Strategic Planning Analogy #434: Want More, Get Zero

THE STORY
I was talking to an executive recruiter (also known as a “headhunter”) today. He says that he runs into a peculiar phenomenon when talking to many unemployed senior executives who are looking for a job.

The recruiter will ask these executives about what kind of financial compensation they want in their next position. Often, the answer goes something like this:

“At my last job, I made $250,000. I refuse to take anything less at my next job.”

Unfortunately, this unemployed executive is confronting some harsh realities. First, the great recession has changed how companies value certain skill-sets. His skill set isn’t valued as highly as it was prior to the great recession.

Second, the longer this executive remains unemployed, the larger is the perception that his skill-set is becoming outdated. By not being currently employed in this rapidly changing world, his skills may become obsolete.

Therefore, although he might see an offer of $200,000 for his skills, he will probably never see another offer of at least $250,000. So by refusing to take anything less than $250,000, he ends up with nothing. I don’t know about you, but even though $200,000 is less than $250,000, it is sure a lot more than nothing. In that situation, I’d take a $200,000 job if it were offered to me.

THE ANALOGY
It’s human nature to not want a reduction in our wages. We like to believe that our income should continue to rise each year until we retire. Unfortunately, harsh reality does not always make that possible. In fact, I read recently that it is normal in the US for a worker’s wages to peak when they are in their late 40s and plateau or decline thereafter (in real terms). If the worker refuses to take a pay cut, their only alternative may be no pay at all.

A similar situation can occur in business. The harsh reality of a new, disruptive technology can have the potential to render a company’s current business model obsolete. However, a company may stubbornly refuse to migrate to the new technology, because it provides less income than the prior technology. By refusing to accept the lower returns of the new technology, the company eventually ends up with no returns at all.

Take Kodak, for example. Back in 1975, Kodak claims to have invented the first digital camera. However, Kodak did not bring the product to market. Why? As it turns out, there is a lot less profitability in digital imaging than there is in film-based imaging. The profit loss from no longer selling film or developing equipment/services is far larger than the replacement profits from digital imaging. By refusing to accept a new business model because it was less profitable than the old one, Kodak ended up with neither and had to file for bankruptcy.

Or how about Ford? They invented the minivan, but did not bring it to market because they thought it would merely cannibalize their highly profitable station wagon business. Splitting the market between two vehicle types would be less profitable. Of course, Chrysler brought out the minivan because they did not have a large station wagon business. In the end, the station wagon business virtually disappeared, and Ford was never a major player in minivans. By refusing to accept less up front, Ford ended up with almost nothing (no station wagons and no meaningful share of minivans).

I personally experienced this problem at Best Buy. During the early days of the transformation of music from CDs to digital files, one of my jobs at Best Buy was to look for a way to exploit this transformation. I looked at the music and entertainment industry from all possible angles. I created countless scenarios and strategies. The problem was that every strategy I examined in the new music space was less profitable than what Best Buy was making in the old music CD world. This made Best Buy somewhat reluctant to make fast, bold moves into the new space.

Apple, however, was earning nothing in the old CD world. Therefore, everything in the new transformation would be additional profits for them. As a result, they were fast and bold with the iPod and iTunes. And Best Buy is becoming increasingly irrelevant in music.

The newspaper industry was hesitant to move fast and bold into digital news because it was so much less profitable than the analog newspapers. By not wanting to cannibalize the more profitable printed paper, the newspaper industry let others take the lead in the digital space. Now, most newspaper firms are struggling to stay afloat.

So businesses can fall into the same trap as that unemployed executive. By refusing to accept less, they can end up with practically nothing.

THE PRINCIPLE
So this is the strategic dilemma. What do you do if you realize that the next transformation in your industry will make your industry less profitable? How do you convince your stakeholders to make bold moves into the new space, when those bold moves appear to destroy more profits than they create? What is the right way to handle the transformation? How do you keep from being like the unemployed executive who refused to take less, which resulted in getting nothing?

Here are some principles to consider when confronted with this type of situation.

1) Make the Right Comparison
The unemployed executive in the story was making the wrong comparison. He was comparing new job offers to his prior job. Instead, he should have been comparing new job offers to his current unemployment. By comparing job offers to the old job, he was rejecting opportunities which were far better than the current unemployment.

The same is true in business. You cannot stop these business transformations. If nobody inside the industry wants to do it for fear of earning less, then someone from the outside will cause the transformation, because they have nothing from the old status quo to lose. Sony had no stake in film photography, so it rushed into digital photography. Apple had no stake in the CD business, so they rushed into iTunes. And so it goes.

Therefore, the real comparison is not today’s business model versus tomorrow’s. No, the real comparison is tomorrow’s business model versus nothing. That makes the need to adapt look more appealing.

2) Manage the Timing
Although the transformation may be unstoppable, you may be able to slow it down a bit. Kodak did not need to immediately abandon the film business back in 1975 and immediately plow every effort behind digital. They had room to wait a bit.

Delays can be good, because they help you build up a war chest of cash to use during the transformation. However, don’t wait too long. Eventually the race will get underway and if you wait too long, you will never catch up.

3) Keep Your Powder Dry
A delay is not an excuse to ignore the transformation. It is time to prepare for the transformation. Back when rifles were loaded with gunpowder, there was a saying to “keep your powder dry.” The idea was that you never knew when you would need to fire a shot, so you’d better prepare your gunpowder so that it could be used immediately (as a dry powder).

The same is true in business transformations. Eventually, you can delay no longer. Then you need to act quickly, strongly and boldly in order to remain relevant in the new world. You need your rifle to shoot immediately. Therefore, use the time of delay to “keep your powder dry” by working behind the scenes to prepare to win in the new space. Keep up the R&D. Develop prototypes. Invest in start-ups. Hire the proper talent. Do what it takes to get ready to win in the new space. That way, when it is time to move, you can move immediately, with great force.

4) Consider Creative Reorganization
To pull this off, you may find it beneficial to rethink your organizational structure. For example, you may want to place the old business model and the new business model into separate business entities. This can ease the resistance to self-cannibalism since you are different businesses with different leadership, different goals, and different compensation.

A separation also makes it easier to spin off either business. The old business can be sold while it still has some value (before it goes to zero). The new business can be spun out separately, so that all its growth is plus business rather than a decline from the past (since the past was not a part of its separate structure).

Separation also allows the new business to achieve a better (i.e., higher) valuation in the marketplace. These reasons help explain why so many businesses these days are splitting the growth part of the portfolio from the rest of the portfolio.

5) Switch
Another option is to consider switching industries. Fuji could see that the photographic film business was going away. It discovered that the chemical reactions with film are similar to the chemical reactions with skin. Therefore, Fuji redeployed its film knowledge to the cosmetic industry to create a significant new profit center to help replace some of what was being lost in film. So check to see if your core competencies provide opportunities to shift to better industries.

Firms like GE and Nokia have been successful for generations because they are willing to abandon core industries in decline and add on new initiatives in growing areas. In essence, GE made its core competency to be running business portfolios, which allows it to adapt to negative transformations by shifting the portfolio in a new direction.

6) Get Out Early
If the transformation looks bad and you can see no viable way forward, then sell out early, when others still see value in your business. The longer you wait, the worse it gets. Don’t wait so long (like Kodak) that nobody wants you anymore and the only option is bankruptcy. Those who sell out first usually get the highest price.

SUMMARY
Often times, business transformations can result in new business models which provide less profitability than the old model. If you are a leader in the old model, this reduction in profitability may create resistance to migrate to the new model. However, by resisting the lower profits, you can end up with nothing, because the old business model will cease to exist. Fight the resistance and come up with a plan for dealing with the transformation.

FINAL THOUGHTS
A lifeboat is a lot smaller and less glamorous than a large ship. However, if that large ship is sinking, the lifeboat is a better place to be. Stop clinging to the sinking ship and swim to the lifeboat.

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 #307: Brakes or Paint

THE STORY
I’m currently trying to decide whether I want to sell my car soon or keep it for awhile. If I’m going to keep the car for awhile, I need to do some repair work—new tires and new brakes.

However, if I’m going to sell the car soon, I’ll skip those repairs. Instead, I’ll spend a little bit of money on the car’s appearance--like touching up some areas where the paint has chipped.

Although the touch up work would be a lot less expensive, it means I would be selling it and buying a new car, which is a lot more expensive than fixing the tires and brakes.

Decisions, decisions.

THE ANALOGY
One of the great advantages of strategic planning is that it helps you to make the right decisions. Strategic plans give you the goals and objectives for your business. It tells you what you want to be. As a result, it is faster and easier to make decisions—just do things consistent with those strategic goals.

This is very similar to the story of my car. If my goal is to quickly sell my car, then I know exactly what to do—quit spending money on long-term repairs and put a little money into making the car more attractive to a buyer. If my goal is to keep the car for a long time, then I know what to do—invest in long-term repairs. Once I decide which goal I want, I will know exactly what to do.

So, we have a simple, two step process: determine the goal and then do the things consistent with that goal. Decisions become so much easier when you have the context of an overall goal, because a lot of options quickly fall away as no longer consistent with the goal.

But here is the interesting wrinkle…normally we think of strategic goals as being very long term—four to five years (or even much longer). However, sometimes a strategic goal can be very short term. In the example of my car, if I chose the goal of selling the car, then the time span is only a few weeks—touch up the car and sell it right away.

The same thing can occur in businesses—sometimes the goal for a business is to get out quickly. Before the housing bubble burst, a lot of people were following this type of short-term goal. They would buy a fixer-upper house, fix it up, and then quickly sell it. The strategy even had its own TV show: Flip that House. If you can flip a car or flip a house, why not flip your business?

THE PRINCIPLE
The principle here is that strategic goals do not have to be designed to perpetuate a business for a long period of time. Sometimes the best goal is to quickly shut down a business or sell it off quickly.

This is not a strategy of defeat. It is a very viable approach to business. For example, a lot of people are well skilled at starting a new business, but not skilled at running that business once it gets large. They are better off flipping those businesses to people better skilled at running larger businesses once the start-up phase is over. There are a lot of these “Serial Entrepreneurs” in the high tech world. They start a business, sell it, then start another.

The same thing can also occur at the end of a business lifecycle. It takes different skills to thrive when an industry is in decline. Selling out to someone better skilled at this is a viable strategy.

So what can we learn from this?

1) Don’t Forget that Selling/Flipping/Shutting Down is a Viable Strategic Goal
When determining your strategic direction, don’t automatically assume that your goal is to create long-term viability. Short-term ownership may be a better option.

At the end of the day, it is all about cash flow. There may be more cash flow in getting out than in staying in. If your business is worth more to someone else than it is to you, then perhaps they will share a portion of that added value with you at the time they purchase the business from you.

Even if you lose money on getting out, if you lose less than if you stay in, you are better off. Take pride in choosing an option that optimizes cash flow, even if that means shutting a business down.

2) Waiting Rarely Makes These Strategic Approaches Better
Business is about taking risks. Not all risky ventures pan out as we had hoped when the pro formas were created. Sometimes, the problems can be fixed. Sometimes we just have to take our lumps and shut it down.

Studies have shown that one of the biggest problems in this area is waiting too long before shutting a bad risk down. Like an old car, waiting won’t make it more valuable. The value has nowhere to go but down. Cash flow is needlessly destroyed as time goes by.

It is easy to see why this happens. People get emotionally attached to businesses. Egos don’t want to admit that certain problems cannot be fixed. Careers may be threatened if the business is shut down. These cause us to procrastinate and postpone pulling the plug.

There are two ways to get around this. First, take away the negative social and emotional stigma to shutting a business down. Celebrate the wise decision in shutting something down quickly when that is the best option. Don’t punish the careers of those who make such a wise decision.

Second, set up predetermined trigger points before starting the new risky venture. If a particular trigger point is met during operations, this automatically starts a serious discussion around rapid sell-off/shut down. Trigger points help take the emotion out of the decision. A rational, predetermined approach has a better chance against the emotional tendency to procrastinate.

3) Once the Goal is Determined, Get All The Actions In Line With It
In the story about my car, if I decide to sell soon, I’m going to take radically different actions than if my plan is to keep the car awhile. The same is true for businesses. If the goal is to quickly sell/flip/shut-down, then all the actions should support that goal.

First of all, your definition of who you customer is may need to change. The primary customer is no longer the one who buys your products/services. Instead, the primary customer becomes the one who will buy the entire business. Are you doing everything to appeal to that new customer?

For example, at the height of the dotcom boom, a lot of start-ups wanted to eventually be bought out by a big firm like Cisco. The plan from the beginning was to sell out soon, so firms like Cisco were as much their target audience as product customers.

Cisco made it known at the time that they only wanted to buy companies located in one of three areas—Silicon Valley, Austin Texas, or the Research Triangle in the Carolinas. Therefore, if your goal was to quickly sell out, the decision was simple—locate your business in one of those three areas.

Investments should change when this type of goal is chosen. With my car, the investment would change from brakes to paint. On the show Flip That House, they showed which types of investments have the best quick returns to a prospective buyer.

Do the same. Alter your investments to optimize the sale, not to optimize long-term viability.

SUMMARY
Selling or shutting down a business is not a sign of failure. It is often the wisest strategic move available. Therefore, do not forget to consider this as the proper strategic goal. And if it is the proper goal, act quickly and act properly. Change your actions to support the goal, even if it looks like an abandonment of supporting long-term viability.

FINAL THOUGHTS
Strategic planning helps determine core competencies. If your core competency involves specializing in running firms at a particular stage in their lifecycle, then do not be afraid to get out of those businesses when they migrate to the next life stage. In fact, plan it in advance, before the change occurs.