Strategic Planning Analogy #498: Snapshots vs. Paintings

THE STORY

I recently got back from a combination trip to see my new grandson and a vacation.

I wanted a good picture of my grandson. To get it, I took a lot of pictures of him. Some of the pictures were pretty awful, but eventually, that process lead to getting a good photo of him (see photo above).

Afterwards, I went vacationing and toured some old houses. There were old oil portraits of people on the walls.  They may have looked fancy—even a bit regal—but I’d rather have the simple snapshots of my grandchild than any of those old paintings.

THE ANALOGY

In the business world, we have the option of building two types of planning processes—either one like the process used to create fancy oil paintings (like the ones I saw in the old houses) or like the process used to create digital snapshots (like the ones I took of my grandson). 

The painting process may create something worthy to display on a wall for generations, but it is usually time consuming, costly and inflexible. Those don’t sound like good qualities for a strategic plan. 

Conversely, taking digital snapshots is quick, inexpensive, and flexible. It may produce a few duds, but eventually you get some good photos in a very efficient way. Those qualities also sound good for strategic planning.

THE PRINCIPLE

The principle here is that the goal of strategic planning is not to create perfect documents and statements to proudly display on walls and bookshelves. The goal is to figure out how to move a company forward in an efficient and timely manner. To do so, we can learn more from the process I used to get a photo of my grandson than from the artists who made those old paintings on the walls of those old houses.

The Problems With Paintings

Oil paintings can look great on the wall and last for generations. The artist of great paintings can achieve great fame. And that can sound appealing. There is a certain appeal for planners to want to create plans great enough to “hang on the wall” for generations and give the planner fame and glory. But great plans should not be the desired endpoint; instead, the desired endpoint should be great companies. The plans are just a means to that greater end.

The important thing to remember is that you don’t need “perfect oil portrait” plans in order to effectively and efficiently move a company forward.  In fact, the desire for this perfection can actually be counterproductive. 

One of the problems with oil paintings is that they take a long time to create. Time is a precious resource in our fast-moving world. Time lost in perfecting a plan can become advantage lost to faster competitors. A “good enough” plan received in a timely manner is more valuable than “perfection” which comes too late to be of any use. Is your planning process geared more towards timely completion or excessiveness and grandeur?

Another problem with oil portraits are that they are posed. The people being painted have to remain in a stiff, usually unnatural position in an artificially positive environment.  And if the posing still doesn’t look good, the artist will alter reality to make the painting more flattering than reality.  The end result may be great art, but not an accurate accounting of reality.

Bad planning can fall into the same trap. The plan may try to place the company in the best light rather than show the harsh reality of the truth of what’s happening out in the marketplace. The most positive assumptions can be used. The plan may try to please the egos of the leadership rather than tell the truth they do not want to hear. Wrong strategic decisions are made, because judgment is clouded by unnatural flattery in the “posed” strategic plan.

Sometimes the flattering distortions are the result of trying to hit unrealistically high profit numbers with the plan. The only way to fit these numbers into the plan is by surrounding them with unrealistically optimistic scenarios, since you cannot get there just by incrementally tweaking the harsh reality.

The result is that the plan becomes a failure and the numbers are never achieved, because the plan was never achievable once reality overcame the false optimism posed in the assumptions.  It would have been better to paint the real picture and show that the desired profit numbers were not achievable. Then, you would be aware that radical change was necessary and you could take steps in advance to avoid the inevitable failure of the flattery approach.

Finally, oil paintings have to problem of being hard to modify once the paint has dried. We live in a dynamic world.  Adjustments are inevitable.  Is your planning process hard to modify once the ink has dried?  If the world changes shortly after the plan is put into play, do you have to wait a year until the next planning cycle to make adjustments?

The Benefits of Snapshots

Digital snapshots avoid a lot of the problems we saw with the painting approach.  They are fast and easy to create.  They capture reality rather than an artist’s distorted vision of flattery. They provide rapid feedback of what is happening. And it is easy to keep taking snapshots so that your latest picture is accurately telling you what is happening NOW.

What does a snapshot oriented planning process look like?  First, it gets out of the portrait studio inside the corporate offices and goes out into the marketplace to capture reality where money is changing hands. And it doesn’t care what camera the snapshots come from. It gathers impressions from social media, customers, competitors and a variety of other sources, so that the information is not a one-sided bias of “corporate-think.”

Second, snapshot planning is very experimental. When I was taking snapshots of my grandson, I tried all sorts of approaches to getting his picture.  Some of these experiments did not work.  But some picture-taking experiments were great.  The planning analogy is to do a lot of small experiments. Test hypotheses to see how well they fly out in the marketplace. The results of a test can often provide far better guidance for strategic decisions than having internal executives guess about what will happen in the real world.

Try things on a small scale. The disaster at JCPenney was not that CEO Ron Johnson tried something different. The disaster was that he did a full rollout before testing it.  There was little downside risk to my taking a bad snapshot of my grandson, so I could afford to try a lot of things before finding what worked.  Set up your tests in a similar manner, so that you do not risk much and can pull the plug early if it doesn’t work. That approach would have saved JCPenney a fortune.

Being flexible and experimental does not mean that your planning becomes random. This is not a process of just clicking a camera continually in random directions until you get a good shot. No, there still must be a focus to where you point the camera.

Winning strategies need to position your company in a place where is can bring a competitive advantage. There may be very few places where you can create that kind of advantage. Random acts are not the best way to find these places. First you need to understand the marketplace, what you bring to bear on the marketplace, and what others can do. This preparatory work helps you to know the general space where you are most likely positioned to succeed. Then you get flexible and experiment within that space.

The emotional connection between me and my snapshots was the fact that I wanted a record of my grandchild. Random photos of anything, or of other babies, would not have worked.  I needed to point my camera in the general direction of my grandson in order to get a satisfactory photo. In the same way, your plan needs to know the focal point. This provides guidance for the experimentation.

SUMMARY

Plans are not the endpoint, but a means to a greater end—the long-term improvement of the business. Therefore, rather than wasting time perfecting the plan, focus your effort on building a tool which quickly and effectively points to where success is most likely, so that you can win the race to finding the fortune that such a place offers.

FINAL THOUGHTS

You rarely see oil portraits of the young and unaccomplished. Instead, most portraits are of older people after they have made their great accomplishments.  They look backward at past successes rather than towards where future success will come. Planning processes which are too focused on the successes of the past (like oil paintings) will hang on too long to obsolete strategies and miss out on winning the battle for next big thing. 

Strategic Planning Analogy #469: Mirror, Mirror

 

THE STORY
I knew a woman who didn’t like the way she looked.  She wanted a quick and easy way to solve the problem…and she found one.

She took all the mirrors out of her house.

 

THE ANALOGY
Yes, getting rid of the mirrors meant that she could no longer see the way she looked.  And yes, by not seeing the way she looked, she no longer was reminded of the way she looked, so it did not bother her anymore.  But it didn’t change the way she looked.  The problem was merely avoided, not eliminated.

Company leaders often take a similar approach.  They are uncomfortable with their long-term prospects (or how to deal with them).  As a result, they only focus on what they are comfortable with—the near-term issues (the crisis of the day).  They never take the time to examine the firm with a look at the long-term.  The long-term views are eliminated like mirrors, so that you can no longer see how dire the future might be.

Although that may be the comfortable way to eliminate dealing with the issue, it doesn’t solve the problem.  It merely avoids the problem.  Eventually, long-term issues will catch up with you.  And if you haven’t dealt with them in advance, they can destroy your business.

 

THE PRINCIPLE
The principle here is that the future is will come, whether you are paying attention to it or not.  The more you pay attention to it in advance, the better it will be.

Back in the 1980s, Gary Hamel and CK Prahalad wrote an article for the Harvard Business Review saying that senior executives should be spending about a third of their time looking into that future mirror.  Instead, what they found was that senior executives were only spending about 3% of their time looking into that mirror.  I don’t think those numbers have changed significantly since then. 

The tyranny of the immediate always seems to win over gazing into the long-term.  And there is a serious price to pay for this.

Why ignoring the future is a mistake:

1) The Future Determines Your Valuation

The value of a company or business is not based on what happened in the past or what is happening now.  It is based on what will happen in the future.  Companies are cash flow machines and today’s value of the firm or business is roughly the sum of its future cash flows brought back at some discount rate.

Look at the social media firms like Facebook.  Their extremely high stock valuations cannot be justified by what is happening today.  They can only be justified by future expectations.

If you want a high valuation for your firm or business, then you need to have a compelling story about the future and future cash flows.  And you won’t have that story if you ignore the future and only concentrate on the here and now (by throwing away the long-term mirrors).

The question is not what have you done for me lately, but what are you going to do for me tomorrow.  And a great tomorrow won’t happen by accident.

2) Others Are Still Looking at Your Future

In the story, the woman no longer fretted about how she looked because she could no longer see what she looked like.  However, throwing out the mirrors did not stop others from looking at her.  And if they were turned off by her appearance, she would still have problems.  It could hurt her social life, hurt her career and lead to a less desirable life.

The same is true in business.  Consumers look at you; bankers look at you; private equity looks at you; parent companies look at you; clients look at you; vendors look at you; competition looks at you.  If they don’t like your future prospects, they can make your life miserable.  They will take away funding.  They will take away business.  They will assume you are a higher risk and charge you more for their services.  As a result, you will have even more near-term crises and more dire future prospects.

3) Others Are Preparing their Future

If everyone was equally blind to the future, we would all be similarly handicapped.  However, there are always those companies who seriously work to optimize their long-term prospects.  Their proactive approach will help define how the future unfolds.  And since they are working for their own advantage, the future will not unfold to your advantage.  You will become weaker as they become stronger.

Remember that if you don’t define a place for yourself in the future, someone else will define it for you…and you probably won’t like the results.

4) The Future is not Always Incremental

The future does not roll out as a smooth continuous line of incremental improvement.  Major disruptions can occur.  Just ask anyone in the analog business who got wiped out by the digital revolution (like Kodak, traditional newspapers, etc.).  So just trying to get better at the status quo will at some point break down.

So if your head is only looking down at what is in front of you today and all you are trying to do is make it incrementally better, faster, or cheaper, then at some point you will have the best, fastest, cheapest obsolete item on the market.

Only by looking to the future will you have the foresight needed to adapt to the non-incrmental change (which is inevitable)—hopefully with enough advance notice in order take advantage of the leap rather than be a victim of it.

So What is the Solution?

If top management has a little trouble finding sufficient time (or desire) to stare into the mirror, then someone else needs to be doing it for them.  That would be a key role of a strategic planning group.  By being freed a bit more from the tyranny of the immediate, they can spend more time looking into the mirror and pondering what the future looks like.  

Then, as a trusted advisor (and a bit of a nag), the strategy group can ensure that the voice of the future is at the table when decisions are being made.

 

SUMMARY
The future will come, whether we are ready for it or not.  And the future will be better if we are prepared in advance.  After all, that’s where today’s value comes from—our potential future prospects.  And if top management cannot carve out enough time to do so, then strategic planning can add significant value by doing much of it on behalf of senior management.  That alone should make every executive team want to have a vibrant strategic planning unit.

 

FINAL THOUGHTS
There’s an old saying which goes something like this:  “Blessed is the company which never does any long-term planning, for their inevitable demise will come as a complete surprise to them (and they won’t have wasted all that time in worry about it).”  A better blessing would be to properly prepare for the future so that you can be rewarded with long prosperity.  Look into those long-term mirrors.

Strategic Planning Analogy #439: The Certainty Within Uncertainty

THE STORY
Every so often, I’ll check out some of the online discussion boards on the topic of strategy. A common discussion topic is about whether long term planning is useful anymore.

The line of reasoning usually goes something like this: There is so much uncertainty in the world that the future is completely unknowable. Therefore, any projections into the future are worthless.

What I find interesting is this: These people seem so certain that the future is uncertain. So doesn’t that make “uncertainty” a certainty? And if that is the case, then there is a measure of certainty to the future (certainty about uncertainty), so that you can make long-range plans.

THE ANALOGY
The connection between what happens in those discussion boards and what happens in corporations is fairly straightforward. If you have a defeatist attitude towards the viability of planning, then you will not take planning very seriously. However, if you take a more positive approach, you can still extract significant value from the discipline.

Planning takes place within a context. You plan to win within the future marketplace (your context). Yes, it is true that nobody ever knows 100% of what that future will look like. But that is no excuse to abandon planning. There are still many certainties embedded in that uncertainty—enough so that smart people can take advantage of them in their planning.

And even knowing in advance that uncertainties will rule is knowledge you can use to develop your context. The “certainty of uncertainty” lets you know a lot about the type of world you are trying to win in. Just having that knowledge can make long range planning viable.

THE PRINCIPLE
The principle here is that there is a way to do effective planning in a world of uncertainty. Long range strategic planning can still put your company at a competitive advantage when the world is full of uncertainty. You are still better off doing the strategic planning than not.

1) Regardless of Infinite Causes, there are Finite Outcomes
Uncertainty means that a lot of different things may or may not happen. There are an almost infinite number of unknown situations that could occur. Since one cannot realistically create an infinite number of plans, this knowledge of near infinite unknowns can be intimidating to a planner.

But it needn’t be. Fortunately for the planner, even if there are an infinite number of unknown factors causing change in the world, there are a relatively small finite number of effects which these factors cause.

The most important thing is usually not the cause, but the effect, because the effect is what effects your ability to win.

For example, regardless of the cause, most of the effects fall into a few simple categories like:

a) Markets Open or Markets Close
b) Competitors Get Stronger or Weaker
c) The Economy Gets Better or Worse
d) The Current Business Model Becomes Obsolete (a Better Model or a Different Technology Comes Along)
e) The Supply Chain is Disrupted
f) Government Regulations Change the Rules

Since the effects make up a much smaller list, you can manage them from a planning perspective. For example, in a previous blog we looked at how Caterpillar built a strategic plan in advance for what to do when an economy suddenly turns bad (regardless of why). When the economic crisis occurred in 2008, they pulled out that plan and weathered the great recession better than they would have otherwise.

Similarly, when the automakers in Japan were hit in 2011 by the Tsunami in Northern Japan followed closely by the flooding in Thailand, supply chains were severely disrupted. It pointed out the flaw in the close-knit just-in-time supply strategy. A more flexible strategic approach to the supply chain would have been beneficial regardless of what caused supply chain disruption.

2) Not Everything in the World Can Change Suddenly
If uncertainties act slowly enough, there is time to make these unknowables “knowable” before it is too late. Things like world dependence on oil and climate change can change, but the transition will be over decades, so there is time to build strategic plans around them.

And then there are knowables like the age of a population. Aging is tied to the chronological year. People cannot suddenly age faster or slower than the pace of the calendar. Therefore, age-related strategies can rely on a relatively stable and knowable environment.

Similarly, future adult population growth depends upon births which have already occurred. This adds some level of certainty to market-sizing of adults.

And finally, many core attitudes don’t change much. Maslow’s hierarchy of needs stays constant over time. Regardless of what is going on around them, people want to feel loved, they want to feel a sense of self-worth, they want to eliminate guilt, and so on. Although the manifestations may change, the underlying motivations are fairly constant and can be counted on.

3)There Are Still Things Completely Under Your Control
Yes, there many things outside our control. But there still many things under our control. The question is how we should act regarding those things under our control. We have options and alternatives regarding those decisions. Some of those options and actions would create better long-term outcomes than others. Strategic planning can help determine which alternatives to take.

For example, we have control over where we spend much of our company’s time and money, where to invest our efforts. Companies do not have enough resources to do everything. Therefore, they have to make choices, make trade-offs.

In particular, we can choose which position we want to own in the marketplace. We can choose which attributes we want to win on. We can choose who we want to target and what the message should be.

In addition, we can choose our corporate culture and management style. To a large extent, we can even choose our business model. We can also choose where to focus our R&D efforts.

In other words, businesses still have to make a lot of decisions. Choosing one path means rejecting another. In the absence of a long range strategy, these decisions will tend to be more erratic and more contradictory. Instead of reinforcing each other to build a stronger long term position in the marketplace, they become almost random—swaying back and forth in the winds of the latest fad. Everyone (customers, employees, other stakeholders) becomes confused about what you stand for, so you end up standing for nothing.

By contrast, strategic planning helps get all those decisions aligned so that they reinforce each other. You can move more quickly, because everyone knows the general direction. And being able to move quickly is important in a world of uncertainty.

We do not have to be victims of our environment. We can take control. As Peter Drucker said, “The best way to predict the future is to create the future.” Spend some time making decisions to create the future you want.

Here’s The Action Plan
Given what has been mentioned, how should we use strategic planning in a world of so-called uncertainty? There are five steps.

Step #1: Choose
Choose your position, your point of differentiation, the place where you will win in the marketplace. Choose the general direction of your trade-offs. Take command of those things under your control.

Step #2: Institutionalize Flexibility
In a world where frequent small adjustments are necessary, one needs a flexible operating structure. Make becoming flexible a part of your strategy—flexible supply chains, flexible factories, less cumbersome decision-making procedures, flexible balance sheets, etc. The certainty of uncertainty makes this essential.

Step #3: Prepare for Scenarios
From the finite list of potential effects, build a list of scenarios. Then create the proper strategic response if those scenarios are to occur. That way, like Caterpillar, you can immediately respond in a rational and proper manner when a particular scenario comes to pass.

Step #4: Encourage & Discourage
Although there are uncertainties in how the future will unfold, that does not mean that we are helpless in our ability to influence that outcome. Through efforts like lobbying, public relations, charitable giving, investing, and other such actions, we can help influence the course of history. Rather than being a victim of change, we can help mold how that change comes about. Have as part of your strategy actions to encourage a future more to your benefit and to discourage a future less to your benefit.

Step #5: Keep Monitoring the Situation
If you assume that the world is changing all the time, then keep watching it so that you know what is going on as soon as possible. Frequent change is not an excuse to ignore the environment, but to watch it ever more closely. In particular, find the key leading indicators that scenarios are changing and monitor them on a regular basis. That way, you know when to

a) Pull one of those scenario plans off the shelf; or
b) Where to place your encouraging/discouraging efforts; or
c) When and how to make adjustments in order to stay on course.

SUMMARY
Just because there is a lot of uncertainty in the world does not mean we should abandon long-range planning. There is still a lot of certainty within that uncertainty, even if the most certain thing is the knowledge of continued uncertainty. Long range planning allows a company to rise above the seemingly random swings of change and stake out a position of strength. Rather than being a victim of the whims of change, you can take charge and even help influence how that change occurs (to your benefit).

FINAL THOUGHTS
Look at the world as being like an ocean constantly in change, and your company as a small boat. If you don’t want to be tossed around and out of control, you need an anchor. Strategic Plans can be your anchor.

Strategic Planning Analogy #382: Stop the Suspense

THE STORY
When I think of the word “suspense” I usually think of old Alfred Hitchcock movies or Stephen King movies/novels. These are people who entertain us by captivating our minds with the fear of the unknown. It’s the type of scary feeling which we enjoy.

What “suspense” does not bring to mind is accounting. Yet there is an accounting concept called suspense accounts. Suspense accounts are used as a temporary placeholder when you do not know the proper place for a journal entry. For example, let’s say your company receive some money, but you haven’t yet figured out why. You would debit cash and temporarily credit a suspense account until you know where the real credit would go.

Another example is using a suspense account to temporarily balance your balance sheet if it is out of balance and you do not know why.

Come to think of it, suspense accounts are also about experiencing the unknown, just like scary suspense movies. Unfortunately, this is not the type of scary feeling we enjoy. I’d much rather have a scary movie than a scary set of accounting books any day.

THE ANALOGY
Although we may enjoy surprises and plot twists in our entertainment, most of us try to avoid that in our business performance. Investors (for both Debt and Equity) love stability and predictability. Too many surprises scare them (too much suspense). That’s why stable and predictable companies can usually borrow at a lower rate and get find more people to buy their stock at a higher price.

In addition, most employees don’t like too many surprises about their job stability. Therefore, by creating a stable environment, you may also be better able to attract and keep great employees

Strategic Plans can be a useful tool in taking a lot of the fear and suspense out of how people view a company’s future. Just that alone makes strategic planning valuable to a business.

THE PRINCIPLE
The principle here is that strategic planning and strategic plans are great tools for minimizing suspense in business. We should use them to that end in order to reap the benefits.

There are four main ways in which strategic plans and strategic planning can help take the suspense out of business.

1. Minimizing the Unknown
One of the great benefits of a strategic planning process is that it gets people to think about the future long before that future is a reality. The more time you spend pondering the future before it arrives, the more prepared you are for it when it arrives. It is no longer a surprise.

A good strategic planning process should use some of that time to gather “facts” about the future. Although we can never understand with 100% certainty what the future holds, we can study trends and other environmental factors to better understand what the future will likely be.

Strategies are played out in the context of the future. The better we understand that context, the better we can design the strategy.

There are lots of ways to gather these “future facts.” You can purchase insights from experts in the field of futurists and trend watchers. You can have an internal strategy team conduct a lot a research (primary and secondary). You can draw from the expertise of your network of employees, customers and suppliers. You can go out to the edge of society where trendsetting typically occurs and see what they are up to. Or you can do a combination of these or other approaches.

The important thing is to get smart about the future, so that it more known and less surprising.

2. Minimizing the Uncertainty
Even after gathering a lot of “future facts”, you will still not be able to predict the future with 100% accuracy. Even so, you can still eliminate a lot of the suspense around the remaining unknown by preparing for multiple outcomes.

Through strategy tools like scenario planning or real options, companies can build multiple potential outcomes into their view of the future. By anticipating these various outcomes in advance, one can prepare the proper strategic variations for each scenario.

If you have prepared an answer in advance for each of the likely scenarios, you can have high confidence in your future performance even if you have low confidence in any particular scenario occurring. In other words, even if the future is uncertain, your strategic path can be certain if it includes answers for addressing the uncertainty of multiple scenarios. The unknown is a lot less scary if you are ready for a variety of potential “surprises.”

3. Smoothing the Bumps
Every strategic initiative has a life-cycle. There is a growth phase, a maturity phase, and a decline. The problem with many companies is that they do not adequately prepare for these transitions from one phase to the next. As a result, they end up with a trench of unstable performance—a period of strength followed by a period of decline followed by a slow ramp up to something else followed hopefully by another phase of strength (see chart).



That’s a lot of suspense. How low will the decline go? How soon will they find a replacement strategy? Will the replacement strategy succeed? If so, how long will it take? This is one of the problems Kodak is facing. They waited until analog imaging was virtually dead before becoming aggressive in digital imaging. There is much suspense over whether they will survive the trench. The company may end up dying with the death of the old analog business.

A much better approach is to anticipate the decline of the current strategic initiative and start building the replacement strategy while the current strategy is still strong. That way, by the time the old strategy starts declining, you already have a strong replacement. There is no trench of suspense in this approach. Instead, performance is relatively stable (see chart).



Best Buy has a strong history of using this approach. They aggressively go after the next new technology before the old one is obsolete, so that they can seamlessly move from strength to strength.

Strategic planning plays a role here by anticipating the future so that the trenches can be avoided. It forces the discipline of building the replacement strategies in advance.

4. Communicating Confidence
Plans should not be a kept a secret. They should be shared widely with employees and other key stakeholders. The more your employees and investors see and understand your strategy, the more confidence they will have in your future. And the more confidence they have, the less scared they will be about your future prospects. And the less scared they are, the more you will be able to achieve those benefits mentioned at the beginning of the blog. By contrast, if you are silent about your plans for the future, people will tend to think the worst and become even more afraid.

Strategic plans are a great promotional tool to ease the fears of your stakeholders and create confidence. Don’t be afraid to take advantage of this.

SUMMARY
Suspense and fear are enemies of a company. They can increase your cost of capital and make it harder to get and retain great employees. To ease the fears and make the future less scary, use strategic planning to a) learn more about the future, b) create contingencies for the unknown, c) smooth out the bumps in strategic transitions, and d) communicate confidence in the future by having a plan for it.

FINAL THOUGHTS
Keep your suspense at the movie theater, not in your business.

Strategic Planning Analogy #373: Value is in the Context

THE STORY
A couple of years ago I put together a wish list on Amazon.com so my family would have some ideas about what to get me for gifts (at their insistence). One of the items I put on that list was a book of comic strips from one of my favorite comics.

Recently, my wife bought me a copy of that book. I was enjoying the comics. The note from Amazon said it was a used copy of the book. I assumed that meant that my wife got the book at a discounted price, since when I put the book on my Amazon wish list, used copies were selling for about $5.. Thinking that the book didn’t cost much, I found myself enjoying the value of all the jokes in the comics. What a bargain!

Halfway through reading the book, my wife informs me that she had to buy the book used because it was out-of-print. It was so scarce, that she had to pay $150 to buy the book, a very steep premium over the original list price.

Suddenly, the jokes in the remainder of the book didn’t seem funny enough to justify the price. The enjoyment value to me dropped considerably.

I guess I should have checked how much the price of the book had changed between the time I put it on my wish list (and was still in print) and today (when it was out of print).

THE ANALOGY
Strategic planning has a lot to do with choosing among options:

a) Should I buy company A or B?
b) Should I sell division C or D?
c) Should I increase or shrink investment in product E?
d) Should I pursue opportunity F?

In making these choices, we tend to rank order the options in terms of value and then choose the option(s) with the best value (adjusted for risk tolerance).

As a result, the level of success in strategic planning has a lot to do with how well one places values upon the various options. If you place the wrong values on the options, you will make the wrong choices.

At first, one might think that value is based solely on what you are getting, since that is what you are buying. For example, this line of reasoning would say that the value of a box is equal to the value of the contents of that box.

Yet, this did not appear to be the case with my book of comic strips. The quality of the humor in the book stayed constant over time. The jokes in the book didn’t change. The number of pages in the book didn’t change. Yet the price of the book fluctuated wildly. Some paid about $20 for a new copy of the book. Some paid about $5 for a used copy of the book. Others paid about $150 for a used copy of that same book (30 times more than the $5). Today I checked and Amazon is trying to sell the book for over $700 (140 times the $5). Obviously, the value of that book is not based solely on adding up the intrinsic value of each joke within the book. Something more is going on here.

If a little book of comics can fluctuate in value by so much, even when its contents are easily comprehended and do not change, then it shouldn’t surprise us that values on our more complex strategic options can also vary wildly. Like that book, more is going on in determining the value of these strategic options than just looking at the contents within that option. If you only look at the contents of what you are getting, you may value the option improperly.

And just because some people may be willing to pay as much as $700 for that book does not mean that it is worth $700 to everyone. The proper question is not “What is the book worth?” That question mistakenly assumes that value is based on something constant—like the constancy of the contents of the book. However, the value has more to do with the user of the book (an external factor) than the content of the book (an internal factor). Depending upon the user, you will get a different value for the book.

So instead of asking “What is the book worth?” (a question which has no single answer), we need to ask “What is that book worth to me?” This latter question may require a more detailed analysis of me than of the book.

THE PRINCIPLE
The principle here is that values need to be computed within a context. If you only look at the contents, you will come up with the wrong value. To get the proper value, one must also factor in the context in which the contents find themselves. For example, a bottle of milk within the context of a refrigerator is worth more than a bottle of milk under a heat lamp. The contents are the same—milk. However, the refrigerator keeps the milk from spoiling, so it makes the milk more valuable.

In particular, there are three types of context which should be included in your valuation analysis.

1. The Context of the Marketplace
One of the great contributions to strategic analysis was Michael Porter’s Five Forces. The premise behind this concept is that a strategic option’s value changes depending upon five forces external to the contents of the option. These five forces are:

1. Bargaining Power of Buyers
2. Bargaining Power of Sellers
3. Threat of Substitute Products or Services
4. Level of Rivalry Among Current Industry Participants
5. Threat of New Entrants into the Business

For example, when my book of comics was still in print there were many sellers of many copies of the book, so the Seller’s power was low (and the price of the book was low). Once the book was out of print, there were fewer copies for sale, increasing the bargaining power of the Seller, causing the price to shoot up to over $700.

Therefore, when valuing a strategic option, one must not only value the contents, but also the marketplace in which the contents operate. Otherwise, you will miss out on the impact of these five forces upon the value. And in most cases, these five external forces have far more to do with the real strategic value than an intrinsic evaluation of the internal contents. The market determines the value, not the contents. Ignore these five forces at your own peril.

2. The Context of the Recipe
By itself, the desirability of flour as a food is not very high. If you don’t believe me, try to eat a spoonful of plain flour. It’s awful. However, if you put that flour into a recipe for bread, its desirability as a food goes up. And if you put that flour into a recipe for cake, the desirability goes up even further. The point here is that the value of an ingredient (like four) changes depending upon the context of the recipe.

In addition, if you are missing some of the ingredients for your recipe, it impacts the value of all the other ingredients. For example, if I have all of the ingredients needed to make a nuclear weapon except one, I really do not have a nuclear weapon, so all of the ingredients I do have are fairly worthless. Until I get that last ingredient, I have nothing. But once I get that last ingredient and make the bomb, I have created something of great value. So how much is it worth to me to get that last ingredient? How much am I willing to pay to complete the recipe?

Great strategies are like great recipes. They take a number of strategic components (ingredients) and add them together in such a manner as to create a finished product worth far more than merely the sum of the parts. Apple is a great company because it has a great recipe: cool products, with cool features, with tons of cool apps, sold in a cool way, from a company with a cool culture and a cool leader. The value lies in the way all of this seamlessly works together. Take away the ingredient of the cool apps and the value of the iPhone drops dramatically. Or a great app store without a cool device for the apps to play on isn’t worth much either. You need the whole recipe to create the optimum value.

Therefore, when creating your strategy, keep in mind the context of the recipe. First, make sure your strategic plan has a greater recipe. If all you have is a collection of individual ingredients (or businesses) working in isolation, you haven’t created much value. For a strategy to create great value, it must end up converting those ingredients into a finished, integrated plan with a value worth well more than the sum of its parts.

Second, don’t value the strategic options in isolation. Think of their impact on the value of the entire recipe of your strategic positioning. Your greater recipe helps determine how much value each option is worth to you. Just as steel is a more valuable ingredient to an auto maker than it is to cake baker, some strategic options will be more or less valuable to you depending on your recipe. Make sure you understand what ingredients make your recipe the best.

Third, make sure your strategic plan includes all the ingredients necessary to create the finished strategic product. Be willing to pay extra to get the last missing component.

3. The Context of Time
Things change over time. These changes can impact value. For example, the value of that book of comics changed when the book shifted from being in print to being out of print.

Never assume a constancy of value. The power of the five forces can change over time. Your recipe can change over time. Consumer interests can change over time. Products and industries move through lifecycles, where each phase (introduction, rapid growth, maturity, & decline) impacts value. Things which used to have a lot of value in the past may have very little value in the future (and vice versa).

Strategic planning is supposed to be maximizing the longer-term interests of the firm. Therefore, when making valuations, be sure to look at those values within the context of the future, which is where the strategy is going to be operating. Don’t be afraid to radically change your portfolio in order to optimize the times. The single most important factor to the long-term success of GE has been its willingness to add and subtract to its portfolio in order to stay relevant to the changing times.

SUMMARY
The true value of a strategic option usually has more to do with factors external to the option than factors internal to the option. Therefore, make sure you consider external factors in your evaluation. This would include externals like Porter’s Five Forces, the context of your Strategic Recipe, and the context of Time.

FINAL THOUGHTS
After finding out how much the price of that book had changed between the time I put it on my wish list and the time my wife bought it for me, I decided I needed to go back and monitor that wish list more frequently. For the same reason, it’s probably a good idea to go back and monitor the values of your strategic portfolio on a regular basis as well. Otherwise, you may not see when the values change (and they will change).

Strategic Planning Analogy #357: Crawling Backwards

THE STORY
Back when my son was a baby, he learned to crawl in only one direction—backwards. This type of crawling allowed him to move a bit, but since his eyes were facing in the direction he was leaving rather than the direction he was going, he kept bumping into walls. By not being able to see where he was going, he never got to anywhere he wanted to be.

We hated to see him suffer so much, so my wife and I came up with a plan. We would hold out in front of him some of his favorite food when he was about to crawl. The appeal of the food was so great that he eventually learned how to crawl forward in order to get to the food.

THE ANALOGY
It’s hard to get where you want to go when you are moving in the direction of your butt instead of the direction of your eyes. Like my son, when you are always looking backward, you tend to run into walls.

It seems like a lot of businesses have learned to move like my son did. Their eyes are focused on where they have been rather than where they are going. The majority of their time is oriented on the past rather than the future. As a result, instead of quickly rushing to a glorious future, they end up bumping into walls. Their prospects die along with the death of dying past.

THE PRINCIPLE
All strategic initiatives eventually fail. Even the great ones.

Great strategic initiatives are ideally suited to their environment. However, the elements of the environment are in constant motion. Consumers change, technology changes, competition changes, government regulations change, and so on. Strategic initiatives that were once ideally suited for the environment will get of sync with the environment if they do not adapt to these changes. Eventually, the changes will be so large that even previously great strategic initiatives will fail.

Therefore, if you want to continue to be successful in the future, you need to anticipate the changes the future will bring. And you will not be able to anticipate the future if all you think about is the past.

You may not think you are spending too much time on the past, but consider the following:

1. Finance
The purpose of accounting is to accurately represent in numbers what has happened in the past. Although this is necessary to do for taxes and government regulations, it has almost nothing to do with preparing one for the future. Accountants use the word “closed” as in “We have closed the books on the prior quarter.” That door to the past is shut…finished…closed. Quit opening it all the time.

How much time do you fret over the preparing of those accounting financials? How focused are you on having discussions and giving presentations based on those numbers about the past? How much of your management time is devoted to criticizing or praising people based on what happened in those numbers from the past?

If you want to dwell on financials, try focusing on future cash flow opportunities rather than past accounting performance. After all, stock prices are based on what people think of your future cash flow prospects. Think like they do. Put your eyes on the future rather than the past.

2. Growth
Businesses progress through various lifecycle phases, from introduction to growth to maturity to decline. Each phase requires a different type of strategic initiative. If you do not properly transition your strategy for these changes, you may not successfully progress to the next phase (and die prematurely).

As I’ve said many times previously, managers seem to love the growth phase. There is a tendency to want to perpetuate that phase as long as possible. Rather than looking forward to maturity, they keep looking back at the glories of growth.

This can cause many problems. First, maturity tends to be the most profitable phase of the lifecycle. Why do you want to postpone the most profitable phase? Second, if you keep pushing a growth-based strategy on a business that is no longer in growth, you will cause numerous problems. You will over invest in infrastructure and capacity, wasting a lot of money. You will set goals that are unrealistic, causing perpetual disappointments.

If you want growth, the way to get it is not by overinvesting in a mature business (looking backwards). It is by looking forward to brand new opportunities to provide growth that the mature business can no longer produce. Use the profits of maturity to fund the next cycle.

3. Efficiency
A lot of what businesses focus on is based in a desire for greater efficiency. In the name of efficiency we get standardization, benchmarking, ISO certification, Six Sigma and so on. At first, all of this sounds pretty good. Unfortunately, almost all of the tools used to become more efficient have the unwanted side effect of locking your business more tightly to the past.

Benchmarking chases after imitating where others have been. You cannot move ahead of competition if you are always chasing them via benchmarking. You cannot set the new standards of the future if you are focused on benchmarking the processes and the procedures of the past.

The problem with setting standards and going after ISO certifications and Six Sigma answers is that they get very rigid. You are locking the business into one way of doing things. Tolerance for deviation and experimentation goes away in the name of efficiency. Although those standards may have been ideal at the time they were established, they will not be ideal forever. Locking into the process of the past lock you into a mental mindset of the way things need to get done. Radical new approaches and different business models are stifled, because they do not fit the mold of the rigidness put in place in the name of efficiency.

The ideal process for one type of strategic initiative may be a horrible process for a different type of strategic initiative. For example, Apple built a successful business model for digital music by ignoring virtually every standard in the entire music value chain. It could do this because it was not locked into the old standards which were caused the analog music firms to bump into walls. The analog companies had perfected the obsolete and could not psychologically abandon it the way Apple did. They were crawling backwards while Apple ran past them to the future.

If you want a glorious future, you need to embrace some experimentation and deviation. Cultures like a Google and 3M encourage lots of experimentation. This leads to new opportunities. Remember, the ultimate goal is not to perfect efficiency at what you are doing today (perfecting the obsolete), but to do the right things for tomorrow in a non-wasteful manner.

SUMMARY
There are some benefits to accurate accounting, a desire for growth, and a pursuit of efficiency. If you are not careful, however, a single-minded pre-occupation with these concepts can lock you into the past and make it more difficult to see into the future. In finance, balance the backwards look at closing the books with a forward look into future cash flow management. In seeking growth, look forward to new growth opportunities rather than trying to get unrealistic growth out of a mature concept whose growth days are past. In the pursuit of efficiency, don’t lock yourself into rigid procedures that make it impossible to adapt to the new realities of the future. Leave room for experimentation.

FINAL THOUGHTS
In the story, we got my son to quit moving backwards by providing an incentive which made moving forward a lot more desirable (tasty food). If you are having trouble getting your firm to look forward, perhaps you need to do a better job of making a future orientation look more desirable as well. You have to make pioneering into the future seem more pleasurable than nostalgia about the past.

Strategic Planning Analogy #316: Use Your Gut

THE STORY
Back in 1983, Howard Schultz traveled to Italy. While there, he took part in the local culture of the Italian coffee bar. While spending time just sitting at the coffee bars and soaking up the cultural experience, Howard had an inspiration. Howard believed that Americans would become just as captivated with this Italian coffee experience as he was.

The idea was to design a “third place” for Americans, somewhere between home and work. It would be a place for conversation and a sense of community. And, yes, a place to buy quality coffee at premium prices.

When Howard got back to the US, he started a coffeehouse, called Il Giornale. In 1987, he purchased Starbucks to further his vision.

Apparently, Howard’s gut instinct was pretty good. There are now more than 15,000 Starbucks in 50 countries. Annual sales are in the $10 billion range. That’s a lot of coffee.

THE ANALOGY
If Howard Schultz had done a lot of research into coffee facts back in the early 1980s, I don’t think he would have gotten much support for his vision. Price was one of the main drivers of coffee purchases, with a constant price war going on in the supermarkets between the top brands. Premium-priced quality coffees in the US hardly existed, and there was not a strong clamoring for it, either.

Nobody was really clamoring for a “third space,” either. Convenience was the driving force, as people were looking for ways to do things faster and easier. The idea of going out of your way to get a slow coffee experience would have sounded insane to most people at the time.

Seeking community? The 1980s were a key time of people moving out into the suburbs to escape interaction and hide in the comfort of their suburban home.

Young adults, a key Starbucks segment, at that time were into drinking colas, not coffee. Coffee was seen as that boring drink that old people consumed. And the last thing the youth wanted was to behave like old people.

If you were to have added up all the facts, the Starbucks vision would have looked like a real loser. Yet it was just the opposite.

Howard Schultz’s intuition, however, could envision something beyond the facts. This intuition was more valuable than the facts.

In the business world, strategic decisions are being made all the time. Usually, these decisions are made based on a blend of facts and intuition. Most of the current business literature praises fact-based decision-making and downplays the role of intuition. However, as we can see in this story, transformational strategic decisions like Starbucks often need to rely more on intuition, because the facts of the day are all pre-transformation.

It is like trying to measure the wingspan of a butterfly while it is still a caterpillar. The caterpillar has a wingspan of 0, because it is still in the pre-transformation stage. The wings do not come until after the metamorphosis—when the caterpillar turns into a butterfly. Rejecting a caterpillar’s eventual flying ability based on pre-transformation factual measurements will lead to the wrong conclusion—that this animal will never fly.

Intuition is needed in the pre-transformation stage, in order to envision a post-transformational world (because you won’t see it in the pre-transformation facts). Like the pre-transformation caterpillar, “facts” would have lead people to believe that Starbucks wouldn’t fly, either. And they would have been wrong.

THE PRINCIPLE
A recent article in the McKinsey Quarterly was titled “Strategic decisions: When can you trust your gut?” The article was in interview with Nobel laureate Daniel Kahneman and psychologist Gary Klein.

This article tended to downplay the importance of gut intuition. It was considered to be a tool fraught with many perils—one to be used very minimally, because it was not very reliable. In fact, it was downplayed so much that the interviewer had to ask if there were ever situations when intuition could be trusted in the business world.

Gary Klein responded that intuition is best suited for situations with high predictability. He continued to say that in very turbulent situations there is no basis for intuition.

At first, this sounded very logical to me. But then I started thinking about examples like Starbucks. Eventually, I came to the conclusion that often the principle should be the exact opposite of what Gary Klein said, especially when it comes to major strategic decisions.

During times of high stability and high predictability, facts are probably at their highest level of relevance. You know exactly how to interpret the facts, because the future environment is virtually identical to the environment in which the facts are collected. You can trust the “facts” of customer behavior and customer research more than at any other time, because behavior is relatively stable and there is no turbulence to befuddle the consumer opinions. And because the management has already successfully acted in this environment, they will know exactly what the facts imply for their business. Therefore, stability is the best time to rely on the facts.

It is during times of turbulence when facts are the least reliable. Conflicting reports may be coming in. The “facts” may predate the latest turbulence and be obsolete or irrelevant. Customer opinions may be worthless because they applied to an older context. Customers may have no idea how the turbulence will affect their long-term future behavior, so they cannot give you accurate insight. Today’s “facts” cannot tell you where the environment will end up when the turbulence finally reaches a new level of stability (like trying to measure butterfly wings on a caterpillar). Therefore, since facts are at their lowest level of reliability during turbulence, one needs to rely even more on intuition in order to make sense about what is going on.

This is especially true when you are trying to create a transformational strategy, like Starbucks. In essence, transformation strategies are trying to take a stable environment and intentionally inject turbulence into it. The idea is to intentionally upset the status quo in order to create a new environment more favorable to your company.

Great strategic moves often try to re-write the rules of the game. Starbucks re-wrote the rules of how we view the role of coffee in our life. Apple re-wrote the rules on how we interact with people, information and entertainment. Linked-in has re-written the rules of how people find jobs. Social networking sites have changed the rules on how people think about their privacy.

I enjoy watching old movies made before the digital revolution. It is funny to see people driving around town looking for a pay phone, because cell phones weren’t invented. Housewives slave for hours to make dinner, because there are no microwaves or fast food restaurants. People have to wait until they get tomorrow’s newspaper in order to know what is going on in the world. It is difficult today to even imagine living like that anymore. Similarly, it would be difficult for people of that time to imagine the lifestyles we have today. Mere facts are not very useful in transformational situations like this. Instead, you need the intuition of visionaries—people like Howard Schultz.

Peter Drucker used to say that the best way to predict the future is to create the future. In other words, the more you take control of your destiny and proactively work to write the rules of the future, the more likely you will know what the future will be. Howard Schultz did not wait for the coffee revolution to occur before jumping in. Instead, he proactively created the coffee revolution. He created demand that did not before exist through his strategic actions. He made the old facts obsolete by creating a new world.

Similarly Steve Jobs did not wait for the digital music revolution to reach stability before jumping in. Through the iPod and iTunes, he invented the new reality that people flocked to. Through intuition, he envisioned a future and made it happen. Steve Jobs didn’t look at the facts to see what the future was evolving into. Instead, he envisioned a better world and made it happen, regardless of the facts.

SUMMARY
Contrary to popular opinion, turbulent times may be the best time to ignore the facts and rely on creative intuition. This is even more true when you are intentionally trying to upset the status quo and proactively re-write the rules of the future in your favor.

FINAL THOUGHTS
Here’s the real shocker. If it weren’t for intuitive visionaries like Schultz and Jobs, the world would have evolved differently. There might not have ever been a coffee revolution or an app store for smart phones without them. The facts at the time would have been identical. Yet the outcomes would have been different. The intuition of visionaries had more to do with how these markets developed than the facts of the moment. Think about that next time people are telling you to reject intuition and stick to fact-based decision-making.

Strategic Planning Analogy #311: What’s Next?

THE STORY
Years ago, I had to make a pitch to some senior executives in order to get funding approval for a new retail concept. I thought I was well prepared for any questions the executive team might ask. One of them, however, asked me a question I was unprepared for.

He said, “I refuse to fund this new retail concept until you can tell me what concept will come next that will eventually make this new format obsolete.”

Since I had assumed that this new retail concept probably had at least a couple of decades to go before obsolescence, it never occurred to me to worry about its end when I was making a pitch for its beginning.

THE ANALOGY
No business environment remains stable forever. Things change. New concepts come; old concepts go away. Business models which once were perfectly suited to the market eventually fall out of favor. Change is inevitable.

Although I think the executive in the story was a little extreme, he did have a point. He wanted to make sure we were preparing a retail format that was designed to withstand the inevitable future change. If we only design to optimize today, we may be hastening our demise.

In particular, this old executive had a theory about retail based on years of observation. In most cases, he saw new retail concepts as appealing more to a niche when they start out. Eventually they gain greater acceptance and a broader appeal. This allows them to expand their offering.

Unfortunately, he also observed that these new niche concepts tend to start out building small stores—only big enough for the small niche of customers and products. Later, when the appeal broadens, those initial stores are too small to handle the added traffic and added merchandise categories. The stores need to be torn down and replaced with larger ones. This is a very costly adjustment.

His theory was that if you assume that eventually the appeal will grow and you can eventually sell more, build the bigger store today. That is a much more cost effective approach than to start with the ideal store for right now and then be too small in the future. Therefore, when this executive was asking me that question, what he really wanted to know was whether I was designing a large enough store to handle the long-term potential.

This approach applies to more than just new retail formats. With almost any business model, there is the risk that if you try to make it perfect for today, you are sub-optimizing the full life of the business. It is better to build a business model which optimizes the profit potential over the life of the project than to make it a little bit more profitable today and forgo much of the long-term potential.

Trying to squeeze out that last extra drop of profits today may close the door to many buckets of future profits when the market changes.

THE PRINCIPLE
The principle here is that strategic plans need to prepare not only for the world as it is today, but also for the world as it will become. This may require strategies and near-term tactics that walk away from some current profits in order to reap even more potential later.

Having the ability to turn down some near-term profit in order to preserve that long-term potential can be difficult. Many stakeholders (lenders, shareholders, employees trying to maximize this year’s bonus) are pressuring to make as much today as they possible can. Resistance is difficult.

To help build your case, here are two approaches.

1) Lay Out The “Natural” Forces of Change
Just because the future will change does not mean that the future is totally unknown or random. Much of that change is reasonably predictable. There are “natural” forces in the lifestyle of an industry. These natural forces tend to create predictable change.

Because this change is reasonably predictable, it can be modeled. These models can then be used to help show why a sub-optimal approach today can be the best long-term option.

For example, when a new industry first emerges, there is usually very little direct competition. The old industry is usually unprepared and quickly loses market share to the new industry. Because of the lack of intense direct competition, early profit margins are high. Just quickly filling the pipeline with product is good enough.

Over time, however, natural forces tend change that environment. The old industry starts fighting back and adjusts in a way to lessen the advantage of the new industry. The new industry attracts additional players, making direct competition more intense. Profit margins drop. Just having a rather generic offering is no longer good enough as differentiation and excellence are needed to stand above the competition.

Eventually the next new big thing comes about to make your formerly new industry become the old, obsolete industry. Now you have to manage a declining business.

Since these types of natural events are highly likely to occur, you can build a strategy around ways to optimize performance throughout this change.

For example, if you are one of the early players in a new industry, you may want to create a strategy which legally helps increase barriers to entry for those who want to come in later. One approach might be to spend money up front tying up suppliers with exclusive or preferential contracts. It may put a small dent in near-term profits, but if it has a dramatic impact on slowing the ability of others to enter the industry, you can forestall many of those negative natural forces. Hence, you are more profitable in the long run.

Also, if you know that inevitable competition is going to create a need for more competitive excellence at some point, it may be more cost effective to build that into your strategy early. Although there were many factors behind the bankruptcy of Circuit City, one of the factors had to do with early real estate strategy decisions. In the beginning, the Circuit City business model was unique and powerful enough that they could locate their stores just about anywhere and customers would flock to them. As a result, Circuit City saved some expenses in the early days by locating stores in secondary (cheaper) sites.

However, eventually the industry became much more competitive. Firms like Best Buy came into Circuit City markets and built in the superior locations. (Best Buy also had larger stores, which would have made that executive in my story happy.) Consumers could see little reason to drive past those nice new Best Buys in the superior locations to get to the inferior location of the Circuit City. As a result, Circuit City eventually found itself at a significant competitive disadvantage. The cost to relocate all those stores to better sites was too much to bear at the end.

Yes, Circuit City was a little bit more profitable in those early days because they cut costs on real estate. However, that early decision locked them into a long-term competitive disadvantage which ruined a lot more future profits than the amount saved on that cheaper rent. If Circuit City had taken into account those natural forces when making those early real estate decisions (and other, similar decisions), they might still be around today.

2) Build in Flexibility for the Factors You Cannot Control
If may cost a little bit more up-front to build greater flexibility into your strategy, but that added flexibility may allow you to more profitably adapt to the uncertainty of the future. For example, Wal-Mart has a habit of leasing all of their stores. I am almost certain that if you did a detailed cash flow model, you would find that Wal-Mart would be slightly better off if it owned its stores rather than leased them. If that is the case, then why lease?

The reason is added flexibility. When Wal-Mart decided to move away from the discount department store strategy to the supercenter strategy, the leasing gave them greater flexibility to make the change. In many cases, they walked away from the discount store property when the lease was over and leased a brand new supercenter practically across the street. The old landlords are stuck trying to figure out what to do with an empty discount store that has little value when Wal-Mart builds across the street. If Wal-Mart had owned those buildings, then Wal-Mart would have been stuck with those old, obsolete-sized buildings. This would have made the transformation to the supercenter strategy far more difficult and far more costly. Foregoing a little cash by leasing was more than compensated for by the huge value it provided in flexibility.

The big thing in building automotive factories these days is flexibility. Sure, it costs more up-front to build a factory which can easily convert to building a wide variety of vehicles. However, it costs a lot more if you have specialized factories which specialize in the wrong thing when the market changes.

SUMMARY
If your strategy is designed to make as much money today as you possibly can, then you will probably make less money tomorrow, because market factors change. Optimizing profits over the life of the business usually requires some near-term sacrifices. To help make the right choices: 1) Anticipate the natural forces of change and work them into your plans; and 2) Add flexibility to adopt to the changes you cannot anticipate.

FINAL THOUGHTS
One of the most spectacular business failures of the 20th century was Iridium. The entire business model was dependent on the assumption that mobile phone fees would stay high forever. This was needed to justify the expense of launching and operating over 60 communications satellites in outer space. Natural forces prevailed, however, and mobile phone fees plummeted (as did the prospects for Iridium). If the folks proposing the initial investment in Iridium had been confronted by a question like the one I received in the story, perhaps this disaster could have been avoided.

Strategic Planning Analogy #290: Strategy is A Location

THE STORY
What if we thought of our mental condition as being like a location on a map? Then, if someone said “I am in a state of confusion,” we could just tell them to “Get in a car and drive to a different state, like the state of Contentment.” The United Mental States of America could have all sorts of interesting states. I think we already have a lot of politicians from the state of Denial.

Just think of how much money you could make selling maps showing the best path for getting from a bad mental state (like the state of Despair) to more desirable locations (like the state of Bliss). Wait a minute! Isn’t that basically what travel agencies do? Isn’t that what all those psychological self-help books try to do? Is Dr. Phil nothing more than just a seller of maps?

Continuing with this idea, if someone said “I think I am going crazy,” you could reply “How can you be going to a place where you already live? You’ve been in the land of Crazy for years.”

THE ANALOGY
Strategic planning tends to deal with a lot of abstract concepts. This is particularly true when it comes to strategic positioning. To make these abstractions easier to understand and work with, it can be useful to follow the example in the story.

In the story, the idea was to take abstract mental conditions and treat them as physical locations on a map. In the same way, I think there are benefits to looking at the abstract concepts of strategic planning as if they were positions on a map.

THE PRINCIPLE
The principle here is that strategies may be easier to understand and create if we think of them as being a location. In fact, there are three different ways to apply this principle.

1. Strategic Success Depends Upon Locating Yourself Properly on the Consumer’s Mind Map
Consumers act based on how they think. Hence, if you desire a certain consumer behavior, one needs to first get the consumer to think in a particular way about that behavior. In other words, you need to locate your product or brand in a specific location in the consumer’s mind if you want your strategy to succeed.

Where is that ideal location in the brain? It will vary based upon your strategy, but all successful locations will address the three S’s. The first S stands for “slot.” Different parts of the brain are used, depending upon the type of problem the brain is trying to solve. One of your first strategic tasks is to decide what problem your product is trying to solve.

Perhaps you are trying to solve the problem of “what’s for dinner?” Or maybe you are trying to solve the problem of preparing the customer for retirement. Then again, the problem could be trying to lower the cost to run your client’s factory.

There are all sorts of problems to choose from. As part of your strategy, you need to choose the problem you are trying to solve. And I don’t mean an internal problem like “How can I make my company more profitable?” The problem is to be a problem held by your potential customer. This is an important decision, since if you cannot help a consumer with a problem, then you have no relevancy to that customer.

Once you have chosen the problem, you need to make sure that your brand/product is “slotted” into the location of the consumer’s brain concerned with that problem. In other words, whenever that problem turns up for that consumer, you want your name to fire up in that part of the brain. This is done by communicating in a manner which continually associates your brand with that problem.

For example, Crest has spent decades associating its toothpaste brand with the problem of cavity prevention. It is now solidly slotted in the brain, so that when the problem of cavities comes up, the brain immediately thinks of Crest.

The second S is “solution.” Your strategy needs to provide a solution to that problem. What is it about your product/brand that makes it capable of solving that problem? Again, there are often many ways to solve a problem. You have to choose one.

This solution choice includes both the process and the performance. By process, I mean the general approach to solving the problem. For example, if the problem is weight loss, the choice of process could include exercise, diet, surgery, pharmaceuticals, hypnosis, and many others. By performance, I mean the type of attribute emphasized in the process you choose, such as being fastest or cheapest or most comprehensive, etc.

The third S is for “superiority.” It is not good enough to just be located in the brain where the problem is being addressed. You need to be seen as the superior solution to the problem. In Al Reis and Jack Trout’s excellent book Positioning, they refer to this as being a rank ordering, like rungs on a ladder. You want your brand to own the top rung (the best) in the mind of the consumer. So, another role of strategy is to locate your brand on the top rung on the problem ladder. You have to have a convincing argument (both rationally and emotionally) for why you should own that location.

Whenever I work with someone on developing a strategy, I usually end up at some point asking the question “Why should a customer prefer your product over all the other options?” If you have difficulty answering that question, the consumer probably has even greater difficulty coming up with an answer. And if you are not perceived as being the best alternative, they will choose someone else.

For example, for the problem of dependable transportation, Toyota has firmly cemented itself to the top rung location. It is perceived as best at automotive dependability. Through years of effort, Toyota has created a strategy which gives them ownership of that location in the brain of most consumers. They are slotted as the superior solution.

To summarize, your strategy needs to develop a superior means of solving a relevant problem and then place that information on the top rung in the relevant problem-solving location in the consumer’s brain.

2. Strategic Success Depends Locating Yourself Properly on the Competitive Map.
A strategic position is not created in a vacuum. The position plays itself out in the competitive marketplace. You can think of this marketplace as being like a map. Each competitor has a location on that map. The viability of your strategic position depends in large part on where you are on the map relative to everyone else.

For example, let’s say that you are a retailer with a strategy is based on owning the low price solution. Your ability to own the low price position depends a lot on your location on price versus competition. Wal-Mart recently has started a number of price wars in areas such as toys, books and DVDs. As long as Wal-Mart is driven to be closer to the lowest possible price location on the map than you are, you cannot own the low price position, no matter where you set your prices.

So when creating the action plan for your strategy, do not think primarily in terms of absolutes. Instead, think in terms of relativity—where you are relative to others on the map. In other words, if you want to own quality, it is not good enough to just set a high absolute quality level. You need to have higher relative perceived quality than the competition. That can be a moving target.

Often times, it is best to locate yourself on the competitive map is a place that is relatively empty. For example, if everyone else seems to be fighting for space on the quality area of the map, you may be better off going to the price area of the map, which is more wide open. The lest contested a space, the easier it is to own in the mind of the customer.

Right now Chevrolet is trying to convince people that it has the highest quality, most fuel efficient cars available. That is a hotly contested space, already owned by Toyota and Honda. Chevy will have a hard time unseating those entrenched positions. It would have been better off trying to go after a less contested space.

Although Ford would also like to be seen as high quality and fuel efficient, its approach has been less of a direct assault on Honda and Toyota. Instead, Ford is trying to establish itself with superiority in high-tech enhancements. This space is less contested on the competitive map. Once Ford owns this space, it can use high-tech superiority as a justification for a secondary claim at superiority in quality, safety and fuel economy (caused by unique technology).

And when you are building this competitive map, make sure you include every competitor attacking the same problem. For example, if the problem is weight loss, you need to include every process aimed at that solution. You may claim to be the fastest exercise solution for losing weight, but if there is a pill you can take that works a lot faster at losing weight than any exercise, you have not really captured the “speed” space on the map.

3. Strategic Success Depends Upon Locating Yourself Properly on the Map of the Future
Strategy is often about creating a better position in the future than you have today. It is often easier to communicate where you want to take the company if you can visualize that future state on some sort of map. Then, not only can you show the desired future location, but also today’s location and the path you must take in order to get from the one to the other. The mind map or the competitive map may be good templates to show the new destination and transition path to get there.

SUMMARY
Complex concepts can often be better understood, worked with, and communicated if thought of visually—like positions on a map. In strategy, some of the more useful maps would be a consumer mind map, a competitive landscape map, and a future map.

FINAL THOUGHTS
If your strategy cannot be easily translated into a visual map, then it is highly likely that your troops will get lost in strategy execution (and you will not reach the desired destination).

Strategic Planning Analogy #260: Are You Better Off?

THE STORY
Back in 1980, it was a close presidential contest between current president Jimmy Carter and former governor Ronald Reagan. Even just a few weeks before the election, there was not a clear leader.

It was hoped that some televised presidential debates would help people make a choice. Unfortunately, there was a split between how to handle third party candidate John Anderson. Reagan wanted Anderson in the debate; Carter did not. This argument caused them to miss deadlines for the debates.

Finally, with a little over a week before the election, Reagan wanted so badly to get in a debate that he caved in to all of Carter’s demands. So on October 28, 1980, Carter and Reagan debated in Cleveland, Ohio.

Ronald Reagan’s closing remarks at the debate were, "Are you better off now than you were four years ago? If so, I encourage you to vote for my opponent. If not, I urge you to vote for me."

Given the Iran hostage crisis, the weakening economy, and rising inflation, it appeared that most felt they were not better off than four years ago. As a result, immediately after the debate, public sentiment moved largely in favor of Ronald Reagan, and he won by a comfortable margin.

THE ANALOGY
Recently, there was a discussion on Linkedin about the sad state of strategic planning. During the current recession, it seems that strategic planners were often in the first wave of people let go. Not only that, recent unpredicted and unexpected events, like the housing slump, the debt crisis and the stock market slide had made people lose confidence that one can ever have much insight or influence over the future.

Finally, there was so much emphasis on near-term survival, that any talk of long-range planning seemed out of place in many companies. People were starting to believe that things change too fast and are too unstable to create any kind of meaningful long-range plan. The entire idea of strategic planning was starting to look out-of-date and useless.

Although I disagree with the conclusion, I can certainly understand the dilemma. To me, it goes back to the 1980 presidential debate. Business leaders were asking themselves a version of the question posed by Reagan: Is my company in 2009 better off now than it was several years ago?

The answer for most is “no.” Sales have plummeted. Profits have vaporized. Stock prices are down. Bankruptcies are up. By almost any measure, things are worse than before.

Now isn’t it the role of strategic planners to be the ones focused on improving the long-term prospects of the business? If the future is getting worse, then it would appear they are not doing their job.

Therefore, just like in the 1980 presidential election, companies are answering the question by throwing out the incumbents (the strategists) and are moving in a new direction.

THE PRINCIPLE
The principle here is that if strategists want any respect (and want to keep their jobs), they need a favorable response to that question: Is my company better off than before? Or to put it another way, is my company’s future any brighter because of the strategic planning efforts we have taken? If not, Reagan’s approach would say to kick out the strategists.

Granted, the current recession is so deep and so global that almost everyone is worse off, regardless of strategy. But has your strategy at least made you less worse off than your competition (are you gaining an edge on them)?

That has been the situation for the Ford Motor Company. Years earlier, it could see what was coming and built a strategy that acted early to get in front of the problem. They refinanced their debt when that was still relatively easy to do. They sold the weaker divisions when there was still a relatively healthy market for selling them. They got leaner and meaner in preparation for tougher times. As a result, Ford may not be having great times today, but they are gaining share and are better positioned than many of their competitors.

Now, it might seem obvious that strategists should measure themselves on how well they are helping to steer a company into a better future. Yet, when I look at what strategists get busy with, that does not always appear to be a priority. Here are some ways that strategists keep busy at tasks that are only tangentially related to creating better futures.

1) Scribe
Yes, it is important to get all the words and numbers written down. Things need to be quantified and clearly described. Accountability requires it. But if most of your time is spent just getting things written down and organized, you are not adding much value to the process. A stenographer or an administrative assistant can pretty much do that.

After a certain point, any improvement in the way words and numbers are written down will not improve the quality of a company’s future. And that point is fairly low on the quality spectrum. Instead, the place where quality time should be is on the ideas and activities behind what is written down. How much influence are you having on crafting the content of what is written? How much time is spent making sure business activities are bringing the content into reality? Don’t just blame the ops people for bad implementation of brilliant words. If you act as nothing more than a scribe, you should expect poor implementation.

2) Oracle
Yes, visionaries can be critical to success. And yes, one often needs to see into the future before one can optimize it. But if visioning is where you stop, then it is not very useful. Unimplemented ideas are like money hidden under a mattress. If it is never spent, then you live like a pauper, no matter how rich you are. You never benefit from it and may as well be poor for all the good the money did. Ebenezer Scrooge may have had money, but he did not have prosperity of life.

If you want a better future, then time must be spent in applying the insights of the oracle. Just being smart is not enough. In fact, studies have shown that B+ students make for better entrepreneurs than A students. B+ students tend to work harder in real life, while A+ students are too satisfied in just being smart and resting on idea-making that doesn’t go anywhere.

3) Activities Director
On the old Love Boat TV show, Julie was the activities director on the cruise ship. Her job was to make sure that there were lots of activities going on (on schedule with no problems) and that people were happy doing something. Sometimes we can get busy doing things like Julie. We spend so much time making sure the activities of the planning cycle go smoothly (the various discussion meetings, the filling out of paperwork, the approvals, the offsite planning meetings, the communication meetings, etc.) that we lose sight of why all that stuff is being done in the first place.

Perfect meetings do not always lead to perfect futures. I’d rather have a sloppy process that creates real substance than a flawless process that nobody treats seriously. True planning is not the process of managing the planning cycle. You can hire meeting coordinators for that. True planning is managing the quality of what comes out of the process.

Better Ways to Be Busy
If you want to have a meaningful part in creating a better future, focus your busyness on three things. First, help people get an accurate understanding of their true condition. Provide knowledge and insight that makes them smarter about what the situation is. Break down inaccurate biases. If your people have an unrealistic bias about what your condition is, then you will create a strategy that is inappropriate for true reality.

Second, control the debate. Make sure the tough questions are addressed and true out-of-the-box thinking is going on. Stretch the minds. Help people see the long-term consequences of near-term actions. Help people to see beyond the status quo. Help people envision alternatives.

Third, don’t hand off all responsibility once the ideas are on paper. Be active in making sure tasks get done. Monitor actions to make sure they stay on track. Keep people accountable. Make sure the long-term agenda does not get lost in the tyranny of the immediate fires which scream for attention. Scream back at them.

If you focus on these three tasks, you should get a better answer when people ask if the company’s future is better off because you were there.

SUMMARY
When strategists get a bad reputation, it is usually because leaders do not see significant value being added by strategists in the creation of a better future. Therefore, it is in your best interest to focus your limited time on the activities which are most critical to creating that better future. Don’t let the allure of “busyness” in lesser activities lure you into thinking your job is complete.

FINAL THOUGHTS
Ever notice any of those employees who have mastered the art of “looking busy” in order to avoid doing real work? You probably don’t have much respect for them. Remember that whenever you start feeling content in the busyness of being a scribe, oracle or activities director.