Which Comes First—Goals or Strategies? (Part 2)

REVIEW
In the last blog, we looked at why it can be a mistake to set financial goals prior to setting the action strategy. More specifically, we saw that setting financial goals prior to setting a strategy can increase the risk of:

1) Setting the Wrong Goal (wrong metric and/or wrong level)
2) Taking the Wrong Actions (if the goal is inappropriate than it will lead to doing inappropriate actions)
3) Increasing Undesirable Risks (Unrealistic goals can lead to desperate behaviors)
4) Sacrificing the Long-term to hit Short-term Goals (Sub-optimal Trade-offs)
5) Perpetuating Failed Strategies (Rather than shutting them down)

In this blog, we will look at suggestions for reducing these risks.

CLARIFICATION
Before moving on, I’d like to make a clarification. Thanks to some feedback, I realize that I may have given the false impression that I am against having goals. On the contrary, I like goals. I’m reminded of an old Pogo cartoon. Pogo and his buddy Albert are running through the woods as fast as they can. Pogo asks his buddy Albert if there is any particular destination they are running towards. Albert says no. So Pogo replies, “Then why are we running so fast?”

The idea is that if you have no idea of where you are going, there is no reason to run. Strategy is like that. Strategic planning is the task of finding the best path to a goal/mission/objective. If you do not know where you want to go, you cannot design a path to get there.

My concern is that most of the goals I see are merely financial numbers, like a goal for sales, profits, etc. These are not destinations, they are hoped for outcomes. They provide little to no insight into what the company must become to be successful.

These financial “destination-less” goals are the ones which lead to the five problems listed above (if they are set prior to setting the strategy). In this blog, we will look at alternatives.

THE PRINCIPLE
Here are four suggestions for how to avoid these problems.

Suggestion #1: Set Non-Financial Goals
There is no law that says all goals need to be a financial number. Successful financials do not magically appear out of nowhere. No, they are typically an outcome of a combination of the following actions:

a) Owning the right position in the marketplace.
b) Maintaining/Strengthening the core competencies, capabilities and capacities needed to hold/strengthen a winning position.
c) Leveraging a winning position in the marketplace.
d) Having enough productivity in order to profitably afford to the position.

If good numbers depend on first achieving these types of actions, why not set up goals around these types of issues? For example, you could have a goal of achieving a particular position in the mind of the targeted customer. You can measure this goal via consumer research. Or, if your strategy is centered around quality, you can set a quality level goal (which can also be measured). If success requires international expansion, then set that as a measurable goal.

The point here is that there are a lot of ways to achieve a financial target. These approaches may or may not have any correlation to the desired strategic actions listed above. In fact, some of those approaches can disastrous to a strategy.

For example, I know an executive who hit his financial target by completely ignoring the strategic mandate to invest in a repositioning of his business. Instead of taking cash flow and putting it into repositioning, he let the money fall to the bottom line as near-term profits. He made a great bonus that year because he hit the financial target. Soon thereafter, however, the business was sold at a great loss, because the strategic repositioning never occurred. The business was destroyed, because the leader took the wrong path to achieve the near-term financial goal.

The point is that if you want that repositioning to occur, then make the repositioning the goal, not a financial number that can be achieved while ignoring the strategy. In other words, if you want certain strategic behaviors or conditions to occur, than make these behaviors and conditions the goal. The only way to ensure that the right actions get done is to set the goal around the action. Reward doing the right thing rather than hitting a financial goal the wrong way.

And, of course, you cannot set these types of behavior or condition goals until you have an understanding of the proper strategy. That is why strategy work needs to be done before setting the goal.

Suggestion #2: Separate Planning Cycle From the Budget Cycle
Many companies intermingle the timing of the planning cycle with the budgeting cycle. I think this is usually a mistake.

Budgets tend to be very financial in their focus and goal orientation. And this is not necessarily a bad thing. But by formulating strategy at the same time as budgets are set, one tends to end up with strategies which are often little more than a budget with a slightly longer time frame (a sort of 3-year budget). And this can be a bad thing, leading to all the problems mentioned earlier.

If you want people to think more strategically and create more strategic (less financial) long-term goals, it seems to work better if that process is not done simultaneously with annual budgeting. For example, if you do your budgeting in the fall, then do your primary strategy formulation in the spring. Not only does the separation allow for a better focus on strategy, it provides time between the two processes to understand the true ramifications of the strategy, so that strategy can better drive what is an appropriate budget.

Some of the intermingling is a result of placing strategic planning groups inside of finance or budgeting departments. Finance departments have a natural financial orientation, which can lead to goals that are too financial. If you want to reduce that bias, then you might want to consider taking strategic planning out of the finance group (if that is where it is today).

Suggestion #3: Just Don’t Do It
If setting a financial goal up front gets in the way of making great strategy later, then stop setting a financial goal first. It could be just that simple.

Suggestion #4: Add A Feedback Loop
If your company still insists on looking at financial goals first, then reply by insisting that the company also looks at these goals last. In other words, add a feedback loop to the end of the process to determine whether the original goal is still the most appropriate goal. If it isn’t, then reserve the right to change the goal at the end.

It may be that, after the strategic analysis, you conclude that some of your original assumptions during the goal-setting phase are no longer valid. Perhaps the best strategic path leads in a different direction from where your goal lies. If so, change the goal so that it fits your new reality.

SUMMARY
Many companies use a strategic process where financial goals are set before the strategy is chosen. This approach increases the likelihood of bad results and missed opportunities. Four suggestions for reducing this problem are to:

a) Set Non-Financial Goals
b) Separate Planning Cycle From Budgeting Cycle.
c) Stop Setting Goals First
d) Add A Feedback Loop

FINAL THOUGHTS
Before running off to operate your business, be like Pogo and ask what the destination is. And don’t settle for a mere financial number. Ask for a real destination that is based on prior strategic analysis and rooted in specific activities.

Strategic Planning Analogy #414: Which Comes First—Goals or Strategies?

THE STORY
Let’s assume that you want to race in the Olympics. Let’s further assume that they way you qualify for the Olympics is by agreeing (in writing) to guarantee achieving a specific time when you race (quick enough to win committee approval). And, if you fail to achieve that time, you will owe the Olympic Committee a large sum of money. Then, to make it even more interesting, the Olympic Committee does not tell you which type of race you will be competing in until after you commit to a specific time.

When making the time commitment, you do not know if the race is a short sprint or a long marathon. You don’t know if the race involves running, speed skating, swimming or bobsleds. Perhaps there are hurdles or other obstacles. Perhaps not.

It seems to me that committing to a race time before you knew what the race was would be an act of insanity. It’s a good thing the Olympics aren’t run that way.

THE ANALOGY
Although the Olympics are not run that way, it seems that many businesses are run that way. When starting their strategic planning process, these companies begin with goal-setting. The goal could be a level of sales, or profits, or a percent return on investment, or a stock price. Setting these goals is a lot like setting the goal of the time you want to achieve in a race.

Then these companies get management to commit to hitting these goals, and tie their bonuses to achieving these goals.

It isn’t until all this is completed that these companies start looking for a strategy which can achieve that commitment. To me, choosing the strategy after committing to a goal is a lot like being told what race you are going to run after committing to a race time. It is often a process of foolhardiness. And, unfortunately, I think a lot of companies are on this foolish path.

THE PRINCIPLE
The principle here is that long-term success is more likely to occur if goals are set after conceiving the strategy rather than before. In this blog we will look at some of the negative consequences of putting goals first. In the next blog we will look at some potential solutions to this problem.

When a company puts goal-setting ahead of strategy-forming they increase the likelihood of six bad outcomes.

Bad Outcome #1: The Wrong Goal is Set
Setting the goal before knowing what to do can lead to two types of improper goal setting. The first is choosing the wrong metrics. For example, at different stages of the lifecycle, different metrics may be more appropriate. Rapid sales growth targets may make more sense during the rapid growth phase but be inappropriate during the decline phase, when cost control may be a more appropriate metric. You cannot know what the most appropriate metric is until you understand the type of plan you are putting in place.

Even if the right metric is chosen, you might choose the wrong target level—too high or too low. How can you know what the appropriate target level is before you know what you are doing? Set it too low and you may miss opportunities (and reward too generously). Set it too high and you may encourage people to take on bad behavior (as we will see below).

Bad Outcome #2: The Wrong Actions Are Taken
People act based on how they are measured, so if you measure the wrong things, people will tend do the wrong things.

If the metric is inappropriate for the circumstances, it might force people to apply strategies consistent with the metric but wrong for the circumstance. For example, if a business has recently reached maturity but the goals are more appropriate for an earlier rapid growth stage, one might try to apply rapid growth strategies in order to try to reach the rapid growth goals. This could lead to investing in over capacity and money-losing sales strategies, in an attempt to try to achieve no-longer-realistic top line growth commitments.

Going back to the story, you might be best suited for running a marathon, but because you promised a quick race, you are forced to run a sprint. So instead of playing to your strengths—a place where you can win—you go with your weakness in a place where you will lose. Figure out the race you are most likely to win before committing to an outcome.

Bad Outcome #3: Undesirable Increase in Risks Are Taken
Many times, aggressive goals cannot be achieved by the core business. You end up with what is commonly called a “planning gap”—the difference between what the current strategy provides and what you want to achieve. The bigger the gap, the more one has to do to fill it. This can lead to taking on a lot more risks in order to fill the gap, such as diversifying further from one’s core or doing some hasty acquisitions.

We know most acquisitions fail, and if they are being done primarily to fill a gap rather than to fill a synergistic strategic need, the risk is even higher. In addition, so much focus could be placed on filling the gap that the eyes are taken off the core, increasing the risk of problems there as well.

Perhaps the only way to narrow the gap is to assume the best case scenario—everything has to go right. The best case scenario is rarely the most likely case scenario. As a result, your strategy takes on added risk for failure if you have to skew assumptions in order to make the strategy fit the goal.

Bad Outcome #4: Long-Term Prospects Are Destroyed
When the numbers come first, people’s priority is to try to hit those numbers—whichever way they can. There are lots of ways to hit a number, and a lot of those ways are destructive in the long run. To hit aggressive numbers in a short time span, one usually has to make trade-offs which hurt the long run. For example, to hit near term profits, future-oriented activities (like R&D or innovation) may get cut too much. To hit aggressive near-term sales, one may create costly promotions which merely steal away sales from the future. To hit near-term return on capital numbers, one may underinvest in long-term capital projects.

One of the first cases I had in business school was about a manager who made his numbers by cutting out all maintenance costs. Eventually, everything broke down and the long term costs of repair were much higher than those maintenance costs which were cut. This is an important lesson which can be lost if aggressive goals are put in place which can only be met by making bad trade-offs with the future.

A lot of Warren Buffet’s success is due to taking the long view. He knows that he will usually get more out of an investment if he manages it for the long term rather than a quick payback. But if goals come first, one can start managing for what’s best for the goals rather than managing for what’s best for the business. That usually means trouble for the long-term prospects.

Bad Outcome #5: Avoidable Failures Are Perpetuated
If you look at a business purely objectively, you might come to the conclusion that it should be shut down or sold. However, if you start with an inappropriate goal, you may be hesitant to retreat from the business, because you feel you need every bit of business possible in order to try to reach the target. For example, I worked with a company that had a business line which they probably should have gotten out of. They didn’t because they told me they “needed the sales” (even though they were unprofitable sales) in order to hit their sales growth targets. I had suggested a more profitable approach, but it produced fewer sales, so it was rejected. Instead, the failed approach was perpetuated.

If people commit to unrealistic goals, then they will not have a realistic way to achieve it. This inevitably leads to not achieving the goal. Disappointment and failure are the most likely result. All the stakeholders get angry. These “guaranteed” failures and disappointments could have been avoided if bad businesses were cut out sooner, and promises were made which had a high likelihood of success, because they were first grounded in doing the right things. If you choose the right strategy first, then you know which goals to promise, and then you can meet them.

Bad Outcome #6: New, Better Options Can Be Missed
If you don’t first have a strategy to help you set your goal, then often times the only thing you have to base the goal on is the past. And as we all know in strategy, the past is often not the best guide for what to do in the future. This backwards orientation (extrapolation of the past plus stretch), may keep us mentally oriented towards modified status quo strategies rather than new breakthrough strategies.

Breakthrough strategies typically come from starting with a clean slate, not extrapolations from the past (which at best, only gives you incrementalism).

In fact, by setting goals prior to setting strategy, management is in essence telling people that the old strategy is good enough. After all, how can you realistically set a future goal before considering strategic change unless you believe no meaningful change is necessary?

SUMMARY
Many companies use a strategic process where goals are set before the strategy is chosen. This approach increases the likelihood of bad results and missed opportunities. Committing to a race time before you know what the race is sounds backwards. The same is true of setting numeric performance goals before you know what strategy will be performed. In the next blog we will look at ways to minimize this problem.

FINAL THOUGHTS
Setting the goals first sounds like wishful thinking. Last time I checked, you don’t automatically get what you wish for. I could wish I was taller or younger, but it isn’t going to happen. No, we should start first by optimizing what is in the realm of the possible and set our goals from there.

Strategic Planning Analogy #391: Warts and All

THE STORY
Oliver Cromwell (1599-1658) is a famous figure in English history. Cromwell was a military leader on the winning side of the English Civil War. A few years after the execution of King Charles I in 1649, the monarchy was abolished and the Commonwealth of England was born. Cromwell held the top position as 1st Lord Protector of the Commonwealth of England, Scotland and Ireland from 1653 until his death in 1658.

During that time, many wanted to crown Cromwell as King. But since he fought so hard against the monarchy, he refused the offer. However, after he died, the monarchy was restored.

As befitting of a person of his stature, Cromwell was to sit for an official portrait, to be painted by the talented Sir Peter Lely. During this period, artists were expected to take some liberties with their painting—portraying their subject as more distinguished and handsome than they really were. As a result, Lely was prepared to do the same for Cromwell and make him appear more flattering than reality.

Cromwell, however, would have nothing to do with this. He was a devout Puritan who was opposed to all forms of personal vanity. He wanted a realistic portrait.

Legend has it that he told Lely the following, “Mr. Lely, I desire you would use all your skill to paint my picture truly like me, and not flatter me at all; but remark all these roughnesses, pimples, warts and everything as you see me, otherwise I will never pay a farthing for it.” Later legend shortened Cromwell’s response to be “Paint me as I am, warts and all!”

And as you can see from a comparison of the painting to his death mask (in the picture above), Lely did indeed paint him warts and all.

THE ANALOGY
Part of the strategic planning process deals with understanding the current state of who you are as a company, business or brand. What is your current position? What is your current image? What are your competitive strengths and weaknesses?

When answering these questions, one can fall into the habits of Peter Lely. You can be so used to portraying everything in its most favorable light that it becomes second nature. Lely didn’t let reality get in the way of his painting of portraits. He was used to painting something better than reality. He didn’t ask for permission to enhance his portraits. It was just expected.

In the world of business, this “cloud of favorability” can become so habitual that you don’t even realize that some reality has been lost in your strategic assessment of current positions, images and strengths/weaknesses.

And of course, if you have a distorted point of view for your starting point, you will likely have an unrealistic goal and unrealistic plan to get there.

If you really want a realistic goal and strategic path to get there, then you need a realistic understanding of your starting point. You need to paint the picture of your current state “warts and all.”

THE PRINCIPLE
The principle here is that assessments of one’s current state should be more like an un-retouched photograph than an enhanced painting. We need a critical eye to discern the complete picture of reality—the good, the bad and the ugly—warts and all.

The Problems With Most Favorable Light
Here are some of the problems which could occur when building a strategy off an assessment whose starting point is more favorable than reality.

1. You may mistakenly choose a position or goal where you stand no chance of winning (because you are not strong enough to achieve it or own it).

2. Not enough effort will be made to shore up weaknesses (causing a further erosion of your business).

3. Competition will be under-estimated.

4. Execution plans will fail because too much was expected from current resources.

5. Customers will not act as expected because they do not love you as much as you think.

6. Too much money will be spent on expansions and acquisitions which fail to deliver on promises due to unrealistic expectations.

7. The stock will eventually plummet once people realize that you have a reputation for execution disappointments due to unrealistic expectations.

In other words, a bad starting point can lead you to the wrong goals and make you ill prepared to achieve the path to get there. From where I sit, this is not a good thing. Underachieving on a path to an unattainable goal is not a good strategic plan.

That is why you need a starting point that includes warts and all. It will help you pick goals where you can truly win and paths that ensure success.

The Problem with Warts and All
The problem is that company leaders often do not always like to hear bad news. Talking about weaknesses and vulnerabilities can sometimes be a “career-limiting” move. Leaders don’t like to hear that something “can’t be done.” There is the fear that the leaders will “kill the messenger” of bad news. Therefore, everything is shown in its most favorable light, like a Lely painting.

So this leaves one with a dilemma. Either tell the truth and lose the ability to influence management or tell a lie and influence management to create a disaster. Not a good set of alternatives.

The Solution
Fortunately, there is a solution to this dilemma. Here are four steps to being able to expose the “warts and all” and still have influence to make a positive difference in creating an appropriate strategy.

Step #1: Anchor Your Discussion on Facts
You will never win the battle of opinions with “warts and all” because:

a) The leader’s opinion carries more weight than yours (the leader gets more votes).
b) The leader’s opinion is usually more favorable and more optimistic (and will reject the warts).
c) Opinions cannot be proven.

The only chance you have is to start with facts from accepted sources. If the irrefutable facts show the warts, then it is harder to ignore them.

And don’t stack the deck or bias the commentary around the facts. Show a balanced approach without emotion. Otherwise you will lose credibility. Let the facts tell the story by themselves. Let them come to the conclusion on their own. This will create greater “ownership” of the conclusions by management.

Step #2: Use Other Voices
It is one thing for you, as an insider, to point out the warts. It is quite another thing if you can have customers, suppliers and partners pointing out the warts. Their voices carry more weight. It is hard to maintain an opinion of invincibility when your own customers are telling you about all of your warts.

I was reminded of this when looking at a recent piece of consumer research by Harris Interactive. According to this study, 77% of the public says that Corporate America’s reputation is bad. I’m sure that this is a lower opinion than the opinions of the leaders of Corporate America.

Go to Google and enter your company or brand name along with the word “sucks.” Usually this search will lead to all sorts of negative commentary about your company. In a world of Twitter, Facebook and other such sites, there are ample ways to track what people are really thinking about you. And if you want to get a bit more scientific about it, you can do surveys.

Remember, the most important opinion about your image is the image held by customer, since that is the opinion which determines your success. Listen to what they have to say. They won’t ignore the warts.

Step #3: Play the Court Jester.
In medieval times, the only one who could get away with giving bad news to the King was the Court Jester. He could get away with it because:

a) It was done in a light-hearted, humorous, entertaining way.
b) The jester was not seen as a threat to the throne.
c) It was an accepted role of the position.

I worked with someone who was quite good at assuming the role of court jester. He was entertaining and appeared non-threatening (in a political power sense). It became accepted that he could speak about all the bad news without fear of reprisal. This approach was quite effective.

I have used a similar approach of positioning myself as the “eccentric genius.” Eccentric geniuses are usually well respected without appearing as a political threat. It allowed me to successfully be the bearer of bad news.

Step #4: Supply a Desirable Alternative
Often times, management embraces a distorted point of view because it is the only way they can see a bright future. However, if you can show them an alternative future which is still bright and desirable, yet includes the warts and all, then they are more likely to accept the more realistic starting point.

In the end, people want a good outcome. It is still possible to have good outcomes when starting form a position full of warts. You just have to look a little harder for it. Once you get leaders salivating over a good outcome and show that it can be achieved even if we are a little weaker than we think, then it has a good chance of being accepted.

So link the bad news about today to some good news about how this can be turned into something great. For example, you may not be good enough to own the whole market, but you may be good enough to own a desirable niche if you focus on it. And that niche may be more profitable than owning the mass position.

SUMMARY
Unrealistic starting points lead to plans that usually fail. If you want success, you need to start with a realistic understanding of who you are—warts and all. In order to successfully portray a less than favorable point of view, it helps if you a) Anchor Around Facts, b) Use Other Voices (Like Customers), c) Play the Court Jester, and d) Supply a Desirable Alternative.

FINAL THOUGHTS
Don’t be afraid of the truth. It can be your friend if you follow the advice above.

Strategic Planning Analogy #321: Do-Be-Do-Be-Do

THE STORY
The Wall Street bankers are having a hard time trying to describe to the government what they did leading up to the financial crisis. I think part of the problem is that even the bankers themselves didn’t fully understand what they were doing. The financial transactions were so complicated that I’m not sure anyone at the time understood all the activities.

Just imagine trying to explain all that stuff to your little children when they ask you what you do.

Maybe that’s why when children dream about growing up, they talk about what they want to “be” rather than what they want to “do.” Children do not understand what grown-ups do, so they talk more abstractly about what they are—what their identity is.

They may say, “When I grow up I want to BE a ballerina.” They don’t say, “When I grow up, I’m going to DO so much practicing every single day dancing on my toes, that my toes will become distorted and bleed.”

Maybe it’s a good thing that children don’t know what we do. Otherwise, they might never want to grow up.

THE ANALOGY
In many ways, I think most business people think in a way that is the opposite of how children think. When children look to the future, they tend to focus on what they want to be rather than what they want to do. By contrast, businesses tend to look at the future and focus on what they want to do rather than what they want to be.

In business, it all seems to be about “getting the job done”—making the numbers, doing the tasks. If you’re a manufacturer, the focus tends to be on making the manufacturing process more efficient—making more for less. If you’re in the service industry, it is about how to more efficiently serve your customer.

It is as if how you are defined as a business is set in stone, so all you can focus on is what to do to be better at that type of business. For example, you may define yourself as a baker, so you focus on the general tasks of baking.

However, what if we were like children and did not assume that what we are is set in stone? What if we were like them and spent more time pondering from all the possibilities of what we wanted to be? What kind of baker do you want to be? How would you like to be known? What would bring pride to your identity as a baker? If you were a famous baker, what is it that causes your fame? Or maybe you don’t even want to be a baker after all. Maybe you’d rather be a chef.

One of the roles of strategic planning is to help companies create a better future. In that role, I think strategists need to help companies become more like children. We need to get companies to daydream about what they want to be in the future. It is not set in stone. We have choices, and how we choose can have a large impact on our success.

THE PRINCIPLE
The principle here is that most businesses do not have a reason for existing. By this, I mean that most businesses have not created a position in the marketplace which makes them so essential that it would be extremely difficult for the market to continue as we know it without them. Perhaps what you are offering is essential, but is your particular company’s version of that offering essential? Is your particular business essential?

Consider this: What if your particular business/brand/service no longer existed? Would the world really miss not having you around? In most cases, customers will quickly find a reasonable substitute and move on with their lives. We talked about this in an earlier blog.

If you have no reason for existing, then there is no reason to assume that you have a right to be successful. After all, if there are many reasonable substitutes, then about the only way to draw business to yourself is through reducing your profitability by either offering more than others or selling it for less. These can lead to lower than needed returns on investment.

Instead, the best guarantee of success is in designing a strategy which makes your particular business essential to others. This is a focus on BEING—How do I become an essential business which has a reason for existing.

Just doing things well does not guarantee success. A focus on doing does not necessarily create a reason for existing. We can see this in a comparison of Apple vs. Sony. Apple tends to have more of a focus on what they wanted to be. For example, they wanted to be the essential cool solution for music. To become that, Apple realized they needed an integrated market approach:

a) A cool device
b) Cool, easy to use software
c) Cool apps to run on that software
d) Cooperation of the content providers
e) A cool, easy way to access and purchase content and apps

This integrated approach caused Apple iPod/iTunes to become an essential cool way to get music. The digital music ecosystem would not exist as it does today without them.

By contrast, during the same time, Sony saw themselves as a consumer electronics manufacturer. Therefore, they focused on what consumer electronics manufacturers do—make consumer electronics devices. They tried to excel at “doing”—engineering and building music devices. Much of that engineering and building was very good. It lead to good consumer electronic devices. But it did not make Sony essential (or successful). The products did not sell.

If you focus on what you need to be, you will discover the right things to do (as Apple did). But, if you only focus on doing things, you may not do the things that are right to create what you need to be (as Sony did).

Let’s apply this principle to the strategic planning process.

1) Goal-Setting
When setting strategic goals, do they focus on “things to do” or on “positions to be”? A “doing” goal could be like hitting a certain level of sales. This is an activity—selling. There are lots of ways to try to hit a selling goal that do not lead to becoming an essential business. You can end up selling at a loss. It doesn’t tell you how to create something essential for others to buy. “Sales at any cost” tends to result in activities that cost you dearly.

Instead of a sheet of paper with only financial “doing” goals, how about some non-financial “being” goals, like:

a) Designing a new business model in which your company becomes essential.
b) Achieving a particular essential position in the mind of the customer
c) Creating a particular “Blue Ocean” opportunity.
d) Becoming vendor of choice with your most profitable customers

These types of goals can only be achieved if you transform the business into becoming a more essential player in the marketplace. Although perhaps a bit more abstract, they can still be meaningful, measurable goals (with accountability) that can create far greater success than merely chasing some financial targets. It all starts by asking “What do I want this company to be when it grows up?”

2) KPI’s (Key Performance Indicators)
When tracking your process, do you measure what is being done or what you are becoming? One of the benefits of something like the Balanced Scorecard is that it helps us to see beyond mere financials to encompass a broader approach to the business. Your KPI’s need this type of broader approach, including measures on whether or not you are becoming what you want to be.

For example, let’s assume you want to lose weight and become more attractive. You can measure your progress through “doing” KPI’s like caloric intake or time spent exercising. However, calories and exercise are not the whole story. You might take in so few calories that you become skinny to the point of being sickly and unattractive. Or you might exercise a part of your body so much that the muscles bulge out in an unattractive manner. To make sure the effort leads to attractiveness, you need “being” KPI’s which also measure degree of becoming attractive.

Once you determine your “being” goal, make sure at least one of your KPI’s directly measures how well you are becoming what you want to be.

SUMMARY
Successful companies tend to be firms which own an essential position in the marketplace. Essential positions are achieved by focusing effort on becoming essential, rather than on just doing well. Therefore, long-term goals and KPI’s should define and measure your success at “becoming” rather than just “doing.”

FINAL THOUGHTS
A focus on “becoming” does not eliminate the need to care about what you do. You won’t become anything at all if you sit around doing nothing (except maybe become a failure). But unless you give becoming the priority, you will never properly focus on the right things to do, nor ensure that the doing is effectively leading to the becoming you desire.

Strategic Planning Analogy #253: Sailing Into Headwinds

THE STORY
One time I was on an executive retreat and had the opportunity to go sailing in San Diego Bay. That sounded like a pleasant and relaxing way to spend an afternoon, so I signed up. When I got to the boat yard, I found out that I was going to one of the leading schools in the nation for teaching how to race sailboats competitively. Well, so much for relaxing.

We got a brief lecture on how to race sailboats (way too short for me) and then we were out in the water. I was relatively clueless about what was going on, but a least we had a good teacher on this large sailboat (or so I thought).

Well, we lost the race, but at least once it was over I thought I could get that relaxing boat ride I had wanted. The teacher said it should be very pleasant, since it never rains that time of year in San Diego. Shortly thereafter, it started to rain.

As the teacher was moving the sail to catch some wind, he unknowingly tried to place the crossbeam in the same location as where my head was. I was knocked flat on my back and almost fell into the bay. Fortunately, the only thing that went into the water was my hat. We got to watch it sink into the bay.

With a sore head, I was ready to go back to shore. Unfortunately, at this point the wind totally disappeared. We were stranded and couldn’t go anywhere. We waited what seemed to me to be forever. The wind never returned. Finally, the teacher decided to call to shore to get a motorized boat to tow us in.

What a crazy day. I haven’t gone sailing since.

THE ANALOGY
Strategic Planning is a lot like sailing a boat. In both cases, you have a team of people trying to move from one location to another. In a racing sailboat, the goal is to get to the finish line before anyone else. In strategic planning, the goal is to reach and own a winning position before anyone else.

If your sailing team doesn’t know how to get a sailboat moving, you will not achieve your race goal. Similarly, if your business does not know how to get a company moving, it will not successfully achieve its strategic goal. Therefore, this blog will look at what we can learn from sailing success and apply it to strategic success.

THE PRINCIPLE
The principle here has to do with motion. Without the right kind of movement, you will not achieve your goal. In sailing, motion depends upon harnessing the power of the wind. The wind is an external force, over which the sailor has very limited control. A similar force is at work in business—it is the movement of the marketplace.

The marketplace is made up of a variety of trends. They could be things like demographic trends, lifestyle trends, governmental trends, attitudinal trends, and economic trends. Sometimes the trends are moving up, sometimes they are moving down. For example, in demographics you may see an increase in the elderly or an increase in young Hispanics or a decrease in traditional families.

Whatever direction the trends are moving in, it is movement. It is this movement that changes the direction in which money is spent. Like the wind, the directional movement of how money is being spent in the marketplace tosses around the fortunes of businesses like a boat. Also, like the wind, these market forces are external to your business and you have only limited control over them.

Good sailors know how to harness that wind to their advantage. Good strategists need to do the same. So what can we learn from these sailors?

1. It is Easier to Adjust to the Wind Than to Get The Wind To Adjust to You
Racing sailboats have all kinds of ropes, pulleys and gears. These are used to reposition all of the sails in order to catch the wind. The idea is that although the wind is essential for moving the boat, if you want the boat to move in the proper direction, you need to adjust the location of the sails.

In the current economic difficulties, many managers are blaming the economy for their poor performance. They refer to the recession is a “strong headwind” which is holding them back from achieving their goals. A good sailor wouldn’t use these excuses. They would instead adjust their sails to use that headwind to their advantage.

This doesn’t mean that you necessarily have to abandon your overall strategy in order to catch some wind. In the case of Target stores, their “Expect More, Pay Less” strategy has had to adjust its sails to be focused a bit less on the “expect more” side and a bit more on the “pay less” in order to catch the winds of the economic downturn. The overall strategy still remains in tact.

On the west coast, many high end restaurants have found that the current economic winds are moving spending away from expensive meals, but still going out for drinks. Therefore, many of these restaurants are adjusting by expanding the size of their bar and cutting way back on seating for meals, but they still want to be seen as high end.

As sailors know, it is easier to adjust the sails to the wind than to command the winds to change to suit your sails. Businesses that are fighting the prevailing long-term trends of the marketplace tend to fail. Just as sailors cannot change the wind, you cannot suddenly change the economy or make baby boomers young again. Being out of touch with the times is hardly a winning strategy and wishing for the times to change doesn’t help. Instead, adjust!

2. Have a Course, But Be Flexible
But what if my strategy wants to take me in the direct opposite direction of the near-term prevailing trends? Well, good sailors know that one can even make forward progress using winds going in nearly the opposite direction. The tactic is called tacking. In tacking, you make forward progress by using a zig-zag motion. The zig-zags provide angles that can catch the wind from alternating sides in a way that combine to still get you going roughly forward.

The idea for business here is that even during rough patches, a strategy can still move forward. However, the exact course may need to adjust a little—perhaps become more zig-zag and less direct. Remember, the goal is not to follow a precise line in your journey. The goal is to reach the finish line. If modifying the path gets you to the finish line faster, than so be it.

What does tacking mean from a business point of view? Well, if the trend’s against you, then zig-zag the agenda of your conversation with the customer. For example, let’s say you want to sell expensive luxury goods in an economic time when customers are cutting back and desiring cheaper items. The customer wants the agenda to be about price. You need to zig-zag around that and use the tough economic times to create an agenda which helps you. Examples:

• Luxury items have a lower total cost of usage because they last longer and need fewer repairs.
• It’s really not price, but value which counts.

Remember that this is a race, so stealing share from the competition may be the best move when the pie stops growing. Zig-zag faster than the competition by adding more service to the package (increasing relative value), or introducing some lower-price entry products, etc.

You can be flexible in the path while keeping the same goal in sight. So don’t just go wherever the wind wants to go. That is randomness that never gets to the goal. Use the wind to go where you want to go, even if it means taking a slightly different path to get there.

3. It takes coordination
When I was sailing that boat in a race, I was not alone. We had a racing team positioned at different spots on the boat to make different adjustments. We had different roles, but we had to work together in order to make the proper adjustments. Our teacher told us what to do so that all of our individual actions added up to the right adjustment.

The same is true in business. Strategic plans need leaders who know what adjustments to make and teams of people who can coordinate their work in order to make that adjustment. Strategies need to be more than platitudes on a piece of paper. They need to embrace action plans.

4. Be Ever Alert
Winds can change in an instant. All it took was two planes ramming into the World Trade towers on 9-11 to instantly cause a major redirection of marketplace trends. Sailors pay attention to the weather to try to anticipate wind changes. We need to do the same by studying trends and doing scenario analyses, so that we can try to spot changes early and have a backup plan in place for when they do.

5. Don’t Just Sit there
When I was in that boat race, we never had a moment to rest. We were continually tightening and loosening ropes. Sometimes we had to change where we sat and lean so that the weight was in the right place. It was tiring work.

The same is true with strategy. It is not something you do once a year for a few days and then ignore for a year. It is an ongoing process that requires action all year long. Adjustments are being made daily. If the strategists are not in on the adjustment discussions, then the adjustments can make the overall strategy obsolete. You need to provide context so that all the adjustments eventually get you to your goal.

And when the winds die, don’t just sit there waiting. Find ways to get towed to where the winds are (spend some capital, reposition). Sometimes the prevailing winds have moved so far from where you are that it is time to refashion an entirely new strategy.

SUMMARY
Businesses move on the winds of marketplace trends. These trends direct the way the money flows. If you want that money to flow into your sails, you need to be adjusting your sails on a continual basis. This does not mean randomly drifting with the wind and chasing every fad, but in cleverly using those winds to accomplish your long term goals.

FINAL THOUGHTS
One time I went canoeing a large lake on a very windy day. The wind blew me westwardly across the large lake and quite a ways north. When I tried to turn around and go back, I was not strong enough to fight the wind. It kept pushing me and the canoe back to shore. Eventually I had to get out of the boat and knock on doors until someone could help me call the boathouse to get them bring out a pontoon boat to haul me and the canoe back…another example of the problems which occur if you ignore the wind when planning a journey.

Analogy #224: Doing Vs. Becoming

THE STORY
When I was younger, I loved to work on doing maze puzzles. I even loved designing maze puzzles of my own. The objective of a maze is to find the one route that will get you all the way from the beginning to the end without reaching a “dead end.”

One thing I learned about mazes is that it is a lot easier to finish a maze if you work backwards, rather than forwards. In other words, starting at the end and seeking out the beginning is easier than starting at the beginning and seeking out the end.

The reason for this is simple. At the beginning of a maze, there are usually a multitude of options. Even though they all look potentially desirable, only one option leads all the way to the end. As a result, one can waste a lot of time choosing the wrong option and going down the wrong paths.

By contrast, at the end point, there is usually only one viable path. This makes it a lot easier to find the right path backwards to the beginning.

THE ANALOGY
One of the goals in a strategic process is to find the right path into the future. Finding the right strategic path is similar to trying to find the right path in a maze. At first, many strategic paths into the future may appear desirable. It is only through careful analyses of these options that one can determine if each option leads to a desirable future or a dead end. That’s a lot of hard work.

The easy way out is to pick the endpoint first and then work your way backwards to today. This is where business visions come in. If you choose the right vision for where you want to end up, it is easier to find the path in the maze to get there by working backwards.

Conversely, if you have no idea of where you are trying to end up, all the paths in the maze look good (and it may be hard at first to distinguish between a desired end and a dead end). So visioning should precede path choosing. (I wrote a chapter on this concept in a book awhile back. Follow this link to read that chapter.)

Although it is fine to work backwards from a vision to today, there is a problem if we may substitute tactics for visions. When we do that, the easy way out often becomes a pathway to destruction, because we lose the rigor of the careful analysis.

For example, we may say that a particular acquisition should be our goal. Acquisitions are not strategic goals; they are only potential means to achieve a goal. Tactics are more like a path in the maze than and endpoint—a means to an end. That acquisition may or may not be the right path. By committing to a tactic, we have in essence pre-chosen our path before determining if it is the right path. There may be much better paths.

THE PRINCIPLE
The principle here is understanding the difference between “doing” and “becoming.” Doing is a process. Becoming is an outcome. For example, let’s assume that your goal is to be the low cost operator in your industry. This is what you want to “become.” This is the end point in your maze.

Now, there are lots of potential ways to become a low cost operator. For example, one might consider:

- Outsourcing
- Creating greater economies of scale through growth by acquisition
- Instituting more rigorous controls
- Backward integration
- Eliminating costly services or features
- Using cheaper raw materials/ingredients

These options are the “doing” part. Each of these options can be a potential path in your maze. Not all paths may be right for you. In fact, sometimes opposite approaches may be better. For example, outsourcing may lower costs for some, while taking more control in-house may lower costs better for others. Backward integration may lower costs for some by eliminating the middle-man, but the opposite approach of opening up sourcing to more bidders could be even cheaper for others.

The right path for you may be quite different than for your competitors. It takes serious analysis to make sure you pick the right path for your business.

The problem occurs when our goal shifts from “becoming” to “doing.” In other words, instead of saying our goal is to “become” the low cost operator, our goal is to “do” an economy of scale acquisition. Choosing the “do” too quickly may cause us to commit to the wrong path before we’ve had a chance to see if there are better alternatives.

This problem can be seen in a recent survey of over 2,000 executives by McKinsey & Company. These executives were asked to think about a recent strategic decision (good or bad) and how the decision was derived. What McKinsey discovered was that good decisions were more likely to have come out of a process which used additional rigor when choosing the path. Bad decisions were put through less rigor.

For example, good decisions were more likely to come out of a process with:

- Better assessment of internal capabilities
- Thorough, objective review of business case, even when most were already strongly in favor.
- Use of a robust fact base
- Dissenting voices were heard

The problem when you choose a path too early is that one can always find a way to justify the decision. As a CFO I knew used to say, “I’ve been in this business a long time and I’ve rarely ever seen a proposal to do something that did not come with a pro forma that had a positive return on investment.” In other words, we can make almost anything we want to do look good on paper.

However, this CFO would go on to say that although all projects had a favorable pro forma prior to implementation, a large percentage would have negative returns once implemented. In other words, the pro formas seemed to have little correlation with reality. Apparently, more rigor is needed in the decision process.

So, when faced with a strategic decision, keep the following in mind:

1) Am I making a decision on what we want to become or what we want to do?

2) If the decision is about what we want to do…

a) Does doing this get us closer to what we want to become?

b) What are the other potential options (paths) of things we could do to get to what we want to become? Why is this option better than the others? In other words, don’t make the decision isolated in a vacuum. Put it into the greater context of goals and alternatives.

3) Don’t accept the assumptions in the proposal at face value. Pressure test them and see if the proposal still makes sense under less rosy assumptions. Listen to the dissenters.

SUMMARY
Our strategic decisions cause us to choose a particular path, as in a maze. Just as mazes have many paths with dead ends, we can choose a strategic path with a dead end. To avoid dead ends, remember two things. First, make sure the path you choose (what you want to do) leads to the end of the maze (what you want to become). Second, take nothing at face value. Pressure test the assumptions and compare your proposal to other alternatives.

FINAL THOUGHTS
Getting the job done right is not the same as getting the right job done. Spending more time upfront on making sure this is the right path to take can save a lot of grief and dead ends later on.

Analogy #168: Blind Confidence

THE STORY
Let’s assume, for a moment, that Simon has a cancerous tumor that needs to be removed from inside his body.

As he is walking down the hallway at work, Simon runs into someone he knows named Bob. Simon strikes up a conversation with Bob which goes something like this:

“Hey Bob, I’ve got this cancerous tumor in my body and I’d like you to take it out.”

Bob answers, “But Simon, I’m not a doctor. I know nothing about surgery. I’ve never done anything like this before.”

“That’s okay,” Simon replies. “You can do it, Bob. I have complete confidence in you.”

“But I don’t have any training, or any proper tools,” protests Bob.

“Let’s not get bogged down in details,” says Simon. “You know the goal. Now just go and get it done. Look! Here’s an empty office. I’ll just lie on the desk right now and you take out the tumor.”

THE ANALOGY
Confidence can be a good thing. Without confidence, difficult tasks would never be undertaken. Inspired confidence from leaders provides the motivation for a firm to tackle a new strategy.

However, there is a difference between realistic confidence and blind confidence. Realistic confidence is rooted in knowledge about the task at hand and the capabilities necessary to accomplish it. There is a reason to feel confident, because you know what needs to be done and are assured that you have what is needed to do it.

Blind confidence, by contrast, is not rooted in anything. You really do not have a clue as to what needs to get done or whether you have what it takes to get it done. Just through blind faith, you hope that it can be done.

In the story above, there is no rational reason why Simon should have any confidence that Bob could take out that tumor. Bob has no training or skills in medicine. He has no tools or assistants to help him in the task. Yet, Simon says he has complete confidence in Bob’s ability to take out that tumor. This is blind confidence.

I suspect that if Bob went into that empty office and started to take out that tumor with whatever he could find in that office, Simon would end up dying from the attempt. This was not well-placed confidence.

Sound silly? Well, I’ve been around businesses who have acted almost as silly. The leaders of these companies come out of their strategy meetings with extremely aggressive goals, but not a clue as to what it will take to accomplish them. Then, they go and tell everyone in the organization how confident they are in the people’s ability to make the aggressive goal a reality.

The leaders do not provide any direction, tools, or training to get the job done. All they supply is the goal and the rhetoric: “I know you can do it. I have great confidence in you!”

The company tries to hit the goal, but without the necessary skills, training, direction or tools, they fail. The company (like the patient) dies from the attempt.

THE PRINCIPLE
The principle here is that blind confidence can be dangerous. Our confidence needs to be rooted in something more. The following four points need to be kept in mind to prevent the perils of blind confidence.

1) Goals cannot be made so aggressive that they do not stand a chance of being accomplished.
Aggressive stretch goals can be very useful in moving a company forward. Jim Collins and Jerry Porras, in their book “Built to Last,” praise the benefits of Big, Hairy Audacious Goals (BHAGs). However, there is a difference between an aggressive goal and a completely unattainable goal.

When goals are left as mere numbers, they can give the appearance of attainability. Saying things like “20% annual profit growth,” “Sales of $10 Billion,” or “40% market share” can sound very impressive. But is it realistic? The only way to tell is to boil down what it would take to achieve these numbers to see if this is realistic.

For example, McDonalds one time tested a McShrimp Cocktail. Customers in the test loved it. An ambitious goal of how many McShrimp Cocktails could be sold was created. But was it realistic?

Upon further analysis, it was determined that even if McDonald’s captured every shrimp on the planet, it would not be enough to satisfy the goal. And even if they could capture nearly all of the shrimp on the planet, the implications on costs would be such that they could no longer get the shrimp at a price at which they could make a profit. And then there would not be any shrimp left for future years. As a result of this analysis, they rejected the goal and did not proceed with the project.

It did not matter how confident McDonald’s management would have been. They could have shouted all day that “I have confidence in your ability to meet these goals,” but they still would not have been met. It was unrealistic.

2) Goals need to be anchored in actions.
It’s one thing to set a numerical target. It is quite another to know how to achieve it. As in the story, Simon had a goal to remove a tumor, but gave the task to someone with no knowledge of how to do it. If you want to achieve a goal, first develop a realistic action plan to get it done.

Remember, if a goal is ambitious, then it cannot be accomplished by doing the same things you did in the past (otherwise the goal would have already been achieved). New results require new actions. If you do not plan the new actions, how can you reasonably expect new results?

Strategic planning should be more than just setting goals. It must provide the key activities necessary to make the goals a reality. This does not mean that you have to understand every detail in advance before starting. But you should at least understand the key milestones necessary to get the job done.

If a goal is not anchored in actions:

a) You could end up trying to achieve an unrealistic goal.
b) You could end up hitting the goal by doing the wrong actions (like achieving a sales goal by destroying profitability).
c) You could end up with chaos, as the company moves in random directions since there is no consensus on what the proper action should be.

Don’t just measure numbers…measure activity.

3) Even a skilled doctor cannot succeed without the proper tools.
Actions require resources, such as people, equipment, training, and so on. Even if Bob in the story had been a skilled surgeon, it would have been nearly impossible to successfully remove a tumor in an unsterile office, without any surgical tools/equipment, anesthesiologist, nurse, or other necessity.

Similarly, if your strategic goal requires certain resources, then the strategy needs to include a path for obtaining those resources. Perhaps you will need to acquire new talent. Perhaps a skillset can only come through acquisition. Perhaps money needs to be invested in R&D or new distribution capabilities.

Offering blind confidence is not enough. You have to offer the proper resources as well. And if you cannot find or afford the proper resources, then your goal is probably unrealistic.

4) What you may think is inspirational leadership may actually come across as clueless leadership.
Finally, if you ignore the first three points and still go on stage to give your speech of confidence, keep in mind that your audience may not interpret the speech as you wish. They may realize that the goal is unrealistic, that you have no clue about which actions to take, and that you have not provided the proper resources to get the job done.

While you’re saying “I know you can do it…I have confidence in you,” the audience may be thinking:

“This is an impossible task. Our leaders are clueless idiots. My future is doomed. I need to start getting my resume out there.”

Hence, instead of providing inspiration and confidence, you have done just the opposite.

SUMMARY
Confidence and inspiration are necessary to tackle new strategies. However, unless that confidence is rooted in realism, associated with specific actions, and supported with the proper resources, that confidence is worthless. The only thing it will inspire is employee defection.

FINAL THOUGHTS
There was a Dilbert cartoon where the pointy-haired boss gives a speech to the employees. He says, “Sales are dropping like a rock. Our plan is to invent some sort of doohickey that everyone wants to buy.”

After the speech is over, he goes over to Dilbert’s cube and says, “The visionary leadership work is done. How long will your part take?”

Strategic Planning Analogy #153: Gaps & Plugs Part 1

THE STORY
Although Wal-Mart is on the leading edge of technology today, this was not always the case. Back in the early 1960s, when Wal-Mart was first starting out, its systems were very crude.

The accounting system consisted of a bunch of pigeon holes on the wall of the office—one pigeonhole per store. The paperwork for each store would then be stuffed into its appropriate pigeonhole. Once a month, the paper would be taken out of the holes and Sam Walton and Wanda Wiseman would close the books.

Not wanting to waste a lot of time doing paperwork, Sam Walton came up with a way to really speed up closing the books. He called it the ESP method. This is how Sam Walton explained the method in his autobiography:

“It’s a pretty basic method: if you can’t make your books balance, you take however much they’re off by and enter it under the heading ESP, which stands for Error Some Place.”

THE ANALOGY
Sam Walton used a simple plug to make his books balance. The plug was needed because Sam did not know how else to bridge the gap in his books.

A similar situation often occurs in strategic planning. First, one comes up with ambitious goals for the company. Then the core business is examined to see if it can achieve the ambitious goal. Many times, the core business appears to fall short of the goal. This creates a “planning gap.”

The question then is how to plug this strategy gap. One approach is to just make-up a line in the plans and stick the gap there, sort of like what Sam Walton did with his accounting books. Perhaps instead of calling it ESP, we could call it USP—Unknown Source of Profits.

Unfortunately, just as Sam had no idea what caused his accounting error, this method will give you no idea for how to fill your strategy gap. Your strategic goal in this case has no real connection to your planning activities. Therefore, it should be no surprise that when plugging your goal in this manner, you usually fall short of hitting the goal. The unknown source of profits becomes an unfound source of profits.

THE PRINCIPLE
In general, there are two places to look when trying to fill this gap—current operations and new ventures. The main principle here is that “putting all of your eggs into one basket,” be it current operations or a new venture, is typically sub-optimal. Instead, a more balanced approach between the two is normally more successful.

In this blog, we will examine some of the pitfalls associated with the extremes—either looking to get it all from current operations or all from new ventures. In the next blog, we will look at how a more balanced approach can often be better.

1) Too much Dependence on the Core can Start a Death Spiral
Ambitious goals are not bad, per se. In the book Built to Last, the authors say that successful companies tend to have “Big Hairy Audacious Goals,” called BHAGs.

If a goal is big, hairy and audacious, then it must by definition expect more than what one would naturally receive from current operations run similar to how they are run today. Therefore, by definition, BHAGs create a planning gap with current operations.

One way to fill the planning gap is to place nearly all of the expectations for filling the gap on current operations, even though by definition BHAGs stretch beyond the capacity of current operations. In other words, once the current patterns of expectations are trended out, they are adjusted to become exceedingly aggressive—far more than just stretch goals. For example:

a) Sales growth goals could be raised significantly above historical trends;
b) Cost cutting goals could place expense expectations well below anything ever done before;
c) Performance is expected to improve even though capital spending is curtailed.

Under this scenario, the implications to the company tend to follow one or more of these patterns:

a) Internal Decline: Employees figure out that the goals are unrealistic/unattainable and that they will now have a miserable time being yelled at and no longer get any bonuses. The good people will start to leave the company and the rest will be demoralized. The balance of employees’ time could move from trying to make improvements to trying to “cover one’s ass” and deflect the blame to someone else. Instead of performance getting better, performance will get worse.

b) External Decline: In order to hit the extraordinary near-term goals, the long-term viability will be threatened. For example, to hit unrealistic sales goals, promises may be made that cannot be fulfilled. To hit unrealistic expense goals, customer service could suffer. Lack of proper investment could eventually make your internal processes obsolete. For a short period of time, these tactics could work, but in the long run, they will ruin your future potential. Customers will eventually realize you do not live up to your promises, have lousy service and are obsolete. They will take their business elsewhere.

These two types of decline can put a company into a “Death Spiral.” It works as follows: over time, demoralized employees and defecting customers hurt performance. As a result, the planning gap between ambitious goals and shrinking results gets even larger. With a bigger gap, the pressure increases on the core business, causing even more internal and external decline. Every year it gets worse until the whole thing blows up.

2) Too much Dependence on New Ventures can Start a Money Pit
Although putting all the burden for filling the gap on the current business can lead to a death spiral, it is also potentially dangerous to put all of the burden on new ventures. One of the big problems with new ventures is that they tend to be at least partly outside our range of expertise. Without that expertise, we do not know what a realistic expectation should be for new ventures. Not knowing all the potential pitfalls, there is a tendency to set these goals unrealistically too high.

This can lead to one or more of the following issues:

a) Distorting One’s Risk Profile:
There are two ways this can increase the riskiness of your firm. First, if one wants big rewards quickly, there is a tendency to gravitate towards riskier investments (risk=rewards). Second, to find big results quickly, one tends to focus on fewer, larger ventures rather than a lot of smaller ones. By focusing on fewer, larger new ventures, the likelihood of failure increases, since most new ventures fail and you don’t have a large pipeline of options.

Technically speaking, if your risk profile goes up, then your key stakeholders should demand an even higher return on investment, since they want to be compensated for taking the added risk. This places even more pressure on looking for even bigger near-term returns. Even if you do not increase your return hurdle rate due to extra riskiness, it should be done. Otherwise you may approve projects at the lower rate which would not pass the test at the more accurate higher rate.

b) Hesitancy to Pull Back if News is Bad:
With all the pressure to find a success with a few big new ventures, there is pressure to be overly optimistic in expectations on these ventures. Revenues tend to be estimated on the high range and costs tend to be estimated on the low range. When reality starts setting in—and prospects do not look as bright—there is pressure to keep plodding along anyway. Too much has already been invested, people are expecting a success, there is little else in the pipeline to replace it, and your career may be damaged if you admit failure. As a result, bad ventures tend to live on longer than they should.

c) Throwing Money at the Problem:
When prospects start looking bad and you still want to succeed, a common response is to throw more money at the problem. Since this is a new venture, you may not have a lot of internal expertise to rely on…all you have is money. The hope is that if you throw more good money after bad, something good will turn out. It rarely does, so then you try an additional round of throwing money at the problem.

d) Current Business Envy:
With all of the attention and glamour given to the new venture, those working on the current business could feel left out and jealous. All the good people may shift over to the glamour side of the business, which hurts current business performance. Or, to keep them working on the current business, you may need to throw some additional money in their direction.

As a result of these four possible results, a focus on trying to get too big of a return too quickly on too few new projects can create a money pit—a place where you keep throwing money, but see little in return.

SUMMARY
Setting ambitious goals is often a good early step in planning. However, if you have no idea of how to achieve those goals, you will most likely not achieve them. In general, there are two sources for filling the gap between current trends and an ambitious goal—current operations and new ventures.

As we saw in this blog, too much reliance on only one of these sources will tend to lead to problems, so the goal is still not met. In the next blog, we will see that a more balanced approach tends to be more successful.

FINAL THOUGHTS
Studies have shown that smaller, consistent increases in performance improve stock prices more than large promises which are never realized. Too much blind ambition can be a hindrance.

Strategic Planning Analogy #137: Stop Lying to Yourself

THE STORY
Have you ever heard of people like this?

I’ve heard of women who want to lose weight. To help motivate themselves to lose weight, they purchase an entire wardrobe of clothing which is smaller than the size they currently wear. The idea is that the desire to want to wear those smaller clothes will be a strong enough incentive to get them to take the weight off.

Unfortunately, I have heard that this plan often fails. The clothes may increase the desire, but desire alone is often not enough. Increasing the desire to lose weight does not always translate into increasing one’s ability to lose weight. Now, instead of just being overweight, they have a wardrobe full of clothes they cannot wear. These clothes are a constant reminder of their failure and increase the frustration.

THE ANALOGY
Just like overweight people, businesses also have areas where they would like to improve. It could be a desire to trim a little weight out of a bloated high cost structure. It could be a desire to improve market share, reduce defects, or increase customer loyalty. Inevitably, the ideas ultimately relate to some way of increasing profitability.

In the story, the women did not create effective plans to reach their goals. All they did was establish a desirable goal (go down a couple of sizes in their clothing) and then put an incentive out there (the ability to wear nice new smaller clothes). Businesses often do the same. Rather than build an effective plan, all they do is set up desirable goals/targets and give out incentives if the goal is reached.

Targets and incentives can be very effective if the goal is reasonably attainable. However, if there is no effective plan for reaching the target or goal, it becomes nothing more than a desire that cannot be fulfilled.

This will tend to result in destructive behavior. Either people will become de-motivated by the impossibility of the task and give up, or they try to “cheat” their way to the incentive by looking for ways to meeting the requirement without achieving the desired goal. (We’ve talked about this type of activity in prior blogs “Your Stock is Too High” and “Raking Up Losses.”) Either way, just as the women were stuck with clothes they could not wear, the businesses were stuck with results they did not want.

Worse yet, the unrealistic target and the incentive give a false hope to management that the goal will be achieved. Therefore, they do not spend the time developing a better, more achievable goal, or a better plan to achieve the original goal.

THE PRINCIPLE
The principle here is to “stop lying to yourself.” If we set up unrealistic goals and targets, we are for all intents and purposes lying to ourselves. A target is like a proclamation to the world that “We can indeed achieve this.” If there is no realistic plan for achieving this, then we have lied.

One of two things needs to happen. Either we need to spend more time trying to figure out what needs to be done to make the target more achievable (turn the lie into truth), or perhaps we need a new goal (abandon the lie for truth).

This principle is especially true when a company falls into the “death spiral.” The death spiral typically starts when a company becomes less competitive in the marketplace. To shore up the lost profits cause by customer defections, activities and expenditures get cut. Without those activities and expenditures, the company becomes even less competitive and loses more customers. So then, to desperately get customers back, prices are slashed. This causes profits to plummet, so costs need to be cut even further. The good employees can see the handwriting on the wall and start to leave, further weakening the company. This type of activity continues until the business unit dies.

When a company starts down this decline, one may at first see it as a mere aberration, rather than a new trend. As a result, goals are set to return to historical growth rates. In addition, because there is a belief that nothing fundamental has changed in the competitiveness of the business model, there will be no plans to meaningfully change the business model.

This can result in disaster. First, by assuming no need to change the basic business model, one will not confront the fundamental issues causing the loss in competitiveness. Hence, the loss in competitiveness will continue. Second, by assuming an aberration rather than a new trend, one sets unrealistic goals, which drive bad behavior.

Back in the 1990s, when I worked at Supervalu, they were the leading food wholesaler to independent grocers. However, two external trends were weakening the competitiveness of their business model. First, independent grocers were losing share to the growth of large supermarket chains. Second, the rise of Wal-Mart Supercenters was not only creating problems for the independent grocers, but was changing all the rules for the entire grocery supply chain.

As it turns out, no matter how effectively you run warehouses for independent grocers, if the independent grocers are going bankrupt due to the chains and Wal-Mart, you have a broken business model. For awhile, Supervalu tended to live in denial, assuming the problem was only minor. Goals were set to grow as in the past, and the basic business model did not change much. This lead to several years of stagnation.

It wasn’t until they stopped “believing the lie that everything was still fine” that things changed. At that point, they changed the business model (primarily through the acquisition of Albertson’s), and are now back on a good path.

It’s like what they say about alcoholism. Until you admit you have a problem, you will not fix the problem. By lying to ourselves, we give ourselves an excuse not to do the difficult work of reengineering the business model.

Over the course of time, companies tend to go through a life cycle. Rapid growth is followed by maturity and maturity is followed by decline. If we are still thinking rapid growth after having reached maturity, we may make bad business decisions regarding investment. If we are still thinking maturity after having reached decline, we may miss out on all the ways to more profitably deal with decline.

Going down with the ship may be admirable in the navy, but not in business. If you know that your business is about to go down, the best move may be to look at liquidation or divestment. Usually, the earlier you take that option, the better, so living in denial is not helping the situation.

Strategic Planning can serve several roles to help eliminate a number of these problems. First, by keeping a close eye on the environment, strategic planning can help build a more realistic point of view about a company’s competitiveness. It can help determine if current problems are an aberration or the start of a new trend. Being the bearers of truth is not always a popular job, but it is a necessary job. Otherwise, a company may be believing a lie.

Second, strategic planning helps discover a path to get to the goal. We don’t want to end up like those women who desire to wear smaller clothes, but have no plan to make it a reality. Perhaps the goal is unattainable with the current business model, but becomes attainable if the business model is changed. Strategic planning can help find that new business model.

In other cases, perhaps the situation has changed so much that new strategic goals are necessary. Strategic planning can help discover what that new goal should be.

SUMMARY
Goals and incentives are most effective when they are in tune with the realities of the marketplace. If your view of the marketplace is flawed, you may set up goals and incentives which are inappropriate. Such inappropriate goals and incentives will support bad behavior and keep you from correcting/changing your business model to one which is more appropriate.

FINAL THOUGHTS
I had a friend who successfully lost a lot of weight. Thinking he would always be at that new weight, he spent a small fortune getting all of his clothes altered to the smaller size. What he didn’t realize was that the short-term plan he had been on to lose that weight was not something he could sustain over a longer period. As a result, some of the weight came back and now none of his clothes fit.

Sometimes, we need to take a longer term perspective in order to truly understand our condition. Being too hasty to change when change is not necessary can be just as bad as too slow to change when change is necessary.

Better Than Last Year

THE STORY
What would you think of a CEO if he said the following:

“Last year, our product defects killed 20,000 people. This year, our product defects killed only 10,000 people. I cut the deaths related to our defective product design in half. That’s a tremendous improvement! I should get a huge bonus for that. In fact, I should have a parade given in my honor.”

Now, what would you think of this CEO if you also knew this:

The reduction in deaths had nothing to do with improving the product design. Instead the reduction in the death count was due to the fact that so many people had heard of the deaths related to the defects in the prior year that the number of purchases of the product this year was also cut in half.

THE ANALOGY
Businesses tend to exist in a world that likes to measure progress versus the prior year. The general logic is that if your performance this year is better than last year, then you have done a very good job and should be rewarded for it.

In the story above, the CEO chose as his measurement the number of deaths related to product defects. Since this year’s results were better than the prior year (i.e., he cut the deaths in half), he felt he deserved a big reward.

However, there were a couple of flaws in his logic. First of all, he assumed that 20,000 deaths last year was an acceptable standard, and that any improvement on that standard was an added bonus. In reality, any deaths caused by defective product design should be considered intolerable. The goal should not have been “achieve less than the 20,000 deaths last year.” Instead, the goal should have been “no deaths from defective design.”

Second, he wanted to be rewarded for beating last year’s performance on this measure, even though the means by which he achieved it was ruining the company. This CEO did not try to eliminate the defect in the design. Instead, deaths were dropping because many people became aware that the defect still existed and therefore stopped purchasing the product. This CEO was ruining the brand image, ruining sales, and ultimately ruining the long-term viability of the business. Yet he wanted to be rewarded for it.

Obviously, just trying to beat last year—by any means possible—is not always worthy of being rewarded.

THE PRINCIPLE
The principle here is to understand the risks involved in rewarding behavior impacting the future based on looking at looking at the past. Past performance is not always the best benchmark for grading future performance. Some of the key factors to consider are the following:

1) Was the achievement of the past at acceptable minimum levels of performance?
2) Is this the appropriate benchmark to measure?
3) Can we achieve success in the future by merely doing the same things better, or do we need to do something different?
4) Is this a time when taking a step backward is called for?
5) Can the goal be met by doing the wrong things?

These points are discussed in more detail below:

1) Was the achievement of the past at acceptable minimum levels of performance?
As we saw in the story above, the CEO assumed that 20,000 deaths due to a defective design was an acceptable benchmark to improve upon. In reality, the acceptable minimum level of deaths due to defective design should have been zero. Anything less than zero should have been punished, even if it were a great improvement over the prior year.

Now you may not have done anything which killed people, but what if you were “killing” a company’s return on investment? What if your division had been losing money for 5 years straight or providing a sub-standard return on investment for 8 years? At some point, just saying “Well at least I lost less money than the prior year” does not suffice. At some point, the minimum standard needs to be set significantly higher than the past. At those times, providing an adequate return on investment needs to be demanded at a minimum, even if past behavior has been well below that standard. And if you cannot do it, we will have to find someone else who can.

For more on this topic, see my prior blog “We Suck Less is Not a Strategy.”

2) Is this the appropriate benchmark to measure?
Not all measurements criteria are created equal. Some are more appropriate at this point in your business’ life cycle than others. For example, at the beginning of a lifecycle, getting recognition and acceptance in the marketplace may be more important than profits. During the growth phase, growth in sales, market share or capacity may be the best measure. In maturity, profit margins may be the best measure of success. In decline, reduction in expenses may be a better measure.

It does no good to hit a target, if it is the wrong target to be aiming at. For example, if you focus too much on profit margins too early in a lifecycle, you may permanently stunt the long-term growth potential for future profits. If you focus too much on growth in the mature phase, you may be destroying value by making poor investment choices at a time when there is not enough growth to support them. Just look at the problems Wal-Mart is having trying to remain a high growth company. They finally decided to curtail some of their expansion plans, because there was not enough market growth potential to support it. For more on this subject, see my blog “Management by Growing.”

In general, the best criteria to measure success are the ones most closely tied to your current strategic objectives. In other words, are you closer to your strategic goal than you were last year? Every year, you may have different near-term strategic objectives. Therefore, you may need to change your measurement tool annually as well. What you want to get better at is achieving your strategy. If that is not something that gets measured, then there is a good chance it will not be achieved, as people instead do whatever it takes to meet the measured goal for the year.

3) Can we achieve success in the future by merely doing the same things better, or do we need to do something different?
If changes in the marketplace are making what you do no longer competitive, or worse yet, obsolete, then just doing it better than last year may not be good enough. Measuring success as making analog camera film more efficiently in a world of digital photography may not be the best goal.

If you are a small hardware store, and a big Home Depot or Lowes decided to build across the street, perhaps this is a good time to reassess what you are doing. Perhaps doing what you did before—only a little better than last year—may no longer be appropriate. It may be time to try something different.

In our little story above, the CEO was trying to be more efficient at building a defective product, instead of focusing on fixing the defect. He needed a new product design, not a more efficient way to kill his customers.

Maybe this is the year for reengineering rather than just improving on status quo. And sometimes when you reengineer, you take a short step backwards during the changeover, which leads to our next point.

4) Is this a time when taking a step backward is called for?
Sometimes you have to take a step back in order to leap forward later. Ramping up R&D or investing more in technology might temporarily cause profits to dip from the prior year. However, it may be the only way to insure greater long-term success. If you continue to under-invest every year in your core business in order to squeeze out an incremental profit, you may eventually choke the business and kill off your future cash flow stream. For more on this topic, see my series on “Cutting Yourself to Prosperity?” Part 1, Part 2 and Part 3.

5) Can the goal be met by doing the wrong things?
Yes, it is true that if you want to change behavior, you should measure that behavior. However, improper measurement might cause them to change their behavior to the worse. In our little story above, the CEO was measured on reducing the killings related to defective design. But rather than improving the design, he achieved the goal by cutting sales in half.

You can improve sales by destroying profit margins. You can improve profit margins (at least for a little while) by cheapening your offering. You can increase market share through acquisitions for which you pay so much that it never provides an adequate return on investment. Therefore, when setting targets, make sure that there are some controls on the methods used to achieve the target, so that bad practices are not rewarded.

SUMMARY
Although we like to pat ourselves on the back and congratulate ourselves whenever we improve on last year’s performance, often times just “beating last year” is simply unacceptable. Perhaps last year was a bad benchmark (e.g., influenced by hurricane Katrina). Perhaps we chose the wrong measure to improve on. Perhaps we achieved the goal in the wrong way. Rather than always looking backwards, we need to set goals more with the future in mind.

FINAL THOUGHTS
Goals need to be set well in advance. It does no good to wait until near the end of the year to pick what you want to be measured on for that year. After all, you can always find at least something on which you improved over the prior year.