Strategic Planning Analogy #499: Planning by Intimidation

THE STORY

Back during the middle of the 20^th Century, Yugoslavia appeared to be a relatively stable country.  With the exception of the time around World War II, the borders of the country remained relatively constant from about 1918 until around 1990.

Internal strife during most of this time seemed relatively minor to the outside world. In fact, the country seemed so stable that in 1984 the Winter Olympics were held in Sarajevo, Yugoslavia.

Yet it was not many years after the Olympics were held that the nation began to fall apart. Violent warfare and ethnic pride during the 1990s eventually dissolved Yugoslavia into seven separate countries: Croatia, Macedonia, Montenegro, Serbia, Slovenia, Kosovo, and Bosnia & Herzegovina.

So much for what seemed like stability in Yugoslavia. Instead, it became a bloody war zone until the dissolution was complete.

As it turns out, that appearance of stability and unity in Yugoslavia was not a natural condition. It only existed because the people felt forced to get along. First, the nation had been run for generations by a series of strong totalitarian regimes. These leaders used their power to create fear of rebellion or disunity. Whenever small uprisings occurred, these leaders quickly used their power to brutally squash the rebellion (and put fear into anyone considering future rebellion). The strongest of these leaders was Josip Tito, who ran the country with an iron fist from 1963 to 1980.

Second, there was a feeling that if Yugoslavia became too unstable, the Soviet Union would step in to restore stability. And the type of actions anticipated by the USSR to create stability were feared to be even worse than the totalitarianism of their own rulers, like Tito.

Therefore, the people of Yugoslavia held their internal disputes in check, fearing that any attempt to show their true ethnic pride would just make matters worse. It wasn’t that they liked each other during the 20^th century—they just felt forced into an undesired tolerance.

After Tito died in 1980 and the Soviet Union dissolved in 1991, the forced pressure to co-exist began to fade away. Without this strong outside pressure to conform, the ethnic pride and hatred of the people was allowed to come to the surface. This lead to the bloody battles of the 1990s. The end result was separation into new nations defined by the more natural ethnic boundaries.

THE ANALOGY

The story of Yugoslavia shows that just because there is an appearance of unity and stability, that does not mean that unity and stability lie in hearts of the people. All that hatred and ethnic pride was still there under the surface.  The only reason it didn’t erupt until the 1990s was because powerful forces had kept it from erupting. The moment those forces disappeared, so did the superficial unity.

This is an important lesson for those in charge of enacting strategy. There are two ways to get employees to comply with a strategy.  The first is to take a Yugoslavian approach. In other words, you use intimidation, power and fear to force people to comply, whether they want to or not. The second approach is to change the hearts of the people so that they voluntarily want to comply. As we will see in this blog, the Yugoslavian approach is usually the less desirable option.

THE PRINCIPLE

The principle here is that coerced actions are never as effective as actions driven from the heart. Just as a mercenary soldier never fights as hard as a soldier who believes in the cause, an employee complying due to fear is never as productive as one who believes in the cause. As a result, the Yugoslavian approach to strategy implementation tends to be rather unproductive.

High productivity is a result of getting relatively large output from relatively low input. The Yugoslavian approach tends to lose on both fronts; it requires higher input for lower output.

1. The Cost of Gaining Compliance Through Intimidation

In totalitarian dictatorships like Yugoslavia and North Korea, a great deal of time, effort and money has to go into building the force of intimidation.  Large armies and police forces are needed. Spy networks are needed. So much effort has to go into the mechanisms of fear that little is left for growing the economy and benefiting the people.

A similar situation exists in business. The intimidation approach to strategy is very costly.  You have to build a huge infrastructure to manage every little detail to make sure the work gets done. Nothing can be left to chance. Every decision has to come from the top and be constantly monitored for compliance. Systems of punishment are needed when people deviate from plan. It becomes like the top-down communist economies. Everything is planned from the top, yet the people starve from shortages.  It doesn’t work well.

Instead of spending time on the large, critical issues for success, management gets bogged down into the minute details. Nothing can be delegated, because the people cannot be trusted to voluntarily comply.  So much time is wasted monitoring incremental changes in performance that little time is left for discovering the large innovative transformations needed to stay relevant in a changing marketplace. You end up perfecting the obsolete.

2. The Lowered Response Due to Intimidation

There was an old saying by the people in the old communist countries: “You pretend to pay us and we pretend to work.” The idea was that the local currencies were worthless, so the people did not work hard to earn it.

That’s what happens when people are compelled to comply with something they do not believe in their heart. Sure, they will stay the course so as not to be punished. But they will not work hard at it. They will not go the extra mile. Instead, you will get the bare minimum effort. And that is no way to win the battle in the marketplace.

When people believe deeply in the strategy, the effort level skyrockets. You don’t have to force people to do well—they WANT to do well. They will work longer and harder for a cause they believe in. And best of all, they will volunteer innovative ways to get things done—far better than that which is dreamed up in the ivory towers at headquarters.

I worked with a company that went through a transition from having employees who deeply believed in the strategy to one where they felt compelled to do that which they did not believe. The employees started going home earlier and worked less while in the office. Productivity dropped dramatically.

3. The Inevitable Breakdown

As we saw in the case of Yugoslavia, eventually the pressure to hold down rebellion becomes too great and the instant there is weakness at the top, the rebellion will occur. The nation of Yugoslavia was quickly destroyed at a very high human cost. 

The same thing can happen in business. As soon as there is a slip in the oppressive power and control, rebellion will occur and everything can become lost very quickly.

A lot of strategic initiates look great at first, when top management is watching it closely. However, if compliance is only by intimidation, those results will quickly go away once top management’s attention moves on to something else. It won’t be sustainable.

4. The Better Approach

Rather than rely on intimidation, a better approach is to get people to want to naturally comply with the strategy. This is easier to administer, creates greater output, and gains from the insights and innovation of the entire organization.

How do you do this? First, have a compelling strategy which makes sense and leads to victory. Don’t expect employees to buy into hollow platitudes. They know a lie or deception or hollow wish when they hear it. Instead, create a position and plan that really can win in the marketplace…something worth believing in.

Second, relate the company goals to individual goals. Show how the path for the company to win will also be beneficial to the individuals who make it happen. Create a win-win scenario where compliance is the best path for everyone. Share the wealth.

Third, don’t micromanage. Allow people to internalize the strategy and make it their own. Then they will come up with creative ways to move the mission forward which far exceed what would come out of micromanaging.

Finally, don’t choke on excessive monitoring of minutia. KPIs (key performance indicators, or whatever 3 letter acronym you use for measurement metrics) are an important part of a strategic process. But that doesn’t mean that ever more KPIs are better. At some point, you can have so many KPIs that you choke on the specifics and lose sight of the big picture.

This is especially true in a Yugoslavian environment. There can be so much fear and intimidation put behind hitting the numbers, that people will do anything to hit the numbers. Unfortunately, numbers can be achieved by both doing the right behaviors and the wrong behaviors. Often times it is easier to hit the numbers with wrong behaviors that are contrary to the plan. So the intimidating process encourages wrong behaviors.

It reminds me of an old process used at a company which prided itself on innovation. To measure innovation, they used the KPI of “% of sales from products introduced in the last five years.” The pressure was so great to hit this number, that managers started achieving it by discontinuing perfectly good older products from the mix. This got them the desired number, but it hurt sales and did not promote innovation.

Spend less time ruthlessly enforcing KPIs which can be hit via bad behavior and more time encouraging people to do what’s right because they believe good will come from doing what’s right.

SUMMARY

Intimidation and fear may create strategy compliance for a short time, but eventually rebellion will occur. And even during the period of coerced compliance, performance is sub-optimal because it typically requires extra management effort and achieves only bare minimum performance. To get optimal productivity, it is better to convince people believe in the strategy in their heart. Then they will work harder with less supervision and add ideas of their own to make it even better.

FINAL THOUGHTS

Next time someone tries the fear and intimidation approach to strategy, remember the fate of Yugoslavia.

Strategic Planning Analogy #451: Too Much Cotton in the Bottle

THE STORY
The other day I bought a bottle of ibuprofen. I bought it to help with the occasional headache I get with my spring allergies.

When I opened the bottle, I couldn’t get the pills out. There was so much cotton stuffed in the bottle that I couldn’t get to the pills. It was quite a struggle to get that cotton out of the jar.

I understand why the cotton is put in the bottle. It is to protect the pills from bouncing around in the bottle and getting damaged during shipping.

But here is my question: What is the benefit of having perfectly undamaged pills if I am unable to get to them and use them for my headache? If they are locked up in a bottle behind too much cotton, they cannot help my headache. They are worthless to me.  I’d rather have easier access to a slightly damaged pill.

THE ANALOGY
That ibuprofen is only useful to me if I can get those pills into my bloodstream. Having them in a bottle does nothing for the pain.

A similar situation can occur in the business world. Businesses have all sorts of resources. They can be financial, technological, intellectual or a wide range of other resources. These resources are like those ibuprofen pills. If properly used, they can be productive and solve problems.

However, if the company tries too hard to protect those resources, it can be like over-stuffing the medicine bottle with cotton. The protection makes it nearly impossible to get access to those resources. And if you cannot use the resources, it is irrelevant that you kept them in top condition. They become worthless to you in your battle to increase your prosperity in the marketplace. THE

PRINCIPLE
The principle here has to do with risk. The problem is that if a company gets overly protective of its resources in order to eliminate downside risk, they will not only prevent undesirable activity—they will prevent all activity. Like over-stuffing the medicine bottle with cotton to prevent any damage, over-stuffing your business with policies to prevent any risk leads renders your resources worthless.

The only way to be 100% certain that activities with downside risks are eliminated is to eliminate all activity. And that leads to another 100% certainty—100% certainty that the company will cease to exist due to a lack of investment. And so, ironically, the policies intended to minimize downside risk actually increase the likelihood of the greatest downside risk—the risk of destroying the entire business through resource starvation.

As the old saying goes, you have to take some risks in order to receive any rewards. So, the goal should not be to stuff the medicine bottle with as much cotton as possible. The goal should be to find the best way to use the pills in the bottle. Or, to use business terms, the goal is not to avoid risk by preventing investments, but to find the most prudent ways to invest.

Now I understand the need to prevent wasteful and reckless use of resources. For example, if I had been reckless and swallowed all of those ibuprofen pills at once, I would have killed myself. But, if used properly, ibuprofen can do wonderful things. And similarly, wise use of company resources can do great things.

So the rest of this blog will look at ways to prevent over-stuffing the bottle with cotton and promote more prudent investing.

Problem #1: Personal Biases
Scientists and researchers tell us that most managers have built-in biases when it comes to making decisions. They say that the typical manager over-emphasizes the potential downside risk and under-emphasizes the upside potential. As a result, managers become too protective and miss out on making perfectly sensible investments.

I have a theory about why that occurs. I believe the problem is that the upside and downside risks for the company are not always in sync with the upside and downside risks for the individual making the decision.

For example, let’s assume that a manager has a tough decision to make. If you just look at the math from a probability analysis, you would see that although the downside risk is large, the upside risk is a little bit larger and a little bit more likely. Therefore, the “experts” would say that the manager should make the investment.

However, that is just considering the risk to the business. Now consider the risk to the manager making the decision. The manager may think that if the upside potential occurs, he/she may only get a minor recognition. After all, it is their job to make good decisions, so if the decision turns out well, they were just doing their job properly.

On the other hand, if the downside were to occur, the manager may rightly assume that he/she would lose their job. Just look at what is happening at J.P. Morgan. Some trading deals went bad and the downside scenario came to pass. And as a result, a number of people at J.P Morgan are losing their job.

So, from the manager’s perspective, there is very little personal upside potential from recommending the deal and if the downside potential occurs, he/she could lose their job. Therefore, it is no wonder that executives appear irrational (from the company’s perspective) in saying no to “reasonable” risk. After all, from a personal perspective, saying no seems highly rational.

Consequently, if you want management decisions to be in the best interests of the company, you need to make the personal risk profile more similar to the company risk profile. Otherwise, you can end up with managers overstuffing the medicine bottle, which hurts the company but protects their career.

Problem #2: Departmental Biases
Large business decisions often impact large sections of a business. Problems can occur if the risk profile varies between the sectors of a business impacted by a decision.

For example, one part of a business might bear the biggest brunt of the investment while another department may reap most of the benefits. In such a circumstance, the department needing to make the investment may resist the move, because the math may not make sense when just looking at that particular department in isolation.

To prevent this “irrational” cotton stuffing, one needs to get all of the affected parties to share in the entire company-wide risk profile. That way, decisions will be made for the good of the company rather than the good of the individual department.

Problem #3: Excessive Busyness
Just because a resource is kept busy does not mean it is being invested properly. There is an opportunity cost risk in missing out on potentially huge gains because resources are focused on surer, but much smaller gains.

Take, for example, your human resources. Since the start of the great recession, there has been a push to keep those human resources as busy as possible. Individuals are often doing a workload previously done by two or three people before the recession. At first, this may be admired as a wonderful productivity gain.

However, if someone is too busy with the mundane, they will not have the luxury of time to ponder larger issues which produce major breakthroughs. As we’ve seen in prior blogs (here and here), some down time is needed if you want the brain to discover that next huge breakthrough.

As a result, excessive busyness can act like that cotton, and prevent you from being able to use those resources for greater benefit. Therefore, one may need to program in some more “slack” time in order to get the most out of the resource.

Problem #4: All or Nothing
Often times, an investment can look scary because it is positioned to appear so massive. It is proposed as an all or nothing deal. You are told you are either in or you are out. And if you are in, you have to make the big bet all at once. And that can scare people away.

Well, this is often a false premise. Most big deals can be broken down into smaller deals. You may be able to test it in a small fashion before rolling it out. You may be able to borrow or rent resources before committing to purchase. You may be able to do a joint venture with a firm rather than have to acquire it.

Tactics such as risk-sharing, stage-gating or real options theory can help keep the risks manageable by placing them into smaller chunks. If a small chunk goes bad, you can stop before investing in the next stage.

Problem #5: A Portfolio of One
One of the best ways to overcome downside risk is to avoid putting all of one’s eggs in a single investment basket. That is just another scare tactic akin to the all or nothing approach mentioned above. Instead, invest in multiple investments. With a portfolio of investments in your pipeline, then the odds increase that the entire mix of investments will be positive (even if some of the individual investments are negative).

Therefore, to encourage better levels of investing, two actions should occur. First one needs to diversify the risk by building a portfolio of investments (at least in their initial stages). Second, one needs to move away from treating risk in isolation but look at the risk in terms of the whole portfolio. Accept some individual failures as a necessary part of the overall quest to create a positive portfolio.

Problem #6: Fear of Obsolescence
Often times, there can be a fear of investing in something new out of fear that it will hurt the core business. For example, Kodak did not aggressively invest in digital imaging for fear of hurting the core analog film business.

But here is what one needs to realize. If it is a good investment, somebody else will make it. Consequently, the core business is at risk whether you make the move or not. So in most cases you’d be better off making the move, since at least then you would be a part of that which destroys your core. Otherwise, you core is destroyed by someone else and you are left with nothing.

SUMMARY
There are many factors which can act to hold people back from making the investments which they should. We were only able to scratch the surface here. However, in the areas we looked at, it was seen that these factors can be minimized/reduced by becoming proactive in addressing them. By getting in front of these issues, we can establish approaches which keep people from stuffing the investment bottle with too much cotton.

FINAL THOUGHTS
By first investing in policies and approaches which help us to better handle risk, we will end up making more good investments in the business.

Strategic Planning Analogy #263: Living in Fear

THE STORY
I knew a woman who was very curious. She liked to read all the time. One of her favorite topics to read about was the dangers and threats which could beset the world. She became an expert in understanding all the potential dangers—everything from the dangers which could beset a women walking alone in a parking garage to the dangers to the entire planet from the thinning of the ozone layer.

The more she read about potential dangers, the more fearful she became. She eventually became afraid that all of the potential dangers had a high likelihood of happening—to her. She became increasing afraid to leave the house. Her fear for the entire health of the planet (and her inability to stop every threat) became so intense that she was prescribed medicine in order to cope.

Over time, the fear so gripped her that she could no longer function in the outside world. She was a true sufferer of agoraphobia—and it was so sad to see.

THE ANALOGY
Although it is not a bad idea to become informed about potential risks, too much fear about those risks can be very detrimental. As we saw in the story, excessive fear over potential threats can be paralyzing. Too much fear leads to an inability to act and move ahead. The fear can trap us in our homes.

Business is all about taking risks. As they say, “No Risk, no Reward.” Of course that doesn’t mean we should ignore all warning signs of risk and dive into a situation blindly. That almost always leads to disaster. The recent economic collapse, for example, was due to not properly understanding the risks of the complex financial products which were introduced. Financial institutions dove too deep into these risky ventures—blind to the extent of the risk—and it almost collapsed the entire economy.

One of the key roles of strategic planning is to provide knowledge and insight so that the risks are minimized. Better, less risky moves can be made based on the discipline of strategic analysis—a solid understanding of the environment. Strategic planning makes you smarter so that you can act smarter.

However, even with the use of strategic planning, the risks do not go entirely away. If you wait until all the facts are in, it will be too late to take the lead. The market dynamics will already be set in concrete and not have room for your late entry. Therefore, there will always be an element of the unknown in every good strategy.

The key is to not become paralyzed with fear. Instead, the goal is to make risk your friend.

THE PRINCIPLE
The principle here is that risk is not to be avoided, but rather to be exploited. Don’t be like my friend who was so fear stricken that she was afraid to leave the house. To win, you have to take your business out into the marketplace and aggressively fight for success. Even in tough economic times, one cannot just hunker down in the bunker in fear and wait it out.

Market share changes hands all the time—especially when times get tough. Customers are more willing to reconsider their habitual buying patterns when their economic condition worsens. Therefore, tough times are not times to hide in your house, because your share is more vulnerable than ever. Of course, the share of your competitor is also vulnerable, so you have an opportunity to gain if you go out and act smartly.

Taking calculated risks into uncharted territory can be one of your best friends, because:

a. It allows you to get a head start in an area which is relatively uncontested (like the Blue Ocean Strategy).
b. It allows you to write the rules in your favor.
c. It increases your chance of being the leader and reaping most of the rewards.

Of course, not all ventures into new space are successful. So how can we improve our chances of success within this uncertainty? Here are four suggestions.

1. Plan the Entire Chain
Successful ventures are based on successful business models. In today’s increasingly sophisticated marketplace, it is not enough just to create a cool product. To make money, one needs to plan and control the entire value chain around it. Your business model strategy must include a way to get the rest of the value chain to work in your favor. Otherwise it can work against you.

Compare, for example, Sony versus Apply. Sony has concentrated on making cool devices. Apple has concentrated on making cool business systems—devices, apps, stores and so on.

Apple realized that a cool device can quickly become a commodity—a piece of hardware that gets the profit margin kicked out of it if you do not control the selling process downstream. Therefore, Apple has tightly controlled its retail distribution.

Second, Apple knew that if the cool applications shift to another device, nobody will want the Apple device, because what customers really want is the ability to get to the cool apps. As a result, Apple did its best to become THE place for the cool apps programmers to programming for.

Finally, devices get purchased infrequently, whereas the apps get purchased all the time. Apple knew if it was not getting a cut of the apps business, it was losing out on where most of the ongoing value in the business model was being made. Therefore, Apple made sure it was THE place for purchasing the apps, so that it could get a cut of the sales.

By planning the entire value chain, Apple was able to ensure that the value chain continued to flow through Apple and did not get diverted somewhere else. This this thoroughness and control significantly increased Apple’s ability at being a success in risky new ventures like the ipod and the iphone.

By contrast, Sony’s recent ventures aimed at cool devices only have not been as successful. They have recently suffered a large loss. Sony’s cool devices are not cool enough on their own to create a secure business model. By not controlling distribution downstream or applications upstream, Sony is more vulnerable to being bypassed in the value chain. By not having the compelling stickiness of a tight value chain, Sony has to cut prices in order to create preference, which hurts margins.

Sir Howard Stringer, head of Sony, has seen the error of this narrow focus and is in the process of transforming Sony to think more holistically about the entire value chain. So, success in new ventures goes up if you plan out the entire value chain—to build a system which is biased in your direction and makes all the players better off if they play by your rules.

2. Look for Superior Solutions
A lot of businesses get excited by a new venture when it uses the latest and greatest technology. The mindset tends to be that “if it uses the latest technology, it has to be better, so the business model should succeed.” The problem is that most people don’t care about how up-to-date the technology is. What they really want is a superior solution to a problem. Sometimes, the latest technology does not improve the ability to solve a problem. Sometimes it even makes it worse.

Take internet grocery shopping, for example. Nearly every venture into this space has been a miserable failure. Is it because they did not use the latest technology? No, it’s because internet grocery shopping is an inferior way to shop.

They claimed that internet grocery shopping would be more convenient. However, how convenient is it really when you consider that:

a) You have to sit at home for a 4 hour delivery window (which is a longer time than it takes to shop).
b) If they are out of stock on an item you want, either they may make a substitution you don’t like or they will not supply the item, leaving you with only half the ingredients needed for a meal. Is that convenient?
c) The ordering process on line is less enjoyable than shopping, and unless you like eating the same food every week, it is still time consuming.

On top of that, a lot of the things a customer does for free when shopping the store (picking out the items, checking them out, taking them home) now are done by labor that must be paid if you buy off the internet. This makes the internet process a lot less efficient and the groceries a lot more expensive. As it turns out, the minor bit of convenience is not seen as enough to justify the higher prices the new internet grocery model needs to earn a profit. So the business model fails. The moral? Just because a model uses newer technology does not automatically make it better. Only go after ventures which truly have a significant advantage over the status quo in solving the customer’s real problem.

3. Narrow the funnel quickly
Although there are risks to putting all your eggs in one basket, there are also risks to trying to venture into too many different directions at the same time. The solution? Don’t be afraid of looking at a lot of potential new ventures early in the process. This increases your chance of finding a real winner. However, quickly determine which ones have the best shot of success and stop the funding on the rest. One of the biggest drains occurs when one delays halting support for the losers. The longer you wait, the worse it gets.

4. Experiment and Adapt
Ultimate successes rarely end up looking like the original vision. They tend to morph along the way as you learn. Therefore, rather than working in the lab alone until the original vision is perfected, do some early experimentation. Let beta models out into the marketplace. Get input along the way from your customers. Be willing to flex and adapt. This increases the likelihood that the final product is what the market really wants.

SUMMARY
Even though new ventures pose risks, that is not a reason to hide and resist venturing into new areas. The idea is to use a strategic planning process which minimizes the likelihood that the risks will hurt you. This includes ideas such as planning the entire value chain, planning for superior solutions, narrowing the funnel quickly, and experimentation/adapting.

FINAL THOUGHTS
If you do the types of activities mentioned in this blog, risk moves from being an enemy to being a friend, because it gives you an edge over the competitors who do not follow this advice.