Strategic Planning Analogy #392: Sunday Best, Part 2

REVIEW
In our last blog, we talked about some of the problems which occur when companies label a function as either an “everyday task” or a “strategic task.” By labeling a particular task as either one or the other we end up sub-optimizing because there tends to be both a strategic and everyday aspect to everything we do. If strategic thinking doesn’t impact the everyday activities of what a company does (and how it does it), then the strategy is rather irrelevant. Conversely, if we cannot translate great strategic, transformational thinking into a future everyday activity, then the great ideas provide no financial benefit.

By labeling an area as only being one or the other (strategic or everyday), we make the everyday less strategic and the strategic less relevant to the everyday. This is the opposite of what is needed. It is only when we see tasks as requiring both a strategic as well as an everyday approach that we get the best of both worlds.

In the last blog, we focused on the problems which occur when a task is labeled as “strategic,” where we used the example of growth. In this blog, we will look at the problems which occur when we label a task as “everyday.” We will use the example of cost reduction.

COST REDUCTIONS
Controlling costs is a key part of nearly every business. When annual budgets and compensation measures are put into place, it is very common to see some emphasis placed on lowering costs versus the prior year. It is so common, in fact, that cost control is seen as being a part of “everyday” business. It no longer feels like a separate strategic activity. It is just a part of the daily grind.

However, by labeling cost reduction as an “everyday” task, we are severely limiting how much we can really reduce.

Efficiency vs. Effectiveness
The big problem with placing cost reductions in the “everyday” category is that the process becomes siloed. Every department acts independently on their own span of control. As part of a particular department’s everyday work, the task of cutting department costs becomes nobody else’s work but that particular department’s.

For example, the annual goal may be to cut 10% of your controllable costs. With this goal, you are not responsible for cutting the costs outside your control, since that is not a part of your everyday work.

At first, this seems logical…only hold people responsible for that which they can control. And because they can control it, and because action in this area can directly impact their bonus, they are both motivated and capable (empowered) to make the cost reductions a reality. What more could you ask for?

Actually, you could ask for a lot more. The problem with this approach is that the task of cost reduction becomes little more than doing basically what you have always done, only a little more efficiently. In other words, the idea is to keep doing your same old everyday work, but with a little less waste and a little more productivity. This approach may make you a little more efficient. However, it may not make your company any more effective. And you may be missing out on the really big, game-changing cost reduction opportunities.

Radical improvements in costs typically require radical changes in the ways things are done. These radical changes usually transcend any particular department. Total reengineering may be necessary—requiring significant cross-departmental reorganization. In the end, entire departments and entire tasks might no longer exist. The product mix may be altered. What becomes the new “everyday” may look nothing at all like the former “everyday.”

These types of changes will never occur in an environment where each department separately works on their own cost problems as part of their everyday activities. Instead, these solutions only occur when cost control is approached from a more global, strategic basis.

I recently witnessed this situation first hand. This company changed its approach to cost-cutting, to take a broader, more strategic approach. A cross-functional team was put in place that was not bounded by the way things used to be done. Nothing was sacred—any everyday task could be radically reinvented. As a result, departments were eliminated, tasks changed, and big reductions in costs were produced—more than what would have otherwise occurred.

Selfish vs. Selfless
And then there is the problem of the multiple hats. Sometimes we need to wear our “department hat” and look out for the best interests of our department. Other times, we need to wear our “corporate hat” and look out for the best interests of the entire company. If cost cutting is labeled as being just an “everyday” activity, then we will only be wearing our department hat when approaching cost reductions.

This can lead to less than optimal results. For example, one way to lower a department’s costs is by pushing those costs onto another department. This may make your department look better, but it doesn’t help the overall company. Another way to lower costs is by reducing the service you provide. But if your lowered service hurts the effectiveness of other departments, then you really haven’t improved the company.

And of course, it is difficult in such an environment for someone to volunteer that his or her area gets eliminated or outsourced for the sake of the whole. Who wants to volunteer to lose their job? Who wants to volunteer to weaken their base of power? Unless there are shared risks across the entire company, nobody will want to take any risk which jeopardizes their individual area.

As a result, an everyday-only approach to problems tends to only nibble at the situation. If you want to make more monumental change, you need to add a strategic component. This is something which needs to transcend what any individual department can accomplish on its own.

SUMMARY
When we label particular activities as being solely either “everyday” or “strategic,” we are short-changing our ability to succeed. All activities have both a strategic and an everyday aspect to them. To ignore one of these aspects is to miss many of the benefits available to us. For example, when the strategic aspect is ignored, we miss all of the benefits which lie outside the complete control of particular department. The cross-functional, non-traditional options are missed. One ends up with small, incremental improvements instead of large, transformational change.

FINAL THOUGHTS
Just because all tasks require both an everyday and a strategic approach, this does not mean that the approaches should be intermingled and done together. Each approach is very different and requires a different type of mindset. Therefore, it is usually more productive to rotate one’s focus—to take a strategic approach for awhile and then switch to an everyday approach for awhile.

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 #300: On a Mission

STORY
There’s an old story about a man watching workers build a church. He goes up to each of the workers to ask what they are doing.

The first worker says he is laying bricks. The second worker says he is laying panels for the floor. The third worker says he is building a place to worship and glorify God.

Guess which worker is probably doing the best quality of work.

THE ANALOGY
All three workers were doing a small part to help build a church. But they viewed the nature of their work differently. Two defined their work by the particular task they were doing—laying bricks or laying a floor. One, however, saw the big picture and defined his work a being part of what he viewed as a noble cause—building a place to glorify God. And of course, the one with the nobler definition of his work is the one who will tend to produce the greatest outcome, because he sees a deeper importance/significance to his performance.

Businesses have the strategic option of defining themselves just like these workers. They can define the work as being a mundane task—like manufacturing widgets—or as part of a larger, more noble task—like making the world a better place.

And the more you imbue a task with a noble purpose, the better off you tend to be. Strategic planning has an important roll in helping to frame a company’s mission so that it imbues the business with a noble purpose.

THE PRINCIPLE
The principle here is that companies with a noble business mission can tap into benefits than mundane missions cannot.

1) Additional Sources of Revenue
Noble companies have three additional sources of revenue. First, they can typically charge more for their products. According to the 2009 Corporate Citizenship Study, people are willing to pay more for products from socially responsible companies. Forty percent said they would spend between 1% and 10% more for a product from a socially responsible company.

Consider TOMS Shoes. TOMS Shoes was founded on a simple, noble premise: With every pair you purchase, TOMS will give a pair of new shoes to a child in need—one for one. To this, they also add the idea of having vegan shoes—no leather (save a cow).

TOMS’ shoes are not cheap. Their simple canvas shoes are about $50. I can go to Wal-Mart or Target and get a simple canvas shoe for half that price (or even less). Yet people are willing to pay a premium for a TOMS shoe. Why? They like the noble idea that whenever they buy a shoe, a person in need gets a free shoe. That is worth a premium price.

Second, a noble cause provides new sources of revenue. Who says you have to earn all of your income from your purchase price? That purchase price can be subsidized with additional income from other sources.

Consider many cause-related media companies. It is getting harder to be profitable in the magazine business these days. Many publications are calling it quits and shutting down because subscription and ad revenues are not enough to remain profitable. However, one cause-related magazine I subscribe to has started a new campaign with its subscribers. It is touting the noble purpose of the publication and asking for additional donations beyond the regular subscription price. It says that it is worth giving extra to keep the noble magazine and its important message in business. I’m sure that extra money is coming in. This is something that a mundane magazine cannot tap into.

If your cause is really noble, there are opportunities to tap into government funds, charitable funds/endowments, or sponsorship ties with other companies that will pay you in order to associate themselves with your noble endeavor.

An example would be St. Jude’s Children’s Research Hospital. In many ways, it is a hospital just like any other hospital. Yet, on top of this, they have imbued a greater sense of nobility to the hospital business. It does more cutting edge research and never turns away a child due to an inability to pay.

As a result, St. Jude’s taps into a lot of additional revenue sources more successfully than many other hospitals. It is strongly promoted by many in the acting community. It has a nationwide charitable program. It has a partnership program with many retailers, including Target, Kmart, CVS, Williams-Sonoma, Dollar General, Brooks Brothers and others.

The third revenue benefit of a noble mission is that there are the added revenues which come from having loyal customers who volunteer to be an advocate for your company. TOMS, for example, has a DVD describing their noble cause and encourages customers to hold DVD parties at their homes to spread the word. TOMS also encourages and helps customers set up parties in their homes to customize and decorate TOMS shoes. On April 8, 2010, they are encouraging customers to bring attention to the noble cause by going a day barefoot. And of course, there are all the web 2.0 opportunities with Twitter, Facebook and the like to build a strong, loyal TOMS community.

Loyal customers will buy more from you and act as evangelists to get others to buy from you as well. And this loyalty is stronger, the more noble the mission of the company.

2) Additional Ways to Lower Costs
Not only does increased nobility improve the top line. It can also reduce costs, further improving the bottom line.

Going back to the 2009 Corporate Citizenship Study, they found that people highly value the idea of working for a socially responsible company. Fifty-six percent said that it would make a positive difference for them. Even more telling, 40% said they would be willing to take a small pay cut to work for a socially responsible company.

For years, private schools with noble causes (principally religion-based) have traditionally paid their teachers less than those working for public schools. This idea does not have to be limited to just schools. Bring a greater nobility to the cause at your business. Not only are the employees who desire to work at noble companies more motivated, you do not have to pay top dollar to get them. The privilege of spending the day feeling a part of a larger, more noble purpose is worth sacrificing for.

This idea can also be used as leverage with your suppliers to negotiate lower costs. They may give you a break if they realize that their lower price to you is contributing to a greater noble cause.

Finding Your Nobility
Perhaps your sense of nobility is not as great as what was seen in some of these examples. But that doesn’t mean that you cannot change your business model to become more noble. St. Jude could have used a more conventional hospital business model, but they chose not to. You can change your business model to become more noble as well.

You could perhaps do a one for one program like TOMS on your product/service. You could be like Target, who gives 5% of its income to charities in the markets where it has stores. Best Buy is getting more involved in sustainability issues with the products it sells, accepting returns of old electronics items and working with its suppliers to help design more sustainable products. Wal-Mart is getting ever more active in environmental causes. The change in Wal-Mart’s reputation has improved significantly once they took a more noble approach and I believe it has helped them in many ways. The list goes on.

The way you define your strategic mission has a lot to do with how your employees, customers and other stakeholders view the company. It can not only change the perception, but also the reality of how noble a company you really are.

Consider these mission statements:

Google: To organize the world's information and make it universally accessible and useful.

Proctor & Gamble: Provide branded products and services of superior quality and value that improve the lives of the world's consumers, now and for generations to come.

Johnson & Johnson: To provide scientifically sound, high quality products and services to help heal, cure disease and improve the quality of life

Herman Miller: Herman Miller, Inc., works for a better world around you. We do this by designing furnishings and related services that improve the human experience wherever people work, heal, learn, and live.

And it cannot just be hollow lip service. The mission needs to be more than just words on paper. It has to be lived every day by senior management, supported by where the capital is spent, evidenced in how employees and customers are treated, and a key element of the discussion on all major decisions. In other words, it must be fundamental to the strategy. If done properly, not only will you do well (quality of social responsibility), but you should also do well (enduring, profitable company).

SUMMARY
Companies with noble missions have access to many advantages. Customers are more loyal and act as advocates for your company. You can get away from competing only on price (and perhaps raise prices a little). You can tap into more sources of revenue. You can attract highly motivated workers who do not necessarily need to be paid top dollar. And you can feel good about not only building a strong business, but also a better world.

FINAL THOUGHTS
Now you may be saying to yourself that your business really is rather mundane and that there is not a lot of nobility in what goes on. Yet consider the investment banking industry. Currently, many see investment bankers as the scum of the earth. Large sectors of the population see nothing noble in the way they operate.

However, listen to the way Goldman Sachs CEO Lloyd Blankfein defines his work (from The Sunday Times, November 8, 2009). “We’re very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle. We have a social purpose.” He is, he says, just a banker “doing God’s work.” (something like the attitude of the church builder in our story?)

I’m not saying that you need to agree with Blankfein’s assessment. However, if he can find a way to put such a noble spin on what he does, I would think that you can do the same for your business.