Strategic Planning Analogy #480: Landing a Strategy

THE STORY
I used to live in a city which had a small regional airport.  The city wanted to get more of the large airlines to land at this airport, but the airlines kept refusing.

The airlines said that they would not schedule flights to that airport because the runway was too short.  Sure, it was long enough to land the smaller planes that the airlines use, but not long enough to land the largest jets.  Because the airlines want flexibility in the use of their airplane fleet, they didn’t want to schedule flights into airports which couldn’t handle their largest planes.

After hearing the complaints, the city invested in building longer runways.  And not long after the longer runway was built, a large 747 jumbo jet landed at the airport in grand fashion.

I think it was many, many years later before the second large jet landed there, but it didn’t matter.  The renovations and the longer runway resulted in getting more scheduled flights at the airport.

 

THE ANALOGY
I like to use the term “landing a strategy.”  This concept refers to getting a strategy from being just a cool idea floating in the clouds to being a reality playing out on the ground where the company is operating.

Landing a strategy is a lot like landing an airplane.  If the airport’s runway is too short, the larger jet will not be fully landed before it runs out of runway.  The plane will keep moving at a high rate of speed beyond the edge of the runway and crash into something, creating a total disaster.  That’s why airlines insist on having long runways before committing to an airport.

It takes a lot of time and money to land a strategy (to get it from idea to reality).  If you run out of time and money before the strategy is fully landed, you are like a pilot in a big plane that ran out of runway.  Your strategic attempts are about to go off the runway and crash into something, creating a total disaster.

Due to our optimism, we may think we need a shorter runway (less time and money) than we really need to land our strategy.  As a result, we may already be well into the strategic transformation before we realize that we are trying to land our strategy at an airport (i.e., company) whose runway is not long enough (not enough time or money to finish the transformation).  Then we find ourselves frantically trying to lengthen the runway at the same time our plane (i.e, strategy) is already approaching the runway.  That’s not a very wise approach.

When a strategic transformation runs out of runway, the worst possible scenario occurs.  The old strategy is bankrupt because all the time and effort and money went into the transformation.  The old strategy is too obsolete to create sufficient cash flow to keep the transformation going (running out of money). The time for bankruptcy under the old model keeps getting closer (running out of time).  Yet, because there is not enough time and money left to finish the transition to the new strategy, you don’t end up the replacement strategy, either.  Instead, you are stuck with neither strategy.  A total disaster.

Think about Kodak.  It didn’t start trying to land a digital strategy until the analog business was almost dead.  The old analog business was not producing cash flow and was soon to die (no time or money).  As a result, Kodak’s runway was too short.  They ran out of time and money before a digital strategy could be landed.  The company ran off the runway and imploded.

The airlines in the story had a safer approach.  First make sure the runway is plenty long enough.  Then, only after the long runway is built, will the airlines consider trying land planes there.  Our strategic approaches could learn from this.

 

THE PRINCIPLE
The principle here is about change management.  Nearly all new strategic initiatives require significant change in the business in order to become reality.  You may have a great new strategy, but if you mis-manage the change process to get there, you will not effectively land the strategy.  It will crash and make a disaster.  

If you cannot effectively land the strategy, it is irrelevant how great that new strategy was.  It will crash when you run out of runway, just like a bad strategy.

Therefore, a key piece of change management needs to be assessment of the length of your runway.  If the runway isn’t long enough (not enough time and money), then the process is doomed.

Option #1 Lengthening the Runway

If the runway is too short, one solution may be to lengthen the runway.  In other words, before embarking on the transformation, look for ways to either:

1. Increase Cash Flow; or
2. Slow Down the Demise of the Status Quo.

These actions may not have any direct relationship to the change you are trying to accomplish, but if you do not do them, you will not have enough time or money to do those things which directly relate to the change.  So you need to do them as well.

Tactics to lengthen the runway could include:

1. Selling off peripheral assets.
2. Restructuring the Balance Sheet.
3. Massive layoffs in peripheral areas
4. Sale and lease-back of properties.
5. Looking for legal or governmental protections of the core to keep threats to the core further away.

One of the main reasons why Ford Motor Company did not have to go through bankruptcy and government bailout while GM and Chrysler did was because Ford had taken many of these types of steps to lengthen their runway prior to the great recession.  As a result, Ford’s runway was long enough to last until they could transition through the economic recession and get to their revitalized strategy.

GM and Chrysler ran out of runway because they did not do enough of these types of things.  Without a lot of outside help, they would have crashed when their runways ran out.

Option #2 Shortening the Plane

If lengthening the runway is not enough, you can try to switch to a smaller plane.  By this, I mean that instead of trying to create massive change all at once, you can chop up the change into smaller bundles (like smaller planes) which require less time and money to land (and thus can use a shorter runway).  Those smaller changes with the quickest payback can be done first and create the new money and extra time needed to land the rest of the transformation.

Thus, you fund the latter change by strategically creating funding via the early changes.

Netflix was originally designed to be a digital downloading service (which is why the company was called Netflix instead of Mailflix).  However, the company realized that it would take massive amounts of time and money to create the Netflix model.  Therefore, Netflix started with a smaller plane (movies by mail). 

Movies by mail required less time and money to start up.  And it got Netflix a huge subscriber base and clout in the marketplace that could be applied to the ultimate vision.  And because the near-term model was profitable, it could fund the efforts needed to make the ultimate transition.

Option #3 Changing the Flight Schedule

A third option is to change the scheduling of your flight—prepare to land your plane earlier.  The idea here is that if you start the transformation earlier, before the status quo deteriorates too much, you have many advantages:

1. The old strategy is stronger and producing more cash flow to fund the landing.
2. The company’s image and clout are stronger which makes it easier to introduce your change to the marketplace.
3. The ultimate demise of the status quo is further away, so you have more time.

Kodak essentially invented the world digital imaging.  They had plenty of time, clout and money to implement the change.  The problem was they waited too long to do anything about it.  If they had scheduled the landing of the digital transformation much earlier, the odds are good that it would have succeeded. 

The problem is that companies worry about cannibalization.  After all, the sooner you start the transformation, the quicker you cannibalize the old core.  What you need to realize is that someone is going to eat your core.  Your only real option is to decide whether you are going to do the eating or someone else is going to do the eating.  And if you wait, like Kodak did, and let the competition eat your core, you have no runway to get to the replacement.  All you are is eaten.

 

SUMMARY
Strategic initiatives usually require change.  Change requires time and money (and usually more than you initially realize).  Therefore, if you want to land your strategy, you’d better make sure there is enough time and money to get the change implemented.  If there isn’t, you will need to adjust your approach to that change by either:

1. Finding more time and money;
2. Starting with smaller change initiative bundles; or
3. Starting the whole process sooner.

 
FINAL THOUGHTS
I worked with a company that was running out of runway.  They did not have enough time or money to finish their transition.  The solution they picked was to sell the business to someone with deeper pockets and more time.  In other words, they sold the plane to a company which owned a better airport with a longer runway.  So, before you panic, look for creative ways to get a longer runway.  Creative solutions are out there.

Strategic Planning Analogy #429: Musical Chairs

THE STORY
When I went to parties as a child, we played a game called Musical Chairs. The game used a circle of chairs. There would be one less chair than the number of children playing.

As music played in the background, the children would walk around the circle of chairs. When the music stopped, everyone would try to sit in a chair. Since there was one less chair than children, one child would not get a chair. That person was called “out” and was no longer allowed to play the game.

Then, one of the chairs would be removed and the music would start again. The process would be repeated until only one child was left sitting in the one chair that was left. That child was declared the winner.

Sometimes the game would get very active when two children would fight over a single chair. Although both would try to claim rights to that chair, one of them would lose out. After all, the rules stated that only one person could sit in a given chair. Since there were fewer chairs than children, by definition someone would lose out in each round.

THE ANALOGY
The chairs in Musical Chairs can be thought of as being like business opportunities. And the children can be thought of as being like companies who want to take advantage of those business opportunities.

Like in the game, there are more companies trying to take advantage of the opportunity than there are opportunities. As a result, companies lose out and can no longer play the game in that arena.

You can see this happening all the time in business. Whenever there is a “hot” business space, there will be tons of businesses trying to exploit it. Unfortunately, there are too many companies chasing these “hot” spaces. As a result, most companies do not successfully exploit the opportunity. “When the music stops,” and the companies rush for a seat at the business, not all will find one.

Look at the recent “hot” spaces like Solar Panels, Social Media Couponing, iPad imitations, etc. Companies are quickly exiting the businesses or going bankrupt. Yes, the business space may be “hot” but most of the businesses trying to exploit the opportunity fail. There are not enough chairs to satisfy all who want to play.

THE PRINCIPLE
The principle here is that merely finding a good place for your company to play is not sufficient. So-called “good places” attract too much interest relative to the opportunity. As a result, these “good places” quickly become “bad places” for those who cannot quickly secure a solid ownership of share in that space. Like in the game of Musical Chairs, most players are asked to leave the game because they could not find a chair for their business to occupy.

Therefore, strategies require two elements—a viable space, and a way to aggressively fight to win a place within that space.

Best Buy Example
I was reminded of this principle while reading the book “Becoming the Best” by Dick Schulze, the founder of Best Buy. The book talks about the history of the development of the massive Best Buy retail chain. There were several times in the early years when Best Buy was on the verge of bankruptcy. Best Buy could have very easily become one of those companies who could not secure a chair and been told by the marketplace to leave the game.

Yet, Best Buy endured to become the last national consumer electronics retail chain left in America. It won the game of musical chairs in the consumer electronics space. Why? Part of the answer can be seen in the sub-title of the book: “A Journey of Passion, Purpose, and Perseverance.”

Dick Schulze did not just “show up” at the game. He was quick, aggressive, and persevering. He understood that business is a race and that you have to run aggressively, with purpose and endurance, in order to win that race.

A great example was back in the late 1980s when a large competitor, called Highland Appliance, decided to enter Best Buy’s territory in order to drive the smaller Best Buy into bankruptcy. Realizing what was going on, Best Buy reacted quickly and aggressively. First, Best Buy acted quickly to grab market share in markets where Highland was committed to grow, but moving slower.

Second, Best Buy was the first to realize that the old commissioned sales model (which Highland, Best Buy and everyone else was using) was becoming obsolete. Therefore, Best Buy quickly changed its approach and became the first in the industry to own the superior business model which was an approach more like a supermarket (no commissioned salespeople). They called the new business model “Concept II.” Because of these quick and aggressive tactics, Best Buy survived and it was Highland Appliance who soon went bankrupt.

In other words, with Concept II Best Buy developed a superior position where they could win (a great space) and then quickly and aggressively did whatever it took to own that space before anyone else could get there (a great race). By doing both tasks, Best Buy won the game of musical chairs in its industry and reaped the rewards of being the leader of consumer electronics when all the money was being spent to convert from the analog to the digital era.

Sure, everyone knew that there were great rewards to be had if you were in the digital space when that conversion from analog to digital took place. But not everyone who wanted to take advantage of this opportunity succeeded. Best Buy succeeded when others failed because it worked faster, harder and smarter at securing the right position in the space (Concept II) and then did whatever it took to make sure nobody took it away from them. They found a chair to sit in and never let anyone push them out of the chair.

General Motors Example
An example in the opposite direction would be General Motors. In recent years, it was becoming apparent that the old automotive business model of owning a huge portfolio with lots of different brands was no longer the best place to be. The wise business move would be to sell off some the weaker brands and concentrate more effort on the stronger brands.

General Motors understood this, but they were slow in the race to execute the strategy. Compare their speed and aggressiveness in execution versus Ford. Ford acted quickly to sell off its Land Rover brand, which was going out of favor due to its focus on large, gas guzzling vehicles. As a result of acting quickly, Ford was able to exit the business while also getting some cash from the sale of the division.

By contrast, General Motors was slower in reacting with its large gas guzzling Hummer brand. By waiting longer, that gas guzzling segment became even less desirable. And Ford had already sold its Land Rover division to the best potential buyer for such a brand. As a result, General Motors could not find a buyer for Hummer and had to shut it down at a huge loss.

A similar situation happened with their northern European brands. Ford acted quickly and found a buyer for Volvo. General Motors was much slower and more timid in reacting and could not secure a buyer for its Saab division. GM had to shut it down for a loss.

Both Ford and General Motors saw the same good strategy of shrinking their portfolio. Both tried to execute that same “good” strategy. But because Ford was quicker and more aggressive, it was able to execute the strategy far more successfully than General Motors. Same strategy, but different results due to differences in speed and aggressiveness. Just as it takes speed and aggressiveness to secure a chair in Musical Chairs, it takes those same qualities to win in business.

SUMMARY
Strategic planning needs to be more than just identifying places where money can be made. It needs to also develop a path whereby its company can out-hustle the competition and survive the race to become one of the survivors. Great opportunities cause a large rush of firms who try to exploit it. Most of these firms will not benefit from the opportunity because they lose the race to become one of the few firms which can secure a “chair” in the industry. Slow imitators rarely achieve benefits as large as the quick and aggressive innovators. So it you want to win, not only find the right space, but find a way to win the race.

FINAL THOUGHTS
Musical Chairs requires many rounds before a winner can be declared. Just because you survive any early round does not mean that you will survive later rounds. The same is true in business. Don’t get complacent because of early success. This is an endurance race. You have to keep running.

Strategic Planning Analogy #280: Mother May I

THE STORY
When I was a child, one of the games we played was called “Mother May I.” In this game, one person (called “Mother”) stood facing away from a line of children. The one playing the role of Mother then chose a child (at random, or in order), and announced a direction. These followed a pattern, like, "Bobby, you may take “x” giant/regular/baby steps forward/backward." The child then responded with "Mother may I?"

At this point, Mother then said "Yes" or "No", depending on her whim, and the child complied. If the child forgot to ask "Mother may I?" he/she went back to the starting line. The first one to touch Mother won the game.

THE ANALOGY
The two most important things to remember when playing Mother May I are:

1) You cannot move unless you have permission.
2) If you forget to ask for permission, you have to start all over again.

These two points are also important to remember when developing a strategy:

1) Your strategy probably will not succeed in a space unless you have permission to be there.
2) If you do not ask for permission, the marketplace will punish you and you have to start again.

THE PRINCIPLE
The principle here has to do with the concept of permission. A strategy only works if there is cooperation between your company and its key constituents—the consumers, strategic partners and employees. If your key constituents do not think you have a right to be operating in that space (or in that manner), you will not get the needed cooperation. Therefore, a necessary element to success is gaining permission from your key constituents.

1) Permission from Consumers
Over the last 10 years, Seth Godin has written a considerable amount on what he calls permission marketing. His idea is that un-asked-for one-way advertising (from producer to consumer) is very wasteful. Instead, marketers should first get permission to speak before spouting their marketing message. The idea is to create a relationship, or dialogue, with the consumer first, in order to create credibility. Then, when you give your marketing message, it will be better received, because the customer gave you permission and asked for the message.

This is all very fine and good, but I want to take this to a deeper level. Getting permission to speak is only half the battle. You also need permission to change the mental model inside the customer’s mind.

Consumers have a mental model about how things work and how various brands perform. For example, let’s assume someone wants to buy a new vehicle. Their mental model of choices may go something like this:

“If I want a reliable car, I should get a Toyota; if I want a luxury car, I should get a Lexus; if I want great value, I should get a Hyundai; if I want a truck, I should get a Ford.”

Brands are quickly labeled and slotted into a particular mindset. This mindset is the lens through which they see the world. If you, the producer, make a marketing proposition which is contrary to that mindset, the customer may not give the permission for that proposition to enter their mind.

Ford has been trying to convince people recently that it is not only the place to go for trucks, but also for automobiles. Ford now makes fine automobiles, on par in quality to Toyota and Honda. Unfortunately, the old mental model is so strong that Ford is having difficulty getting credibility as a viable automobile choice. People are not giving Ford permission to enter that mental space in their mind. That space is already filled by Toyota and Honda.

Therefore, before Ford can convince you to purchase one of their cars, they must first convince you that they have a right (i.e., permission) to be considered in your mind as a viable automobile seller.

Similarly, Wal-Mart recently tried to be taken seriously as a source for fashion apparel. It set up a quality fashion design studio in New York. It took out ads in Vogue magazine. It had a fashion show during New York’s fashion week. All that effort failed, however. Wal-Mart was still not taken seriously as a place for fashion. The project was a bust and most of the initiative got shut down.

The problem was not quality. The problem was permission. The consumer would not give Wal-Mart permission to be in that space. It took decades of careful image crafting to get Target to the place where it was seen as a credible source for fashion. Wal-Mart tried to get there in one year. Consumers would not permit it. The mental mindset for Wal-Mart is “Lowest Price.” This is incompatible with fashion ads in Vogue. The mind would not let the message in.

2. Permission from Partners
This same principle applies to your relationship with your strategic partners. Cisco and HP have been strategic partners for a long time. The relationship has been successful for both of them. However, in the past year these two firms have been invading each other’s territory. Cisco has made devices which cut out HP and HP has made devices which have cut out Cisco.

Neither one asked the other for permission to do this. They just did it.

The companies claim that these are rational growth moves and that their partners should understand that and rationally still work together in other areas as they partnered in the past. Unfortunately, we are not 100% rational. Companies, just like people, have an emotional element as well. These emotions get upset when a partner invades their space without permission. They retaliate with products that invade the other person’s space.

I suspect that in a few years all of that great strategic partnering between HP and Cisco will be a memory.

3. Permission from Employees
I know a company where they used to value their employees highly. The employees were considered to be the most important asset and were treated as partners. Then there was a change in command. The new administration started treating employees as a horrible cost to be minimized. They did not ask the employees for permission to make this change. The employees resented this change.

As a result, many of the good employees left the company. The ones who stayed were less devoted to the company. Rather than volunteering to work hard 70 hours per week, they started working only 40-50 hours per week. If they were going to be treated as”just an employee”, the employees would start treating their work as “just a job”. Enthusiasm and morale declined. Productivity was ruined.

Be careful about taking employees for granted. If you act without their permission, they can make your life miserable.

SUMMARY
Just like the game “Mother May I”, if you want to move ahead, you need to ask for and receive permission. Otherwise, you will meet resistance. With customers, one needs to get permission to change mental mindsets. With partners and employees, one needs permission to change the status quo.

FINAL THOUGHTS
Getting permission takes time. It looks like a way to slow down a strategy. However, without permission the strategy goes nowhere. That’s even slower. So factor getting permission into your strategic timetable.

Strategic Planning Analogy #276: Bias to Stop

THE STORY
Ford invented the minivan, but refused to build them. Why? First, Ford was #1 in the sales of station wagons at that time. Ford feared that the minivan would cannibalize the sales on all those station wagons. Second, the truck division thought it might cannibalize some truck sales, as well.

Ford saw little benefit in spending all the money needed to gear up production for a new vehicle (the minivan) if all it was going to is steal business from their other profitable lines. Therefore, they did not introduce the minivan. It seemed like a wise financial move at the time. Why needlessly spend all that extra capital to get sales you already had?

Of course, when Lee Iacocca left Ford and went to Chrysler, he found himself at a company that was weak in the station wagon and truck businesses. There wasn’t much at Chrysler to be cannibalized by the minivan. Therefore, Chrysler introduced the minivan. It was a huge success, mostly at Ford’s expense.

Ford was correct about one thing. The minivan did make the station wagon obsolete. Ford lost nearly all of its station wagon sales. Too bad Ford did not factor in a competitive introduction of the minivan into their business model. In the end, Ford did not save the expense of introducing a minivan (as they had hoped). They had to do it anyway, as a response to Chrysler. However, because they let Chrysler get a head start, Chrysler got most of the benefit of the minivan.

THE ANALOGY
As this story illustrates, one can create logical arguments to kill a new project, as Ford did with the minivan. One can even back up that argument with solid financials. However, that does not always mean that the new project should be killed.

Logical arguments and financial models can be flawed. A natural bias to kill new initiatives can exist in an organization. This bias can cloud one’s judgment, leading to a flawed analysis.

Due to a bias towards past success, Ford failed to take into account the inevitability that station wagons would eventually become passé. By not proactively planning for their replacement, they allowed Chrysler to replace them.

Businesses need to be aware of the potential for this bias, so that they do not fall into the trap which hurt Ford.

THE PRINCIPLE
In the last blog, we looked at how a bias to “go” on new ventures can hurt a company. In this blog, we will look at how a bias to “no go” on new ventures can also hurt a company. We will look at the causes of the “no go” bias, how it can distort our analysis, and questions to ask ourselves in order to keep the bias from causing us to make the wrong decision.

1. Bias Source #1: Avoiding the Hammer
The old saying is that the hammer hits the tallest nail. If you stand out too much, you are vulnerable to attack. New ventures have high visibility and stand out. If they fail, you run the risk of being attacked. Their failure becomes your failure. By contrast, it is easier to hide in the bureaucracy of the established businesses.

2. Bias Source #2: Avoiding Accountability
If you say “go” and the new business fails, there is hell to pay, because a highly visible loss is right there on the books for all to see. However, if you say “no go” and the business would have been great, there is less of a backlash, because it is all subjective. Hence, if you want to avoid accountability for your decision, it is easier if you say “no go.”

3. Bias Source #3: New Game Threatens My Game
You’ve been working yourself up the corporate ladder playing by the old rules associated with the old way of doing things. The new ways could make your “game” obsolete. To protect your personal future, you need to protect the ways of the past.

4. Bias Source #4: Short-Term Pressure
There tends to be more pressure on hitting the targets for the current month or current quarter than for long-term profits. Since new initiatives usually have a near-term drain on profits, there is a tendency to put them off, so they won’t hurt near-term earnings.

5. Bias Source #5: Not on My Watch
The remaining tenure for most CEOs is relatively short—shorter than the time for a new initiate to have a positive impact. The leaders may be retired or have moved on by the time the new initiative pans out. As one CEO put it, “Why should I invest in something that hurts earnings on my watch, but provides benefits for my successor that he will take credit for?”

6. Bias Source #5: Fear of Cannibalization
As we saw in the story, new projects often cannibalize older businesses. The thought is that by avoiding the new businesses, we can protect the old ones while at the same time avoiding all that new investment.

These factors can cause a bias to say “no go” to projects which should move forward. They can even distort the financial analysis, to make “no go” look better than it should.

1. Distortion #1: Old Cash Flow Will Go On Forever
New initiatives are often compared to the status quo. If you assume the status quo will always be strong and healthy, then it is hard to justify change. However, it is a fact of life that all strategic initiatives eventually fail. Customer desires change and innovations from others change demand. Product lifecycles eventually reach maturity and decline. The “next big thing” eventually becomes “that obsolete thing.” 8-Track players were once the rage in music. Now they are junk.

The cash flow on the old business will not go on forever. If you don’t replace it, another company will. Either way, there is inevitable decline. Make sure you put it in the model.

2. Distortion #2: Things Won’t Change if I Don’t Change
Ford thought that if they didn’t build the minivan, the minivan would not be built. This, as we saw, was not the case. Innovation is going on all over the place in your industry. If you can see the potential in the new venture, so can others. Just because you like the status quo and don’t want change (because right now you are the leader) does not mean that everyone likes the status quo (especially the non-leaders). Change is inevitable. Either you can take advantage of it (by action) or be hurt by it (through inaction). Therefore, your modeling should assume changing conditions caused by others.

3. Distortion #3: Old Beasts don’t Need to be Fed
To keep older businesses vital, one needs to reinvest in them. For example, I know of a retailer who built a lot of stores in the 1970s and 1980s and then hardly ever reinvested in those locations. Eventually the stores looked rather shabby. In addition, over the next 30 years, those neighborhoods changed and became less desirable locations for stores. People wanted to shop the newer, nicer stores of the competition which were closer to their new homes, rather than drive into the dangerous inner-city locations where these old shabby stores were. By not reinvesting in the old business and refusing to relocate those stores to better locations, the company eventually went bankrupt. In the near term, those relocations looked more expensive than staying in the older locations. Over time, however, the lack of reinvestment killed the old business. Does your business model include reinvestments in the status quo? The old beasts still need to be fed, or they will die.

So how can we avoid this bias and resulting distortions? If helps if we ask ourselves the following questions before making a decision.

1. If you were assured of a promotion regardless of the success or failure of the new initiative would you still want to kill it? (This unlinks your fate from the fate of the project, so that you can look at it more objectively)

2. If near-term pressures were eliminated, what would you do? (near-term is biased towards status quo) Keep in mind that astute investors value your firm based on future cash flow potential, not history. If you can convince them that these are good long term investments, they will support you. It helps if incentive programs de-emphasize near-term and also reward good long-term decisions.

3. What if another company says “go” to your “no go” decision? Can you survive the impact to your core businesses? (This provides a more realistic way to evaluate cannibalization)

4. In your model, are you adequately feeding the old beast to keep it relevant or are you choking it? Either the modeling needs to include lots of cash to invigorate the old, or the future prospects for the status quo need to be significantly reduced. Make sure the residual value on the status quo does not overstate its potential.

SUMMARY
Since all current initiatives will eventually fail, there is a need to continually reinvent a firm with new initiatives. Otherwise, your company will fail when all the current initiatives fail. Unfortunately, it is often difficult to justify the cost of reinvention while the old initiatives are still cranking out healthy cash flows. This creates a bias to kill off new initiatives. The more we are aware of this bias, the more we can avoid its disastrous consequences.

FINAL THOUGHTS
Just as the station wagon did not live forever, it appears that the minivan is now in decline. Crossover vehicles are starting to take its place. And guess what? Ford has aggressively gone after the crossover business, because they do not have many minivan sales to cannibalize. By contrast, Chrysler has been slow to get into the crossover business, in large part due to not wanting to cannibalize the most profitable piece of their portfolio (the minivan). Times may change, but the mistaken logic appears to live on.

Strategic Planning Analogy #262: Blind Loyalty

THE STORY
I was listening to an interview with P&G’s outgoing CEO A.G. Lafley shortly after P&G acquired Gillette. Lafley was talking about how he uses all the P&G products at his home. He was excited about adding the Gillette products to the mix because they, too, were already products he used at his home.

Then he paused and remembered that he was currently using Edge shaving cream rather than Gillette shaving cream. Lafley then said, “Well, I guess I’ll be switching from Edge to Gillette shaving cream.”

Goody, goody…Gillette shaving cream has one more customer (Mr. Lafley), because he bought the company. I hope he has additional ideas for increasing share, since that plan (buying the products because you bought the company) is pretty limited.

THE ANALOGY
Lafley felt an obligation to always buy P&G products, for no other reason than the fact that he was CEO of the company. It became a knee-jerk reaction: if P&G owns it, then I have to buy it.

I guess that, as a leader, Lafley felt a need to show confidence in his products. He may have feared what would happen if word got out that Lafley used a competitor’s detergent. Would it damage employee morale? Would customers switch away from P&G products?

I don’t think that would have much of an impact in those areas. I remember when Brittney Spears was doing commercials for Pepsi and word got out that when she was on tour during that time, she had it in her contract that her dressing room would only have coke products. It didn’t seem to cause much of a stir. So I wouldn’t be too worried about that.

What I would worry about is how Lafley’s behavior may distort his business judgment. If you are blindly choosing P&G products based solely on whether your company owns them, then you are acting quite differently from the marketplace. Yes, perhaps a few P&G employees may switch to using Gillette products as a result of the acquisition, but for the rest of the world, the acquisition is a non-issue for brand choice.

The rest of the world needs a more compelling reason to choose your brand. Lafley’s behavior is out-of-touch with the market, which is far less loyal to the brand. This could distort his view of the P&G brand strength.

A similar situation can occur for strategists. If you become too strong of a company person, your perception of the company becomes ever more distorted relative to the rest of the world. You may give too much credit to your own brands and too little credit to the competition. This can cloud your strategic perspective. Your company bias can distort your judgment and cause you to make strategic errors.

THE PRINCIPLE
The principle here is that Blind Loyalty can blind you from the truth. How can you tell if you are superior to the competition if you never experience the competition? Sure, you can read market reports, but there is a lot to be said for personal experience.

I believe that blind loyalty can distort your perspective of the marketplace. Since strategies are designed to optimize performance within the marketplace, distorted visions of the marketplace can create useless, distorted strategies.

Think about people you have known who have gotten divorced. If you only talk to the wife, you will get a distorted view as to what went wrong with the marriage and probably put too much blame on the husband. Similarly, if you only talked to the husband, you would get a different distorted picture and probably put too much blame on the wife. Depending on which one you are most loyal to, you will have a different perspective on the divorce. If you want the truth about the divorce, you need exposure to both sides and a bit of objectivity.

Similarly, if you only surround yourself with your own products and with your own loyal employees, you will get a distorted picture of your brand. You need exposure to the other side.

I would have been more impressed if Lafley had said in his interview, “I’m a loyal user of Edge and I’m sure there’s a good reason for that. I need to find a way for Gillette to give me an even better reason to use them than Edge.”

Experience the Competition
I knew someone who had been an engineering executive at Ford. Ford put him in a program where he was given a series of competitor’s cars to drive. Every few months, he’d be given a different competitor’s car to drive as his personal car. For each of these experiences, he was to write up his impressions of the car.

This helped him to understand how the Ford engineering stacked up against the competition. He could learn from some of the superior things the competitors did. He could learn where Ford was weak. If he had only driven Ford cars during his employment, they would have missed out on these insights.

No matter where I have worked over the years, I have always told my wife to ignore that knowledge and shop as she normally would. I told her to make her purchase decisions based on what she thought was best, rather than who was paying my paycheck. Although I wasn’t always happy when she chose the competition, I was able to learn from her why she acted that way.

This helped to anchor me closer to the real world. I wasn’t distorted as much by blind loyalty. My perspective was not as overly biased in favor my employer to the point where I could no longer see all the warts on my company that the consumer could see. It made me a better strategist.

Watch Out For Brand Extensions
One place where this distortion causes many problems is in strategies surrounding brand extension. Your blind loyalty (and the blind loyalty of the rest of the decision-makers in your company) can cause you to overestimate the power of that brand. As a result, you overextend the brand into places where it doesn’t belong.

There’s a reason why most brand extension strategies turn out to be disappointments. It is because the rest of the world is not as enamored with your brand as you are, so you over-reach.

Watch Out for New Business Models & Fear of Cannibalization
You can also become so used to doing things the “company way” that you become blind to different business models. Kodak was blind to digital photography because of their infatuation with the “Kodak way” using analog film-based photography. The rest of the world didn’t care that much about Kodak magic moments. They just wanted the best way to get and share pictures. And as it turns out, the digital model was (for most) the superior business model. Blind loyalty blinded management to the need to quickly adopt a digital strategy.

A variation on this problem is cannibalization. You may become so loyal to legacy products that you do not want any type of strategy which will hurt those legacy products. At Kodak, it would have been difficult to get aggressive at trying to own the digital space without hurting the core legacy film business. The new business would have cannibalized the old.

Well guess what. Other companies got aggressive with digital and now Kodak is fighting for survival. Either you cannibalize your business or someone else will do it to you. If you do it yourself, at least you are left with a new, successful replacement business. If someone else does it, you are left with nothing.

The Solution
So what is the solution to avoiding some of these problems? First, you need a corporate culture that shuns blind loyalty and encourages more interaction with the competition. It needs to be okay to question the status quo and say an occasional nice thing about the opposition. The prized image should be that of an objective person, not an overly-loyal company puppet.

Second, spend more time listening to voices outside of your headquarters. Recent technological advances in Web 2.0 make this even easier than before. The more you get involved with your customers, the better your strategic perspective, provided you listen to more than just your most loyal customers. Listen to both the good and the bad comments.

Third, be skeptical. If we, by nature, have too much of a positive bias towards our own company, then we need to counteract that by being overly harsh in our strategic analyses. When estimating the likelihood success of your strategy, shy away from the optimistic scenarios. Be more realistic.

SUMMARY
Most leaders in a company have a natural tendency to develop a distorted positive bias towards that company. This blind loyalty can cause us to make poor strategic decisions. One needs to proactively take steps to counter this tendency, in order to help retain more objectivity.

FINAL THOUGHTS
There was an old saying that loyal IBM employees were so loyal that if you cut them, they would bleed in “IBM Blue.” I’d rather your blood was red, because then I would know you were alive and well (and useful).

Analogy #176: Get Human

THE STORY
Ever try to call up one of those “help” lines for a company and get a worthless computerized phone system? It happens to me all the time. The computer voice will start out by listing about 5 types of problems, and you are to press a number between 1 and 5, depending on which problem applies to your situation.

Almost 100% of the time, my problem doesn’t come anywhere near the five options they give. Therefore, I have no idea which number to press. So I press a number at random hoping that the next level will be more helpful. It almost never is.

Many times, I make these calls from my cell phone or a telephone where the touchpad is in the handset. Therefore, I have to take the phone away from my ear in order to press the proper number. By the time I get the handset back to my ear, I have missed the next round of instructions.

One of my favorite web sites is http://www.gethuman.com/. The primary purpose of the Get Human site is to help people avoid these computerized phone systems and get access to a real human being.

The site lists hundreds of companies and the tricks you have to do when phoning each company to avoid the computerized system and get direct access to a human being. In many cases, the site tells you to “ignore whatever the computer is saying” and press a particular sequence of numbers and symbols. Other times, it tells you to ignore everything the computer says and just wait. Eventually, you outlast the computer and it goes directly to a human. A third approach is that it tells you what to press at each prompt to take the shortest path to a real operator.

This past month, they added a blog feature to the site where people can share their horror stories about using these phone systems.

THE ANALOGY
I must not be the only person frustrated with the lack of help on these help lines, if there is an entire web site devoted to avoiding them. This brings up an interesting question—do companies realize how infuriating these calls can be for their customers? Do they realize how much ill will they can create with their customers?

Most of the time when we talk strategy, we talk about the big picture. We talk about large visions and elaborate positions versus all of the competition in the marketplace. These are all very important, because if you do not stake a claim to a winning position, you have very little chance of success.

However, staking a claim and keeping a claim are two different issues. You get to decide where you want to stake your claim, but the customer decides whether you have earned the right to keep it. If you disappoint your customers, they will pull that stake right out of the ground and throw it away.

In this day and age, direct customer contacts with a company may not happen very often. Your call center may be one of the few chances you get to make the right impression. If those calls turn into a nightmare for your customer (as they often do for me), then all of that fancy big-picture stuff may be for naught. That bad interaction my cause me to reject your firm entirely.

Therefore, strategies must be developed at two levels—the big picture and the little picture. The big picture is figuring out how you want to win the entire game. The little picture is figuring out how to win on every individual interaction.

THE PRINCIPLE
The principle here concerns interaction and transaction-based strategies. Sales do not miraculously appear all at once. Instead, they tend to come in small doses, a transaction at a time. The more successful transactions one has, the more income one receives.

If you blow it at the point of the interaction, there will be no transaction, and the income dries up. It’s as simple as that. Therefore, a part of your strategic planning needs to deal with ensuring that each interaction between the prospective customer and the company reinforce your strategic objectives.

In many ways, a strategy can be looked at as a series of promises to your customers. For example, if you are Disney, you are making a promise that the interactions will be wholesome entertainment for the whole family. That is why there was some outrage over the recent photos of Miley Cyrus in Vanity Fair magazine, which pictured this Disney Hannah Montana star in a less wholesome manner.

For a department store like Nordstrom, there is a promise of great quality, great selection and outstanding personal service. Many people are willing to pay a premium price for this promise. Yet, if the service at the store disappoints, the promise is no longer believed, and the strategy is destroyed.

American Airlines likes to tell people that “They know why you fly.” However, at the point of interaction this past month, when thousands of flights were suddenly cancelled, American made it clear that they really don’t get it after all. The promise vaporized.

Here are some questions to ask yourself to help ensure that the big picture strategy gets translated down to the interaction and transaction level.

1) What are the promises implied in our strategy?

2) What would the customer expect those promises look like at every point of interaction with the company?

3) How can we create a process which guarantees that the customer expectations are at least met (if not exceeded)?

4) Whenever we are making a change in the way things are done, will the customer perceive the change as bringing us closer or further away from our promises?

5) In a crisis mode, will customers see us as abandoning our promises?

6) How do we react when a salesperson lands a big sale, but does it in a way that destroys the strategic intent of the interaction? Do we reinforce bad behavior?

7) Do the people developing our customer interfaces (phone, on-line, etc.) understand enough of the big picture strategy so that they can ensure that the interface reinforces that strategy?

8) What do we reward people for? Is the quality of the customer interaction on that list?

9) Even for the people who do not have direct interaction with the customer, do they see themselves as a support team to help make the interaction better?

10) How do we handle mistakes made in an interaction with the customer?

11) What about the after-sale interactions the customer has with the product or service? Do these help or hurt their impression of the strategy? Remember, they may need to make another purchase later or talk to their friends who haven’t purchased yet.

Finally, we (as executives) need to ask ourselves how much we really know about our company’s customer interactions. In prior blogs, we talked about how important it is get firsthand knowledge about your company’s interactions from the customer’s perspective (see “Do You Do Breakpack” and “Stuffed Shirt”). Try to buy something off your web page. Go on a sales call. Try to complain on your help line. Better yet, spend some time on the other end of the phone listening to customer complaints.

Ross Perot was shocked when he found out that the directors at General Motors no longer bought cars and in some cases no longer drove them. They had no idea what customers had to go through to get a car repaired. Yet these directors had no qualms about making decisions for the automobile company. Out of touch directors lead to an out of touch company that lost a tremendous amount of market share.

You can’t fix it if you are unaware it is broken. And ignorance is no excuse.

SUMMARY
Although it is critical to get the big picture strategy correct, that work is worthless if the company cannot translate it into the right customer experience every time there is a customer interaction. A strategy is not just a theory. It needs to tie into the specific details of how the customer interacts with us.

In reality, our position is what the customer believes about us in their mind. If their experiences cause them to come to a different mental conclusion than what we desire, then we have failed.

FINAL THOUGHTS
Customer perceptions are formed based on many things. Impressions may be formed years before you get a shot at a face to face interaction. Consider the problems at Ford—they have achieved a quality level equal to Toyota, but are not getting credit for it. There is too much bad history to make that statement credible. There’s a reason why the old sayings about what FORD stood for were created by customers: “Found On Road Dead” or “Fix Or Repair Daily.”

Be vigilant in protecting your reputation. Once it goes, it is hard to get back. Grand strategies cannot make up for years of disappointing interactions. Fix the interactions first, and then you have a foundation to make the new strategy credible.

Stop Listening to Me

THE STORY
Auto executive Bob Lutz likes to talk about the disasters one creates when designing cars based on consumer research. Regarding the Ford Thunderbird, he said,

“Ford ruined the Thunderbird by taking [consumer survey] responses too seriously. The original Thunderbird was a sleek, zippy, tightly designed two-seater. Ford asked T-bird customers what they’d like more of: Would they like, say, a little extra room? They would. How about a back seat? You bet. So Ford introduced an “improved” four-seater (and later a four-door). The restyled car was no longer the sleek sportster that had first attracted drivers. It’s mystique paled, and what had been a unique addition to Ford’s line was now just another car.”

The larger, more boring Thunderbird sold poorly enough that it had to be retired.

When at Chrysler, Lutz saw this problem again. In the 1980s, the Chrysler sub-compacts were not selling as well as the Ford Escort. Chrysler asked the customers what the problem was. In Lutz’s words:

“By a vast majority, respondents said they would like the car much better if it were just a little bigger—say four inches longer on its wheelbase. Now, anyone even passingly familiar with the US auto market knows that most people buy subcompacts because that’s all they can afford, not because they have some warped desire to sit with their knees up around their chest. Thus, when asked what they’d like changed about their cars, it’s axiomatic that subcompact owners would like them bigger.”

According to Lutz, the Chrysler executives were so fixated on giving the customer what they wanted, that they embarked on a $170 million campaign to find a way to make their sub-compacts four inches longer and still sell them at the same low price. It never occurred to these executives that Chrysler already had popular cars that were four inches longer for which people were willing to pay a higher price. Eventually, Lutz had to put his foot down and stop the nonsense.

And then, there was the Edsel, one of the biggest design disasters in automotive history. Oh, by the way, it was also one of the most consumer-researched designs in automotive history. Consumers were given choices of many different types of designs on each part of the car. Then Ford took the winners of each part and put it all together. When all of the “consumer chosen” parts were assembled, the total design was a mess that consumers rejected.

THE ANALOGY
We live in a Web 2.0 world. Because the Web 2.0 provides unprecedented opportunities for two-way dialogue, companies are rushing to get consumer interaction—even moreso than in the heyday of Bob Lutz. It is not uncommon these days for companies to have their advertising designed by consumers or even have their products designed by consumers.

In fact, based on what companies are doing, you might conclude that the need for strategy in a Web 2.0 world is being made obsolete. Why develop strategies, when all you have to do is whatever the customer says?

Although it can be insightful to learn what customers are thinking, the examples in the auto industry above point out that if you put too much power in the hands of the customers, it can actually destroy your business.

Just because we have new web tools to better interact with customers does not mean that customers have suddenly gotten any smarter or more insightful. They still say some silly things that could get us into serious trouble. All these new tools merely do is make it easier to fall into the trap of listening too closely to our customer to our own demise.

THE PRINCIPLE
The principle here is that strategies should incorporate many issues which transcend the interests or opinions of customers. If you limit strategy to merely the level of consumer interaction, we can end up making some self-destructive decisions.

The weaknesses of relying too much on consumer input can be summarized as follows:

1) Consumers Don’t Care If Your Business Survives
2) Consumers Can Only Interact Incrementally
3) Consumers are More Interested in Being Polite than in Being Honest

Each of these will now be discussed in greater detail.

1) Consumers Don’t Care If Your Business Survives
One of the chief goals of strategy is to provide a path to long-term prosperity (or at the very least a path to cash out of the business well). Consumers do not typically care about these things. They don’t worry about whether investors (shareholders, banks, hedge funds, etc.) get a return on their investment or whether the employees have prosperous careers. They just want what’s in it for them. And if they are honest, that means they want it all, they want it now, and they don’t want to pay for it.

Very few businesses can develop a sustainable business model around those qualifications. And guess what…in most cases, the customer doesn’t care if you business is sustainable. There are usually enough options that they will just go somewhere else to make their demands.

So if you single-mindedly try to please the customer by giving them whatever they want, and ignore your other stakeholders, you will typically end up with an unsustainable business model.

2) Consumers Can Only Interact Incrementally
Even if customers did care about the long-term viability of your business, they do not have the proper perspective to make long-term decisions. They do not know what is technologically possible. They have full-time jobs and concerns of the immediate. Consumers do not spend 40 hours a week thinking about the potential for where your brand and where it could go in the future.

As a result, consumers can only react incrementally to what is in front of them today. In the case of autos, they may be able to tell you to make them a little bigger or put in more cup holders, but they cannot help invent the future of personal transportation. Nobody was clamoring for a minivan before it was invented. They only clamored for it after a business put it on the market.

Most great business ideas are transformational—upsetting current conventions by providing something completely different than what was in the marketplace. These came out of the minds of visionary business people, not consumers. Nobody asked for the transformational coffee phenomenon of Starbucks, but now they are everywhere.

At Sony, they are proud to say that nobody ever asked for any of those great transformational inventions they have given us over the years. Instead, Sony’s great inventions came out of a deep understanding of consumer behavior (perhaps knowing people better than they know themselves) and a deep understanding of technological possibilities (for which consumers are unaware).

Incrementally, a consumer can suggest a new coffee variation for Starbucks or a new feature for a Sony computer, but beyond that, they are typically not much help. And if your company stays at only the incremental level in its thinking, your company will be passed by from other firms who are thinking transformationally, and who end up taking your customers with them (even though the customers did not ask for the transformation).

3) Consumers are More Interested in Being Polite than in Being Honest
When consumers are asked their opinions, they want to be helpful, but certain biases tend to creep into their responses to cause distortions. For example, there is a bias for consumers to say they will buy your product in your survey at a given price even if they would not, because they want to please you and encourage you. People don’t want to appear to be cheapskates, so they will tell you they are more willing to part with their money for something than they would in reality.

To quote an article in the May 18, 2007 Wall Street Journal, “The moment you ask someone for their opinion I have created a bias because of the natural human instinct to please.” Bob Lutz puts it more bluntly when he says “consumers often lie—albeit for the noblest of reasons.” Lutz’s point is that we tend to give very rational answers when being surveyed, because that is the “responsible” thing to do. Unfortunately, our true behavior is more likely to be driven by emotions.

So even if the consumer has our best long-term interest at heart and thinks about transformational issues, they may still give us answers that do not reflect their true intentions.

SUMMARY
Although consumers can tell us a lot of things, they cannot tell us what our strategy should be. If we let too much consumer commentary affect our strategic decisions, we will most likely miss the mark and allow others to take our business away, because these firms give the consumers what they really want, rather than what they say they want.

FINAL THOUGHTS
Web 2.0 technology is a great tool, just as a hammer is a great tool. But to build your strategic house, you need more than a single tool; you need the entire tool belt.