failures don’t just happen at the end of the life cycle. Failures also occur during the process of innovation. Not every new idea is a good idea. In fact, most innovations fail.

In an earlier blog, we talked about some of the psychological biases which cause companies to want to stick with an innovation too long. Some of those factors include:

a) Innovation is Fun
b) Innovation Can Enhance a Career
c) All the Other Cool, Successful Companies are doing it.
d) My Ego/Reputation gets Entangled with the Reputation/Success of the Innovation.
e) The Budget/Plan is Depending on it.
f) There’s Nothing Else in the Product Development Pipeline, So it HAS to Work.

As a result, there is an inherent bias to stick with a bad innovation too long. We want so badly for the innovation to succeed that we try to create success out of our own desire when there really is no success to be found.

Wanting to succeed in the worst way is usually the worst way to try to succeed. We need to be rational and realize that and early exit from a doomed venture is often the smart move (and will save one from taking heavy losses and write-downs in the future).

3. The Last One Standing is Usually the Loser
A third place where sticking around too long can occur is when the “Roll-Up” strategy is used. The idea is to consolidate an industry by acquiring enough of your competitors to have the leading share (roll them all into one).

There is logic to using this roll-up consolidation approach. It creates economies of scale and there are benefits from reducing the number of competitors. It can also be a great way to expand geographically.

However, the roll-up strategy is best used near the beginning of the mature phase of the life cycle. After all, it does no good to be the great consolidator of a business if the business is near death. The consolidation only makes sense when there is still a demand large enough to want the large entity you are building.

During the 1970s through the early 1990s, Supervalu rolled up and consolidated the wholesale grocery industry. This strategy provided many years of success. However, the largest customer of the wholesale grocery industry is the small, independent grocer. Thanks to the rise of the Walmart Supercenter and the growth of large supermarket chains, the independent grocer was rapidly disappearing. Having the best wholesale grocery business is worthless if you no longer have independent grocery customers. The roll up strategy was starting to die.

Fortunately, Supervalu did not need to die. They changed strategies to become owners of large retail chains (primarily through the acquisition of Albertsons). Now they controlled their retail customer base. Another winner was the wholesaler Cardinal Foods. They sold out early in the consolidation and moved into the growing health care business, eventually becoming the successful Cardinal Health.

In a roll-up strategy, remember that when everyone is willing to leave (and sell you their business), you need to question why you want to buy them. Often, they are willing to sell out because either:

a) They think the business is dying; or

b) They think you are paying such a high premium to get the business that your price is far higher than the present value of future cash flows. In this case, you transferred all the value of the consolidation to the person who is leaving the business via your purchase price.

Either way, that is not a good sign for the consolidator. In the end, all strategic initiatives eventually fail, and consolidating a larger version of that initiative at the point when it fails just creates a larger failure.

Consolidating is nice at the beginning of maturity, but know when it is time to leave that strategy. Sell out early before the very end and let someone else be holding the large mess when the initiative is nearing death. After all, the last one standing when the initiative dies will die with the initiative. I spoke about this principle in more detail here.

4. Distinguishing Battles from Wars
Leaving an initiative early may look like failure, but an initiative is only one battle. The real goal should be to worry about winning the larger war, not a single battle.

The real war is to preserve and profitably grow the corporation. For a corporation to do so, it must continually shed its old initiatives and add new ones. Shedding the old is not a sign a failure, but a realization that the greater goal requires adapting to change. In fact, failure to shed is more likely to create ultimate failure.

Long-time enduring companies like Nokia and GE have had vastly different portfolios of businesses over the years. They were willing to leave industries before that game was over and move to the newer, better game. And when GE has temporarily faltered, it is usually because it stayed too long with a particular initiative.

SUMMARY
Leaving a business early may at first seem like failure, but it is usually the more profitable option. Strategic initiatives eventually die and you cannot stop that. Therefore, to prevent your company from dying, you need to move on. And the sooner you move on, the easier and more profitable your exit will be. Also, the sooner you move on, the easier it is to own the next big thing which is replacing what is dying.

FINAL THOUGHTS
When you see others starting to leave the game, consider it a warning sign that perhaps you need to consider leaving as well.

Strategic Planning Analogy #395: Strategic Trajectories

THE STORY
Back in the early 1970s, National Lampoon magazine did a parody of detective stories. In the parody, the detective was a genius mathematician.

At one point in the story, a bad person was about to shoot the detective with a gun. The detective told the bad person to put away the gun because trying to shoot him was a waste of time. The mathematical detective’s explanation went something like this:

Before the bullet could travel from the gun to the detective, it would first have to travel half that distance. And before the bullet could travel half the distance, it would have to travel one-fourth the distance. Continuing this logic, you could keep dividing in half the distance the bullet would need to travel an infinite number of times. That creates an infinite number of distances the bullet would need to travel to reach the detective. And, of course, anything having to travel an infinite distance would never reach its destination. Therefore, mathematics proves that the bullet would never reach the detective.

It sounds mighty impressive. Too bad it is not true. Just ask anyone who’s shot a gun. I’ll trust their actual experience over the mathematical theory.

THE ANALOGY
Once a bullet leaves the chamber of a gun, it travels along a trajectory. It is nearly impossible to alter the direction of the trajectory of the bullet after the gun has been shot. It’s too late. The direction is already set in place at the point when the gun is shot. The bullet will continue on that trajectory all the way to the end. It is a foregone conclusion.

If your body is at the endpoint of that trajectory, like that detective, you may wish this were not so. You may want to believe that there are mysterious forces holding back the inevitable—perhaps for an infinite amount of time. But this is a false hope. The bullet will follow the trajectory and kill the intended target.

Bullets aren’t the only thing which follows a trajectory. Businesses also tend to follow a trajectory. Based on the way a business is introduced and managed, a path is determined. Sometimes the trajectory is upwards towards great success. Other times, the trajectory for the business is headed towards rapid tragedy and destruction.

In the latter case, the operators of the business may want to deny the inevitability of the rapid destruction. They may work up all sorts of mathematical spreadsheets and analyses to show how the “inevitable” can be stopped. They will use this math to show how the trajectory can be redirected to a better conclusion.

At first, all of that mathematical logic may seem plausible, just like in the National Lampoon story. But, in most cases, the forces behind the original business trajectory are too powerful and too fast. You cannot respond quickly enough or strongly enough to change the trajectory. Despite all that effort to avoid failure, failure occurs anyway.

THE PRINCIPLE
The principle here is that strategic plans designed to significantly alter the trajectory of a business already in motion have a high rate of failure. The original forces are just too strong and the time is too short to create a successful change.

For example, if a product is introduced with a lousy positioning, the product is quickly labeled by the market as having a “loser” position. Once that label is stuck on a product, it is extremely difficult to reposition it as a “winner.” Just think of the many products introduced to compete against Apple. Apple’s position is to be the “cool” product desired by “cool” people. Almost by definition, this positions the imitating competition as “uncool” and the owners of the competition as “uncool.” No customer wants to think of themselves as uncool, so they buy the Apple product.

Even if you can find a small morsel of mathematics to “prove” how your product excels in some way over the Apple version, it is too late. The “uncool” trajectory has already been set. And that trajectory is pointed towards failure. Microsoft has tried numerous times to reposition the Zune to win against the iPod, but the original trajectory was too strong, so Zune cannot avoid the inevitable failure.

Even if you can find a viable way to reposition for success, there is usually not enough time to fully implement it. Getting consumers to abandon an old, bad impression of a product and accept a new, superior impression takes a lot of time and money. Either the time or the money runs out before the process can be completed. And so much money needs to be spent to alter the trajectory that, even if the trajectory can be altered, rarely will the return ever justify all the cost it took to alter the trajectory. Based on return on investment, a quick death is usually the least bad alternative in these circumstances.

Yet, in spite of all the evidence against trying to alter a bad trajectory, it is a very common strategic approach. Years are wasted trying to stop the inevitable. Better financial targets may be set each year for the annual reposition (supported by mathematics), but the improvements fail to occur—year after year after year.

If trying to alter the trajectory has such a high failure rate, then what are the alternatives?

1) Set a Better Initial Trajectory By Aiming Better
Many business ventures fail because they were never designed to win in the first place. Either the business model is flawed or the position desired is unattainable (often because someone else has already locked up the position). If a winning trajectory is not part of the original design, then don’t be surprised when the launch takes a lesser path.

If you have a business on a losing trajectory, ask yourself this question: if my product disappeared, would anyone really care? Could customers easily adapt and move on without me? Usually, the answer will be yes, because losing trajectories accompany products which have not been positioned to be indispensible. I spoke more about this concept in an earlier blog.

A winning trajectory comes from initial strategies specifically designed from the start to win—to make your product uniquely indispensible. If you cannot adequately answer the eight questions asked in this other prior blog, then you are probably setting yourself on a trajectory to fail.

The extra effort spent up-front to engineer success at the beginning will put you on a better trajectory and save yourself a lot of grief later.

2) Shoot Another Bullet
Once it has been determined that your business is on a bad trajectory, often the best course is to stop the attempt to alter the old trajectory through incremental change and instead turn to a radically new approach.

For example, if you shoot a bullet at a target and realize that the bullet is moving way off course, don’t try to convince the bullet to go a different direction. Instead, aim better and shoot a second bullet. The same is true in business.

Apple’s original trajectory with its personal computer business was going in a bad direction. Its market share against the Microsoft-based PC business was small and getting smaller. Although mathematics might show some areas of superiority, the Apple computer business was on a losing trajectory. Apple could have wasted a lot of time and money to change that trajectory, but it did not. Instead it used its computer knowledge to shoot another bullet—the iPod. The iPod, iPhone and iPad are essentially computing devices. But they were built on entirely different business models and business positions. It was a model where Apple could win. It made Apple such a winner that it provided the time, money and image boost to allow the computer business to recover.

SUMMARY
Although the temptation is strong to try to alter the path of a poorly performing product by incrementally tinkering with the strategy, this is usually a futile exercise. The downward trajectory is already set. A better bet is to either spend more time up-front getting the initial trajectory right, or to cut your losses and re-start with a radically new approach.

FINAL THOUGHTS
It used to be a tradition in Detroit that citizens would celebrate the coming of New Year’s Day by shooting guns straight up into the air at midnight. Unfortunately, gravity causes all those bullets that went up to eventually come down. Sometimes, the bullets would cause damage, injury or death as they came down. The city had to spend money to convince people that it was not safe to shoot up because you couldn’t control where the bullets came down.

The same is true in business. Even if you have a business with a wonderful upward trajectory, eventually its lifecycle will end and the trajectory will start to come down. It is a futile effort to try to totally prevent the end of the lifecycle. It is better to look for the next big thing that will grow to replace that which is dying.

Strategic Planning Analogy #386: Embracing Maturity

THE STORY
I enjoy talking to new first-time parents about their small children. The new parents truly love their little baby and think parenting them is such a wonderful thing.

Then they will mention some little parenting problem they are having. I warn them that this little problem is nothing compared to all the problems they will face when that child becomes a teenager.

Many of those who have had experience or knowledge about parenting teenagers have half-jokingly mentioned to me a desire to hand off their children when they become teenagers and pick them back up when they reach their twenties. Of course, the problem would be finding someone to hand them off to during that period.

THE ANALOGY
Being the parent of a cute little baby can seem like such a wonderful, fulfilling experience. Being the parent of a teenager, however, can often seem like torture—something to be avoided if possible. Unfortunately, those cute little babies eventually grow up into those frustrating teenagers. You can’t just stop being a parent when the child is no longer a cute little baby.

A similar situation appears to happen with many strategic planners. In general, strategic planning for brand new baby businesses can be seen as wonderful and fulfilling. You get to set the direction and positioning from scratch. With all that potential growth in front of it, there are lots of fun strategic options to consider.

However, when a business reaches maturity, strategic planning can seem more frustrating. Positions are already set and difficult to change. The fun of growth has been replaced by the pain of intense competition. Rather than talking about great strategic options, the discussion moves to cutting costs. In business maturity, it appears as if strategy is less influential on outcomes (sort of like parenting a teenager).

Like those parents, many strategists would be happy to just deal with the baby businesses and hand off those mature businesses to someone else. But guess what? Most industries and most businesses in the world are relatively mature. That’s where most of the action is. If strategists want to be relevant, then they had better get excited about building strategies for mature businesses.

THE PRINCIPLE
It bothers me that the discipline of strategic planning is out of favor in so many areas of business. Its influence has diminished significantly. There are many reasons for this phenomenon. I believe that one of the many reasons why strategic planning is seen as irrelevant is because the discipline tends to be pre-occupied with early stage businesses. Little focus from strategic planning thought leaders is given to strategic planning in the mature stage of a business. Therefore, it is no wonder that mature businesses see little value to intense strategic planning. And since most businesses are mature, that makes strategic planning appear irrelevant in most places.

One way for strategic planning is to regain its stature is by making it appear more indispensible in the way mature businesses are run. In this blog, we will look at four ways to do this.

1. Reclaim Productivity as a Strategic Agenda
As I have mentioned many times before, I believe that there are three components to effective strategic planning;

a) Positioning – A reason for consumers to prefer you.

b) Pursuit – Aggressively achieving as many ways to exploit that position as possible (top line orientation)

c) Productivity – Making the most money off the areas where you pursue (bottom line orientation).

Although all three are important at all phases of a business lifecycle, productivity tends to be the area requiring the most attention during the mature phase. Therefore, for strategic planning to be relevant and essential during maturity, it needs to take ownership of the productivity agenda.


In many places, productivity is not even seen as a strategic activity (even among some strategic planners). Strategists aren’t even invited to the table when productivity is discussed. It is just seen as a cost cutting exercise, or at best, a budgeting exercise. Just tell people to cut 15% of costs from their budget and you are done.

In reality, productivity is very much a strategic issue. Not all cuts are created equal. Some cuts hurt your strategic position more than others. If strategic implications are not addressed during cost cutting, the wrong cuts can be made—cuts which can totally undermine a business.

For example, a few years back the consumer electronics retailer Circuit City wanted to increase productivity. They noticed that labor was one of their largest costs at store level. They also noticed that their most experienced sales people tended to be the most expensive sales people. Therefore, to increase productivity, Circuit City got rid of its most experienced sales people. It wasn’t too long thereafter that Circuit City declared bankruptcy. As it turns out, those experienced sales people were a critical component of the strategic success of Circuit City. Eliminating those people also eliminated the chance of strategic success.

Strategists need to be at the table to point out the strategic implications associated with various cost-cutting options (and perhaps provide cost-cutting options of their own). This isn’t an option. The destiny of the business is at stake.

2. Move the Discussion Away from Merely Cost-Cutting
Some of the best ways to increase productivity have nothing to do with cutting costs. Often the productivity problem is not how much you spend, but rather what you do. It is a more a question of effectiveness of process rather than efficiency of spending.

For example, I could be the most efficient Morse Code operator on the planet. However, that does not make me the most effective communicator on the planet. Almost nobody understands Morse Code anymore, so nobody will hear my Morse Code message, no matter how efficiently I use it. Rather than trying to make my Morse Code process more efficient, I need to switch to a more effective communication process, like Twitter, Facebook or Email.

If you only focus on cost-cutting, you may miss far more effective options for improving the bottom line via changes in process. Strategists can be an important source for discovering and championing alternative processes.

Strategists can also play a vital role in helping companies avoid new processes which negatively impact a strategy. Take outsourcing, as an example. It makes a lot more sense to change a process from in-house to outsource when the process is less critical to the overall strategy. By contrast, if you outsource a core competency, you may destroy your ability to control your destiny and destroy your competitive advantage.

3. Help People See Productivity as an Investment Opportunity
Productivity is ultimately about increasing profits. Sometimes, you can increase profits faster by investing rather than cutting. If the return on investment is high, investments make sense, even in the mature phase of a lifecycle. Strategists can play a key roll during maturity by discovering and championing those types of investment opportunities.

Strategists are already often a key part of investment decisions during the early phases of a lifecycle. Why not continue that roll into the mature phase?

4. Change M&A to M&A&D
M&A stands for Mergers & Acquisitions. These are activities which tend to do with building and growing a business. However, as a business reaches maturity, it makes sense to give more consideration to the strategies of shrinking and eliminating businesses. This would be the strategies of Divestiture.

Most companies do not take a proactive approach to divestitures as a strategy. Instead, it is seen as the option of last resort—to be used only when backed into a corner with no other option. The thought of divesting while a company is still doing well is often never considered. Yet, the most profitable time to divest may be when the company is still doing well.

Look at the chart below. Outsiders often tend to overestimate the value when a company is just reaching maturity. They may mistakenly see it as still in the growth phase or see a longer mature horizon than you do. Conversely, once there is no longer any doubt that a company is in decline, the potential pool of people to sell to shrinks dramatically. The “bottom-feeders” who go after distressed companies tend to be very cheap and pay very little. As a result, in decline, others tend to underestimate your value. As a result, divesting early can be a great strategic option. We talked about this more in earlier blogs (here & here).


Therefore, divestitures can be just as strategic as acquisitions (read more here). And just as strategists are often a part of the acquisition discussion, they should be a part of the divestiture discussion. And this is more likely to happen if you change M&A to M&A&D—Mergers & Acquisitions & Divestitures.

SUMMARY
One way to improve the stature of strategic planning in companies is by making strategic planning appear more vital in the mature phase of the life cycle. This can be done by:

1. Reclaiming Productivity as a Strategic Agenda
2. Moving the Maturity Discussion Away from Merely Cost-Cutting
3. Helping People See Productivity as an Investment Opportunity
4. Changing M&A to M&A&D

FINAL THOUGHTS
There’s an old poem which goes something like this:

“The problem with kittens is that,
They eventually grow up to be cats.”

We need to move beyond a focus on cute kittens and embrace the reality of mature cats.

Strategic Planning Analogy #374: Black Bananas

THE STORY
Large grocery chains in the US purchase their bananas from the fruit companies in the unripened “green” stage. They do this because hard, green bananas are easier to transport to the US.

Then, after the green bananas get to the US, the grocers put them into their produce warehouses. These warehouses have gigantic, pressurized gas chambers in them. These gas chambers chemically “ripen” the bananas. Depending on the length of time the bananas stay in the gas chamber, you can “manufacture” whatever level of ripeness you want. After they reach the desired ripeness, the bananas are shipped by truck to the grocery stores.

One company I know wanted to increase efficiency by shipping both bananas and flowers to the stores on the same truck. Unfortunately, something unexpected happened. The flowers arrived at the stores already starting to wilt and die—something which hadn’t happened when the flowers were shipped by themselves.

Upon further investigation, it was determined that some of the ripening gas which was infused into the banana via pressure (while in the gas chamber) started to leak out of the bananas when they were in the truck. This ripening gas was absorbed by the flowers while they shared the ride in the truck. As a result, the ripening process of the flowers was accelerated, causing them to die prematurely.

As soon as the company figured this out, they stopped carrying the flowers and bananas on the same trucks.

THE ANALOGY
Bananas and flowers are called “perishables,” because they have a short life. They soon “perish,” or die. You cannot stop a banana from turning black. You cannot stop a flower from wilting. It is inevitable, and it happens rather quickly.

Although we may not want to admit it, strategies are also perishable. Every strategic initiative eventually dies, just like bananas or flowers. And like those flowers in the truck, our strategic initiatives often die faster than we had hoped.

The reason strategic initiatives die is because the environment in which the strategy operates changes. Consumer desires change, technology changes, competition changes, innovation changes, the economy changes, and so on. These forces of change act on the strategy like the gas in those gas chambers. They cause the strategy to move through a lifecycle until it is no longer relevant and dies.

Think of the travel agents, whose strategy of being an intermediary between travelers and the travel industry died when the internet allowed travelers to interact directly with the travel industry and buy their own tickets. At that point, the old travel agent strategy lost most of its relevance.

Think also of Kodak, which is struggling to find a new strategy now that its old strategy, based on analog photographic film, is no longer very relevant.

Strategies based on growth in established economies are currently being replaced by strategies focusing on emerging markets. And retailer JCPenney this week announced it was shutting down its catalog operation, a strategy made irrelevant due to the internet.

In a similar fashion, some day your strategy will also become irrelevant, if you do not adapt. It will turn black like a banana, perhaps before you are ready to move on.

THE PRINCIPLE
The principle here is that since all strategies eventually die, a good strategist should try to proactively manage this process. Just as the grocers can manage the life a banana via the gas chamber, strategists can manage the life of their strategy via various tactics.

In particular, we will look at three areas to consider.

1) Managing the Gas Pressure
There are many things businesses can do to hasten the growth of a new business. You can increase advertising, lower prices, do a public relations push, expand distribution, get celebrity endorsements, win awards, go viral on You Tube, etc. These act like those gas chambers act on bananas, because they push your business from early entry to maturity.

In many ways, this is good, because it quickly increases your market potential. However, just as all that extra gas caused the flowers to prematurely die, too much early pressure to grow can cause your strategy to die more rapidly.

Consider the high fashion industry. A lot of the appeal of high-end fashion brands has to do with their exclusivity. The more you push to expand the market into the middle class, the more you destroy that exclusivity appeal. Soon, the high end customers will abandon the brand because of that tarnished image. And once the high end abandons the brand, the middle class will soon follow. The brand dies an early death. Had less pressure been put up front, the fashion brand might have had a longer, more prosperous life.

Hence, too much pressure up front can push what could have been a lucrative long-term trend into a less profitable short-term fad. However, too little pressure may cause your strategy to never get beyond the introductory stage. Therefore, strategic planning needs to consider what is the proper amount of pressure to apply.

2) Keeping the Pipeline Full
Supermarkets do not make just one large purchase of bananas per year. If they did, they would have two major problems: a) a lot of the bananas going black before getting sold; and b) there would be no bananas to sell in the later half of the year once all the black bananas are thrown away. To avoid these problems, supermarkets buy small batches of bananas all year long. By having a continual supply of fresh bananas coming in all year, they can optimize sales and reduce waste.

The same is true for strategies. Companies need a continual pipeline of strategic innovation, experimentation and development That way, a company is ready when its current strategy begins to die and can seamlessly move on to the replacement strategy. One of the keys to the long-term success of GE has been its ability to continually modify its portfolio in order to remain relevant. It has moved through heavy industry to financial services to entertainment and is now moving to green energy. It does it seamlessly because GE built an infrastructure specifically designed for seamless transitions by focusing on:

a) Great general management (regardless of the business);
b) Mastering portfolio management techniques; and
c) Merger & Acquisition expertise (to help shift the portfolio more effectively).

It’s hard to quickly shift a strategy from a focus on mature markets to a focus on emerging markets if you have never experimented in emerging markets before. That’s why a strategy 100% focused only on the “strategy of the moment” can be so risky. It leaves you vulnerable when the strategy of the moment begins to die. Precious time is lost in transition, because you are unprepared and inexperienced in what comes next. You may not even survive the transition.

It is safer to be like the grocer who keeps the pipeline full of fresh product all the time. Otherwise, you can be like Kodak, who was so focused on photographic film that it did not build up an adequate pipeline of post-film strategies while it still had the time and the cash flow. Now, Kodak is struggling to catch up and it may not make it.

3) Exit Early
I’ve seen supermarkets try to sell black bananas. It’s not a pretty sight. They try to hide the ugliness of the bananas by putting them inside brown paper bags. They put a sign next to them saying something like, “Black Bananas; Perfect for Making Banana Bread.” Then they give it a very low price. And it still won’t sell.

You’d find it difficult to even give away black bananas for free. They just aren’t very desirable.

The same can be true for your strategy. Once a strategic initiative turns black and is dead, almost nobody wants it. You cannot sell it at any price. You may even have to pay somebody to take it off your hands.

As I’ve mentioned in prior blogs (here and here), holding onto a strategy after it turns black is a bad idea. Just as it is better for a supermarket to get rid of a banana when it’s only starting to turn brown, it’s better for a company to dispose of a dying strategy when others can still see a little life in it.

Many companies make the mistake of hanging on to a dying strategy too long. Emotional ties or historical heritage make it hard to let go. However, waiting until the strategy turns black hurts everyone. It is almost always better to error on the side of exiting a strategy a little too early than sticking with it a little too long. The value plummets too quickly at the very end.

SUMMARY
All strategic initiatives eventually die. If you don’t want your company to die along with its strategic initiative, then you need to occasionally adjust your strategy. To optimize the return over the life of a strategy, a) manage the speed at which you pursue growth, b) maintain a pipeline of strategic alternatives, and c) exit dying strategies before it is too late.

FINAL THOUGHTS
Just as it was wrong to put bananas and flowers together on the same truck, it is usually wrong to manage mature and emerging strategies in the same way. They have different needs, so you have to approach them in a different way, with different benchmarks and expectations.

Strategic Planning Analogy #349: Seasons of Life

THE STORY
Way back when I was in college, I took a class in communication. At the time, I believed that successful people need to be good communicators, so I wanted to learn how to communicate well.

One day, we had a guest lecturer who specialized in the advertising communication of pharmaceutical companies. He brought in numerous examples for the lecture. I will never forget one of the pharmaceutical ads. It was an ad for an anti-depressant. The ad was directed towards doctors and was placed in a medical journal.

The advertisement talked about a number of sad situations, such as a major tragedy or the loss of a loved one. The ad then told doctors that if a patient comes to them saddened by one of these occurrences, that the doctor had an obligation to prescribe their anti-depressant, since these were not appropriate times to be sad.

After reading the ad, the guest lecturer (who was incensed by the implication that people shouldn’t be sad and grieve over tragedies like the loss of a spouse) asked, “If these are not occasions when it is appropriate to be sad, then when is it appropriate? Since when is grieving something evil to be avoided at all cost?”

That question still haunts me all these decades later.

THE ANALOGY
The implication of the pharmaceutical ad was that people have a right to be happy 100% of the time. Even in the midst of horrific circumstances, there is no need (or reason) to grieve. Just take a pill and be happy.

Yet deep down we all know that grieving is an important part of healing and moving on after a tragedy. To ignore this part of the process is to ultimately delay lasting health. Sometimes, it is good to be sad for time. It is a natural part of the seasons of life and a valid way to cope with tragedy.

Many times in the business world, I see companies inappropriately acting like the advertising copy for that anti-depressant. They act as if all news all the time about their company and its products should be happy. They do not consider any tragedy large enough to derail their “happy talk.”

In these companies, strategic plans always project a future wildly growing sales and profits—year after year after year—regardless of the seasons of life that company is going through. Forget about recessions. Forget about product malfunctions. Forget about market saturation and life cycle maturity. Forget about tragedies the customers may be going through. Let’s be happy, optimistic and push for ever higher sales in the current quarter.

Just as avoiding grieving in our personal lives can harm long-term emotional healing, avoiding dealing with the tragedies surrounding a business can harm a company’s long-term health.

THE PRINCIPLE
The principle here is that strategic planning needs to consider the seasons of life the company is currently in.

This is not to say that a company is just a victim of its circumstances and has no control over its destiny. On the contrary, the primary reason for strategic planning is to better control one’s destiny. Strategic planning is the attempt to create a better future by proactively choosing the best path (and then making it a reality through execution). By proactively choosing a path, one increases their control over how the future evolves (hopefully in one’s favor). This should lead to superior results versus letting the circumstances of the world fully dictate the future (without proactive intervention).

This also is not to imply that companies should radically change their strategy with every little momentary change in the environment. A good strategy should pursue a strong position which transcends minor variations in the environment. If you are changing your strategy every quarter, then you really don’t have a proactive strategy. You are just in a reaction mode, never catching up, let alone getting ahead. If you want to win by owning a position in the mind of your customer, you need to stick with that position over a long period of time.

Yet, that being said, we cannot blindly ignore the seasons of life a company is going through. Minor adjustments may be needed to have actions appropriate to the times. Without some of these minor adjustments, your strategy can quickly become irrelevant to the moment and actually damage your long term prospects. Just as the death of a loved one requires momentary grieving, there are times when companies need momentary adjustments in order to be in tune with the times.

Here are three examples of how being out of tune can be damaging.

1. Ignoring Tragedies
In spite of good intentions, sometimes bad things happen to companies. Recent examples include performance problems with Toyotas, manufacturing problems at Johnson & Johnson, and the problem with drilling in the Gulf of Mexico by BP. How a company reacts to these tragedies can significantly influence long-term prosperity.

The wrong reaction is to ignore the tragedy and continue the “happy talk” as if nothing happened. Instead, an adjustment is needed. These are tragedies and tragic times need an appropriate response. BP and Toyota lost some serious credibility because they continued their happy talk and did not adjust rapidly to “grieve” about the tragedy.

When tragedy strikes, the strategy quickly needs to adjust. First, quickly (and publicly) acknowledge that a tragedy has indeed occurred. Don’t pretend nothing serious happened. Don’t ignore the problem in hopes it will go away.

Second, take responsibility for resolving the tragedy. Don’t waste time pointing fingers at who is to blame. Instead of trying to deflect the cause of the problem, focus on resolving the problem, regardless of who caused it. Make resolution your responsibility, regardless of who caused it.

Third, quickly create a viable plan to get the tragedy resolved and put the resources there to make it a reality. In fact, as part of normal strategic planning, it may be a good idea to have a tragedy back-up plan in place, so when tragedy strikes, all you have to do is pull out the back-up plan and adjust it, rather than start from scratch.

BP and Toyota did not embrace these three actions and lost a lot of equity in their image (and are paying a high price to get that image back). By contrast, Johnson & Johnson has historically embraced these actions, not only in the recent manufacturing issue, but back when Tylenol was tampered with. By acting quickly and decisively, Johnson & Johnson has done a better job of weathering these storms.

2. Fighting Against Lifecycles
Growth is fun. Growth is exciting. Being in the growth phase of the lifecycle can be a pleasure for both you and your shareholders.

Although there are some tricks to lengthen the growth phase of a business, one cannot stay there forever. Eventually growth phases end and are replaced by maturity, followed by decline.

If a company gets too focused on the happy talk of growth, it can end up mismanaging the company through these transitions. For example,

a. You can set growth targets that are no longer realistic. That can lead to overinvesting, creating the problem of excess capacity. It can lead to taking ever more drastic steps to get the overly aggressively sales targets, which can cause growth that is highly unprofitable. It can lead to building an infrastructure that can no longer be supported, because the projected growth to support it was a fantasy. When aggressive growth targets are no longer met, employees will stop getting bonuses and good, but frustrated people will leave. Each phase of the business lifecycle requires a different approach to organization, investment and compensation. If you ignore the changes in the cycle, you will end up with an inappropriate structure.

b. You can delay looking for “the next big thing.” One of the main reasons why an industry moves into maturity or decline is because a new innovation has taken its place. New industries make old industries obsolete. If you surround yourself only with happy talk, you will not be as concerned as you need to be with potential obsolescence. Instead, you can start to believe that your industry will keep growing forever. You will not invest enough into the innovations that will replace your current position. As a result, someone else with come up with the innovation that makes your industry obsolete, leaving you with nothing. It is better to plan your own demise (as tragic as that may be) and have a replacement innovation than to be left with nothing.

We’ve talked more about trying to stay in tune with your lifecycle in prior blogs, like here and here.

3. Failure to Empathize With Customers
Many times your customers may be going through their own tragedies and grievings. If you do not come along side your customers and grieve with them, you will be out of touch with your customers. Your happy talk will appear as crude and disrespectful. The customers will switch allegiance to companies whom they feel better understand them.

During the recent great recession, there were many companies which failed to empathize enough with those customers who were having great difficulties trying to cope. These companies acted as if everything was still wonderful in the lives of their customers. There was no sense of empathy to the tragedies their customers were facing. Some of these companies, like Abercrombie & Fitch or Proctor & Gamble, lost a lot of market share which may never fully come back.

Without customers, you have no business. Therefore the seasons of life for your customers are very relevant to your business. Your strategy needs to adjust when the seasons of life change for your customers, so that you are seen as relevant and understanding.

SUMMARY
Although strategic planning helps you control your destiny, there can still come major changes in the seasons of life for your business which can trigger a need for adjustments. Whether it is a sudden tragedy within your company, a change in your business’ lifecycle, or a tragedy for your customer, they all need to be addressed—quickly and decisively. Otherwise, you will be out of sync with the world around you. And who wants to buy from a company who is out of sync with the buyer? Setting aside happy talk for awhile and implementing a strategy of “grieving” can sometimes be the best thing you can do.

FINAL THOUGHTS
The Bible says that Solomon was one of the wisest men who ever lived. In the book of Ecclesiastes, Solomon says that:

“There is a time for everything, and a season for every activity under heaven: a time to be born and a time to die, a time to plant and a time to uproot, a time to kill and a time to heal, a time to tear down and a time to build, a time to weep and a time to laugh, a time to mourn and a time to dance, a time to scatter stones and a time to gather them, a time to embrace and a time to refrain, a time to search and a time to give up, a time to keep and a time to throw away, a time to tear and a time to mend, a time to be silent and a time to speak, a time to love and a time to hate, a time for war and a time for peace.”

In other words, the appropriate actions depend on the season of life you find yourself in. Get in tune with your season of life, so that your strategy is appropriate.

Strategic Planning Analogy #312: Who is that Old Woman?

THE STORY
Back in 2002, there was a movie released, called “About Schmidt.” In the movie, Jack Nicholson plays the part of Warren Schmidt, a man beginning the retirement phase of his life.

At the beginning of the movie, Warren is introducing us to the people in his life. At one point in the introductions, the movie is showing Warren uncomfortably trying to sleep with his wife Helen. The voiceover from Warren during this scene is as follows:

“Helen and I have been married 42 years. Lately—every night—I find myself asking the same question: Who is this old woman who lives in my house?”

THE ANALOGY
The point of that scene in the movie was that for years, Warren had a mental picture of his wife more similar to that of the woman he had fallen in love with and married so long ago. His mental mindset had not kept pace with time.

Over the last four decades, Helen had changed quite a bit. However, because the changes had come so gradually, they were hard to perceive on a daily basis. Therefore, Warren’s perceptions had not picked up on how much cumulative change there had been to Helen.

Now that he was entering retirement, Warren was taking a fresh look at the fact he would be spending a lot more time at home with Helen. He looked over, and instead of seeing that young women he had married, he saw an old women in bed with him. It was a shock to him because reality had matured a lot faster than his perception. The mental picture of his wife had been replaced with this old person who seemed strangely different.

I believe this phenomenon happens a lot in the business world as well. Companies and industries age and go through life stages just like people. A young, vibrant, growing business over time can become an old, ugly mature and declining business. It may happen so gradually that you do not perceive the change on a daily basis.

Someone may have entered the business back in the young glory days and spent years working their way up to senior management. The busyness of the daily activities blinds them to the gradual aging of the business. Then, one day the person finds that results are getting harder to deliver. The old business tricks they learned in the glory years aren’t working any more. Suddenly, they take a fresh look at the business and are shocked to realize that the business is now old and dying. “Who is this old business who lives in my headquarters?”

THE PRINCIPLE
The principle here is that the proper strategic approach is different, depending on the life stage of the business. Young start-ups in the garage need a different type of strategy from that of a mature business, and so on. We’ve talked about that in prior blogs (too many to link--try this, this, and this for starters).

In theory, that all sounds so logical. In reality, however, it is a little more difficult, because the transitions from one phase to the next are gradual. It’s not like on Tuesday you have dynamic growth and on the following Wednesday you are in the middle of maturity. You don’t get a tweet on your Blackberry which says: NOTICE – TODAY WE OFFICIALLY ENTERED MATURITY.

If we are not diligent in our observations, the transition can sneak up on us and surprise us. We don’t realize that the woman in bed with us is now an old lady with behaviors that are strange to us. By the time we wake up to the new reality, it may be too late to adapt in a way that optimizes our potential.

I think this phenomenon is particularly prevalent in mature economies, like the USA. Many formerly high growth industries in the US are maturing, and I think a lot of the leaders at these firms are in denial. Their mental picture has not kept up. As a result, their actions are out of sync with reality—they are sub-optimizing.

This phenomenon can also occur in younger economies, like India, where seemingly wide-open industries suddenly are filled by large multi-national firms who seem to sneak in from outside the country.

How can we keep from sub-optimizing due to having the wrong mental picture of our firm’s lifestage?

1) Challenge Your Assumptions on a Regular Basis
How often do you ask yourself if your business is near (or within) the transition to a new lifestage? If you never ask the right question, you will always be surprised by the outcome when the transition occurs. You don’t have to do this every day, but maybe once a year is a good idea. Put it on your calendar.

2) Read the Dials With an Open Mind
When a business is going through a transition, the transition tends to alter the performance of many metrics. Sales growth may slow, profit margins may shrink, customers may leave, and so on. If you mental mindset thinks that the overall lifestage has not changed, you may pass off these changes to your metric performance as “minor aberrations” or “due to the bad economy.”

Then, instead of adapting to the new lifestage reality, you continue with the tactics more appropriate for the former lifestage. Perhaps you even work harder at the old tricks in an attempt to bring back the old metric results.

I’ve seen this happen with the “sales” metric. As a business moves into maturity or decline, the natural growth in the industry goes away. Leaders who are used to all that natural sales growth get concerned when the growth dips. Therefore, they work harder to get back the old sales growth rates. However, the only way to do that is to aggressively try to take share from others. Getting large swings of market share during maturity often requires cutting costs so much (or adding so many extras to the offer) that all the profit is wiped out. You would have been more profitable accepting the lower sales growth and moving to mature industry strategies like cost control.

Therefore when the dials on the metrics you follow start to change, consider whether this might be an early warning sign that your business is moving on to the next phase of its life. Keep an open mind, not automatically assuming that this is just a temporary aberration. It may just be an aberration or an issue with the macro economy—but then again, it may not.

Like cancer, it is always better to detect these things early. Then you can deal with it when the problem is still small. By the time the dials have swung greatly on your metrics, it may be too late to effectively adjust to the new realities.

3) Have a Diverse Network
Don’t surround yourself with people who are just like yourself. Then all you have is a bunch of people with the same out-of-date mental mindset who reinforce that mindset though their agreement.

Instead, have regular contact with people of different ages and backgrounds. Young people aren’t as burdened by past perceptions and out-of-date mental models. They may see the transition sooner and more clearly. The fact that it may be difficult to even hire young people at your firm (because they perceive your industry to be old and in decline) can give you great insight.

Conversely, older people may have already gone through business transitions before. That experience can be invaluable in helping with this new transition. It may also give you more confidence to transition your strategy, since you have someone who knows the way.

SUMMARY
Although it may be obvious that different lifestages of a business require different strategic approaches, this knowledge is worthless if you are blind to which life stage you are currently in. Transitions may be occurring right under your nose and they are not detected, because it happens so gradually. To remedy the situation, question your assumptions on a regular basis.

FINAL THOUGHTS
In the movie About Schmidt, Warren was so out-of-touch with how old his wife Helen was that he was completely unprepared when his wife suddenly died. His lifestyle deteriorated rapidly and he never fully recovered. Your business may be closer to “death” than you realize. If you are unprepared, your business may not fully recover either.

Strategic Planning Analogy #249: Strategic Planning is Like Chess

THE STORY
Jose Raul Capablanca, known as “Capa,” was the world chess champion from 1921 to 1927. He is often considered to be one of the greatest chess players of all time. There is a story he liked to tell, which I found at www.chessdom.com.

"I was playing in a tournament in Germany one year when a man approached me. Thinking he just wanted an autograph, I reached for my pen, when the man made a startling announcement. 'I've solved chess!' I sensibly started to back away, in case the man was dangerous as well as insane, but the man continued: 'I'll bet you 50 marks that if you come back to my hotel room I can prove it to you.' Well, 50 marks was 50 marks, so I humored the fellow and accompanied him to his room."

"Back at the room, we sat down at his chess board. 'I've worked it all out, white mates in 12 no matter what.' I played black with perhaps a bit incautiously, but I found to my horror that white's pieces coordinated very strangely, and that I was going to be mated on the 12th move!"

"I tried again, and I played a completely different opening that couldn't possibly result in such a position, but after a series of very queer-looking moves, once again I found my king surrounded, with mate to fall on the 12th move. I asked the man to wait while I ran downstairs and fetched Emmanuel Lasker, who was world champion before me. He was extremely skeptical, but agreed to at least come and play. Along the way we snagged Alekhine, who was then world champion, and the three of us ran back up to the room."

"Lasker took no chances, but played as cautiously as could be, yet after a bizarre, pointless-looking series of maneuvers, found himself hemmed in a mating net from which there was no escape. Alekhine tried his hand, too, but all to no avail."

"It was awful! Here we were, the finest players in the world, men who had devoted our very lives to the game, and it was all over! The tournaments, the matches, everything - chess had been solved, white wins."

About this time Capa's friends would break in, saying "Wait a minute, I never heard anything about all this! What happened?"

"Why, we killed him, of course."

THE ANALOGY
In general, chess games are not won by murdering your opponent. Instead, chess games are won by the player with the superior chess strategy. Similarly, businesses are not allowed to go around murdering their competitors. Instead, businesses need to outwit their competitors with superior business strategy.

THE PRINCIPLE
Since both business and chess are won by having superior strategies, it may be useful to see what businesses can learn from the strategic approach used by the grand masters of chess. What we find are four principles.

1) Context
2) Position
3) Movement
4) Time-Aware

1) Context
One of the biggest differences between grand masters of chess and the rest of us is their skill at pattern recognition. They can quickly glance at the board of a game in process and immediately grasp the entirety of what is going on across the entire board. This understanding of the “Big Picture” provides the context for making the next move.

This principle also applies to business strategy. Strategic moves do not occur in isolation. They are influenced by the larger environment—consumer trends, competitive activity, regulatory activity, economic conditions, internal strengths and weaknesses, and so on. If you don’t look at the entire playing field, you can miss something that influences the success or failure of your strategy.

In chess, you have only one opponent at a time. In the business world, you have a multitude of players and stakeholders with pieces on the board. This may make understanding the entire board more complicated, but also more critical.

Two suggestions: First, dedicate time and effort to understanding the greater context in which you are operating. Learn your entire chess board. Not only get the data, but get out of the office and see the world in which you compete.

Second, spend time learning patterns. Study historical strategic activity. Study the strategic environment in other industries. Be like the grand masters of chess who practice for thousands of hours and repeatedly expose themselves hundreds of patterns.

The more time you spend looking at strategic environments, the more you will be able to detect patterns of business outcomes. The more patterns you can recognize, the better you can detect which pattern is closest to the one you are currently experiencing. This will provide even more depth to the context for your decisions.

2) Position
The grand masters of chess understand that the most important factor in a game is your relative position of strength versus the opposition. The stronger your relative position, the more control you have over how the game plays out and the greater the likelihood you will win.

When considering individual moves, the grand masters may see several potential moves that maintain or strengthen one’s position. They may be satisfied with any of them. What they really focus on is trying to avoid the very bad moves, which put them on a path to weakening their position. They understand that once your relative position of strength starts to unravel, it is very difficult to gain it back.

Positioning is critically important in business strategy as well. If you have no relative position of strength in the marketplace, then you have no reason for existing in the marketplace. Two suggestions: First, decide what that position of strength should be. To help in that process, see my blog on “Eight Questions.” Second, every move you make should be designed to protect and extend that strength. Avoid the bonehead moves that cause the long-term strength to unravel, even if it means backing away from some quick near-term gain.

3) Movement
Chess is a game of movement. You don’t just create a position of strength and stop playing. The board is in continual motion. The environment changes, and so must you.

Grand masters of chess understand that since change is inevitable, they may as well get in front of it. It is not uncommon for a grand master to study 10 to 12 moves in advance. The idea is to anticipate what the opposition is capable of doing and try to block it before it happens. Anticipation tends to be more effective than reaction.

The business environment is also in constant movement. There is never a time when you can relax and say “I’m all set” and never have to worry about strategic moves again. Two suggestions: First, do not look at strategic planning as an “event” which takes place one a year or so and then is put aside until the following year. Instead, look at strategy as an ongoing process which needs to be incorporated into everyday decision making.

Second, try to anticipate how things could evolve. Don’t just look at one move at a time in isolation. Understand the longer-term consequences, so that you can avoid unintended consequences.

4) Time-Aware
Grand masters tend to see a game unfold in three phases—the opening game, the middle game and the end game. Their style of play and strategy is different in each phase. The trick is to understand which phase you are in and then act appropriately.

Businesses go through phases as well—start-up, rapid growth, maturity, and decline. Each phase is different enough that it requires a different type of strategic approach. Good leaders recognize when companies are moving between phases and change their strategies appropriately. This is discussed more fully in a prior blog.

One of the more common mistakes I have seen are companies that love the rapid growth phase and try to stay there forever, even when that phase is over. As a result, they over expand. The newly mature environment cannot absorb all of the investment, and the firm collapses under the weight of those excessive investments. Stay aware of the times and get in tune with the times.

SUMMARY
The strategic principles of chess are also useful in business strategy. First, realize the full context in which you are acting by understanding the entire playing field. Second, seek out and strengthen positions of relative strength. Third, treat strategy as an ongoing part of everyday activity (not an infrequent event). Fourth, make sure your strategic approach is appropriate to the phase of the business life cycle you are in.

FINAL THOUGHTS
The grand masters of chess can still usually beat the computers. Therefore, don’t just blindly rely on reams of data when creating a strategy. Use your human intuition and think outside the box.

Analogy #161: Buy My Food

THE STORY
My daughter spent many years in the Girl Scouts. As a result, I have many years of experience helping to sell Girl Scout cookies.

Back when my daughter was very young and a Daisy/Brownie scout, it was easy to sell those cookies door to door. People would see that sweet little 6 year old girl and be more than willing to buy cookies from her.

However, it seemed that as my daughter got older, the door to door selling became less productive. By the time my daughter became a teenager, it became a waste of time to go door to door. Apparently, people would much rather buy cookies from a cute little 6 year old than a 15 year old.

Therefore, as she got older, my daughter turned to other activities in order to raise money for Girl Scouts.

THE ANALOGY
Things change over time. Early successes do no imply that success will last forever. My daughter had early successes in selling Girl Scout cookies. However, over time, her success in selling cookies door to door diminished, until it was no longer worth doing.

Was it because my daughter became less capable of selling cookies? No. As she got older, she had more strength and stamina to walk to more doors. Also, she became less bashful and could make a better sales pitch.

Was her declining ability to sell door to door because nobody wanted to buy Girl Scout cookies anymore? No. The Girl Scouts still sell an enormous amount of cookies.

The problem was that my daughter matured from a little girl to a young woman. As it turns out, people are more sympathetic towards cute little girls and feel more inclined to buy from them. By contrast, it is easier to say no to a teenager.

Just as people mature, so do industries. Maturity/decline can reduce one’s potential. You may become more productive and more efficient over time (just as my daughter became better at selling skills over time). But being better at what you do does not automatically make your performance better. If the maturing industry is working against you, there is only so much you can do.

If you want growth, you may need to shift to a different (less mature) industry, just as my daughter had to shift to different fund raising strategies.

THE PRINCIPLE
The key principle here goes back to a prior blog where I quoted a study from McKinsey. That study said that if you want to be a high profit, high growth company, the best thing to do is become a company which sells high profit, high growth products (see “Dip Your Ladle in the Right Stew”). In other words, if you want success as a growth company, keep adjusting your portfolio to have products in growth industries.

We can see this by comparing two companies: Procter & Gamble (P&G) and Kraft Foods. In recent years, the business press has been far more glowing about P&G and far more critical about Kraft. Now there are a lot of reasons for this, but one major reason is because P&G did a better job keeping its portfolio centered in growth.

Both companies have a long heritage in food processing, stretching back over most of the 20th century. Both companies created or acquired strong, well known food brands with a large following.

However, the problem was that by the end of the 20th century, the food processing business was becoming highly mature. Some of the problems in maturity were the following:

1. It was harder to differentiate name brand food products from each other or from private label products. As a result, they were becoming more like commodities, which squeezes profitability.

2. The rapid growth from consolidating the industry was pretty much over. Instead of the big companies growing at the expense of little firms, they now had to battle each other for tiny share gains.

3. Discretionary spending was moving away from processed food to the restaurant industry.

4. Innovations were harder to come by, more rapidly copied, and smaller in scope.

Proctor and Gamble could see this coming, so they decided to transfer the portfolio out of industries that were less mature (like food) and into industries that were less mature (cleaning products, health care and beauty care). The facts were on P&G’s side. According to the US Economic Census, between 1997 and 2002, the value of shipments in food manufacturing grew only 8.6%. By contrast, home cleaning products grew at 16.2% and pharmacy/medical products grew at 53.7%.

So here is what P&G did to reduce its food portfolio:

1. Sold Duncan Hines cake mixes to Aurora Foods in 1997.
2. Sold Jiff peanut butter and Crisco to J.M. Smucker Co. in 2002.
3. Sold Sunny Delight to Sunny Delight Beverages Company in 2005.
4. Announced the intention of getting out of the Folgers coffee business in January 2008.

To get stronger in health care and beauty care, P&G did the following:

1. Purchased Richardson Vicks in 1985 (obtaining Vicks healthcare brands and Oil of Olay beauty products)
2. Purchased Noxell in 1989 (Cover Girl cosmetics and Noxzema)
3. Purchased Max Factor in 1991
4. Opened a health care research center in 1995
5. Got US FDA approval for its prescription drug Actonel in 2000,
6. Purchased Clairol in 2001
7. Introduced ThermaCare heat wraps in 2002.

During this same time, Kraft stuck to having basically a portfolio of food products. Even then, it was late and slow in adapting to the few areas of growth in food processing, such as organic and low cal.

As a result of this one simple difference in strategy, there is a big difference in performance. As you can see in the chart below, over the last seven months Kraft has struggled to try to keep its stock price up with the S&P 500. By contrast, P&G is performing much better than the S&P 500.


So what have we learned?

1. Don’t Just Rely on Being Better
P&G was pretty darn good at running food processing businesses, but they realized that doing an excellent job in a slow growing mature business doesn’t get you very far. More could be gained by migrating to a better industry, like health care or beauty care. It’s important to do well, but a strategy which only looks at improving execution may miss a greater opportunity that could come from shifting the product mix.

2. Get The Facts
There are many independent sources of information for determining if your portfolio is entering maturity/decline as well as point to industries on the way up. Earlier, I quoted the US Economic Census. Another great source is all of the data accumulated by Stern School professor Aswath Damodaran (look here). Understanding trends will allow you to maximize your portfolio within those trends.

3. Make a Choice
If the trends point to a need to shift, then make the choice of what to let go of and what to add on. But choose carefully. Just because an industry is growing does not mean you will do well there. Move into areas where you can add significant value. For example, in the case of P&G, they were experts at building strong national brands through mass channels. They applied that skill to health care and beauty care.

4. Make the Move
Although it may be difficult to sell off a product core to your history when it is still making money, remember this. It is easier to sell off something when it still is seen as strong by the buyer. Early action will make the sale quicker, at a higher price. In addition, the sooner you start the transition, the less pressure there is to hold a fire sale to dump old things or pay way too much to quickly get into the new things. A moderate pace, started early, allows for more rational decision-making. Rash moves are minimized.

Because Kraft waited longer, it may be more desperate in trying to quickly fix its portfolio mix. This may create less value-added in the transition.

SUMMARY
Being a good operator is nice, but operating in a good space may be even more important. The definition of what is a good space changes over time. Therefore, your portfolio may need to change over time.

FINAL THOUGHTS
My daughter couldn’t bring back the past make herself young again. She eventually had to leave the Girl Scouts and do what adults do. You cannot bring back the past, either. Get over it and move on.

Analogy #159: Choosing Your House

THE STORY
When it comes time to choose a house, my wife and I have a problem. She is allergic to new houses and I am allergic to old houses.

More specifically, my wife is allergic to many of the chemicals used in modern home product manufacturing, like formaldehyde (which is in a lot more products than you would first imagine). I, on the other hand, am allergic to certain molds and dust, which are common in many older homes.

Of course, the current housing crisis is making everyone a little sick to their stomach.

THE ANALOGY
Choosing the place where you live is an important decision. You don’t want to end up in a place where you are sick all of the time.

The same is true of businesses. You don’t want to position your business to be operating in places where performance will be continually sick.

Different people have different tolerances. I can tolerate the problems that come with new home construction. My wife can tolerate the problems that come with older homes.

This is similar to business lifecycles. Business problems are different depending on the age, or stage in the lifecycle. Business startups, for example, are different from mature firms. Rapid growth provides different challenges than businesses in decline.

Some business cultures, or management styles, are better suited to particular stages in the lifestyle than others. A manager, for example, may be very good at starting up new businesses, but miserable at managing through a decline phase. In a sense, that manager is “allergic” to decline-phase businesses, just as I am allergic to musty old houses.

A company is far more likely to be successful if it chooses places to live that avoid their allergies. Therefore, strategies should take these natural allergies into account when decided which businesses to live in.

THE PRINCIPLE
There are four key principles related to finding the right house for your company.

1) Understand Your Allergies
You cannot avoid your allergies if you do not know what they are. Take the time in your planning process to understand your strengths and weaknesses. And when you are discovering your weaknesses, get specific.

For example, I said earlier that my wife is allergic to new houses. More specifically, she is allergic to many of the chemicals used in new construction, like formaldehyde. An all-natural new home, like a log cabin, would be something my wife could tolerate. Similar for me, I said I was allergic to old houses, but specifically I am allergic to certain molds that can form in old houses. If a house was well maintained and the humidity controlled, then an old house wouldn’t bother me.

The more you know about the specifics of your weakness, the more you can plan around it or compensate for it.

2) Avoid Toxic Houses
In general, a company will best succeed if it goes with its strengths. Therefore, your corporate portfolio should be skewed towards businesses in the portion of the life cycle you are best at. For those portions of the life cycle you are not suited for (your allergies), avoid them in your portfolio.

For example, let’s say your strength is in knowing how to squeeze more profits out of a mature business and your allergy is in start-ups. Now there may be a great opportunity in some new start-up industry. You may see a lot of your friends investing in this new business. You may say to yourself, “This is a great new opportunity. I should invest in it.”

However, if this is not an area of your strength, such a move could be a disaster for you, even if it is a success for others. Because your natural inclination is to squeeze profits out of a company, you might destroy your start-up my asking it to be too profitable, too early, and starve it of the necessary start-up capital. And even if you can nurse it along, there will be others in this start up industry who are much better at it. In the long run, only a small percentage of the people who enter a start-up industry are truly successful. I would bet that the ultimate winners would tend to be those who have natural strengths at doing start-ups.

Just because a new house may be wonderful for me, it doesn’t mean that it is wonderful for others. It might be toxic for my wife. You have to discover which houses are toxi for you, and then avoid them.

3) Minimize the Threat
In a perfect world, you may be able to avoid all toxic houses. In reality, you may end up with a few, anyway. What to do? In the case of house allergies, I can take an anti-histamine. What is the equivalent in business? It is delegation and separation.

When IBM wanted to get into the pc business, it knew that its core business was allergic to this type of a start-up and that the normal culture would kill it. Therefore, it used delegation and separation. The team given the task of developing the PC was placed in a remote location where the rest of the business would not interfere. Power was delegated to this team so that they could do the start-up the right way, rather than the IBM way. If this had not been done, the PC would never have come out of IBM.

Different phases in the lifecycle have different needs and different challenges. If you try to treat them all identically, you will not be optimizing the performance at each phase. Therefore, if you portfolio has a mix of businesses in different stages, separate them and manage them differently. Back in July of 2007, I did a series of blogs on these differences (see “Same Title, Different Job,” “Management By Yelling,” “Management By Dreaming,” and “Management by Growing”). It would be wise to understand these differences when dealing with the different phases of the lifecycle.

4) Be Prepared to Move
In my case, I may be able to tolerate a new house, but as the house gets older, I may not be able to tolerate that house as much any more. It’s the same house. What has changed is that the house aged. With the aging came a growth of mold which I am allergic to. At some point, it may make sense for me to sell the house and move to a newer house again.

The same thing can happen in business. You may be great at running a small start-up. However, your success could end up creating a large, mature business which you are not well suited to running. Your business moved from your comfort zone into a place where you are allergic. What to do?

One thing you can do is replace management with a team better suited to the new environment. I have great respect for what Dave Thomas did at Wendy’s. When his company evolved to a certain point, he realized that it was entering a phase to which he was allergic. Therefore, he voluntarily stepped down from leadership and handed the company over to management better suited to the new environment.

The other thing you can do is sell the business. There are many people in the high tech dotcom space who are good at starting businesses, but not running them once they become big and bureaucratic. Therefore, they tend to sell the businesses and then go and try their hand at another start-up.

GE is strong with late growth/early mature businesses. When businesses look like they are going into late maturity/decline, they sell them. When they are looking to replace these businesses, they typically don’t start from scratch (where they are allergic), but instead buy established businesses entering the phase they are best at.

It is not a mark of defeat to admit that a business has moved into a phase where you are allergic. It shows that you are smart enough to know when change is the right thing to do.

The worst thing you can do is ignore the inevitable. Business will move through the lifecycle, whether you want them to or not. In today’s environment, the movement through those phases seems to be accelerating. To not include this in your plan is a travesty, because it robs you of the opportunity to properly prepare for all of the changes which come with moving to a new phase in the life cycle.

According to a survey which the Sage company did in Ireland, 53% of the businesses did not have a plan for moving their business to the next stage in the life cycle. Just as it takes time to move to a new house, it takes time to change management or get your business prepared to be sold. This should be a part of your overall plan if your company is moving into toxic territory.

SUMMARY
Business units progress through various stages of a lifecycle, from start-up to growth to maturity to decline. Each stage has different challenges. Your company may be much better at some stages than others. This should be accounted for in your planning process, so that you can take advantage of your strengths and avoid your weaknesses.

FINAL THOUGHTS
As people age, we try to fool ourselves and others through plastic surgery, makeup, hair pieces, hair dyes, etc. We can try to do the same thing with businesses and try to put on a show that we are still a growth company, even when we are no longer in the growth phase. The tricks might fool a few, but eventually living in denial of the truth will hurt you.

Corporate Strategist, Plan Thyself (Part 3)

THE STORY
Once upon a time, there was a man who approached a football coach and said the following:

“I am a great football player. Look at all of my awards. Look at all of my trophies. I am recognized throughout the land as a great football player, and I would like to join your team.”

“Wonderful!,” replied the coach. “We have a shortage of good linesmen. Get out there onto the practice field with the other players. Get up on the line and show me what you’ve got.”

The man did as the coach asked. As it turns out, he performed terribly on the line. He was so weak relative to the player on the opposing side that he eventually had to be taken off the field on a stretcher.

As the stretcher was being taken off the field, the coach went up to the injured player and said, “I thought you said you were a great football player. You looked awful out there.”

The injured man replied, “I am a great football punter, not a linesman.”

THE ANALOGY
Just because a person may be great at playing a particular position in football does not mean that they are great playing every position in football. Different positions require different skills and abilities. That is why football players tend to specialize at excellence in only a couple of similar areas.

As we saw in the story above, this man was well regarded as a punter and had lots of trophies for that skill. However, being a great punter does not provide the skills needed to be a great linesman. Rather than claiming to be a great football player, he should have limited his claim to being a great punter.

A similar situation often happens in the business world. A corporation has success in a particular area, and suddenly they declare themselves to be a great corporation. It may be that their success came in a narrow specialty. However, by classifying themselves as a great corporation, they may get the idea that their skills are broader than they really are.

As a result, the corporation may decide to tackle strategies where they have no right to be, much as that punter did. And, similar to the punter, the corporation may come out of the battle weak and on a stretcher.

THE PRINCIPLE
This is the third in a series on building strategic plans for the role of the corporate headquarters. As we have seen in one of the prior blogs, corporate headquarters needs a strategy as much as its divisions. If the corporation headquarters does not have a definitive strategy for adding value to its divisions, then perhaps the divisions should be spun off and the corporation folded.

In the last blog, we looked at various ways a corporation can add value based on how much it gets involved in the activities of the divisions. In this blog, we will look at ways in which a corporation can specialize its skillset to help certain types of divisions. Much like a punter specializes in punting, a specialized corporation will build a particular type of portfolio—the types of divisions that benefit most from the corporation’s specialized skill.

To illustrate this point, we will look at the various lifecycle stages which a division goes through. These life stages go from new business incubation, through rapid growth, into maturity and then fall into decline. At each stage, a division has different success requirements. If a corporation can excel at building success for one of these life stages, then they can develop a corporate strategy of adding value for firms at that stage in their lifecycle. Then the corporate portfolio would specialize in being full of divisions at that particular life stage.

Listed below are six ways a corporation could specialize, depending on life stage of the divisions.

1) Entrepreneur/Visionary
In this specialty, the corporation is skilled at envisioning what the Next Big Thing is going to be. This requires being able to examine the marketplace to see where demand is evolving to and where the holes are in currently meeting that demand. Then, once finding where that next great opportunity might be, the corporation is skilled at making the right initial investments to create or acquire what will evolve into that next big thing.

Once the company proves the inevitability of that next big thing, the corporation can cash in on the value added by selling the division at a huge multiple, or spinning it out into an IPO, or hold it for a longer term gain.

2) Venture Capitalist
This is the corporation which may not have the entrepreneurial skills to dream up the next big thing, but has the skills to recognize the next big thing when it is in its infancy. Often times, these new ventures are started by people who are skilled at visioning, but not skilled at running professional businesses. As a result, the venture capitalist type of corporation provides funding, nurturing and teaching, so that the young division can make the leap to the next level of development—becoming a stable business.

As with the entrepreneur/visionary corporation, most of the value is unlocked at the time that corporation cashes in their ownership position. The venture capitalist corporation can cash in on the value it adds by spinning out the venture into an IPO or by selling at an incredibly high multiple to a deep-pocketed firm.

3) Growth Funder
During the rapid growth phase of a division, they tend to consume a lot more capital than they provide. Eventually, the cash flow is expected to turn positive, but at this stage, the division is in need of funding. A growth funder corporation is skilled at understanding how to help divisions through this rapid growth phase. They have the resources and discipline to properly stage the funding of the growth. In addition, the corporation understands how to properly scale up the infrastructure to support the growth.

In general, the growth funder adds value to helping the division grow in a way that doesn’t overstress the young division’s capabilities. By giving it a strong operating infrastructure, the corporation enhances the likelihood that the growth will be successful and lead to profitable market leadership.

4) Operator
Once a firm reaches maturity, ultimate success shifts even more towards operating efficiency. “Operator” corporations are experts in understanding how to be a great and efficient operator. They know the tricks to squeeze out a little more in sales and a little less in costs. They mentor the firm and help it install the various procedures and investments needed to get to a higher level of performance.

Here, the value added by the corporation is relatively immediate. As the improvements to the operation improve the cash flow created, the stock multiple on that cash flow comes into play right away.

5) Turnaround Expert
Sometimes, companies fall from maturity into decline prematurely. A turnaround expert can breathe new life into the falling division and extend its useful life. Often times, large corporations who are not turnaround experts and prefer growth businesses will sell off these divisions relatively inexpensively. This is what is happening at a lot of the big consumer product companies these days, like Unilever and Proctor and Gamble. The turnaround expert can buy these established, but falling brands from companies such as these and get more life out of them, usually by unburdening them from the large infrastructure of the old corporation.

Whereas corporations who add value to early stage life cycles get most of the value out at the time they sell, for a turnaround expert, they establish a lot of the value in their ability to buy the brand inexpensively and then bring it back to former glory.

6) Bottom Feeder
This is the corporation who can find pockets of value in even the most distressed of organizations. Usually, bottom feeders get the assets at bargain basement prices. Then they redeploy the assets in a way that makes money. Maybe all they keep are the rights to some brand names that are moved to a more successful operating division. Or perhaps the only thing of value is the real estate, which is repurposed. As with the turnaround expert, much of the value added comes from buying well and then having a better idea of knowing what to do with what was bought.

SUMMARY
If a corporation specializes in developing skills which add value in a particular way, then the corporation can have a strategy of building a portfolio of businesses which would benefit most from that specialized skill set.

FINAL THOUGHTS
In many of these instances, once the corporation adds its value to the division, it may be in the corporation’s best interest to divest of the division and find new ones to fix. Hence, the corporation becomes the constant, and the divisions are like raw materials to be manufactured into something better and then sold at a profit.