Strategic Planning Analogy #416: Would You Build This?

THE STORY
There’s a story from decades ago about the Sears department store company. The company was going through some difficult times. A team of executives was put together to try to rescue the company.

Eventually, one of the executives on the team supposedly said something like this: “If we were starting from scratch, would we try to build something like Sears? If not, then why are we working so hard to preserve it?”

THE ANALOGY
Most strategic planning falls into one of two broad categories. Either one is trying to extend/exploit a winning business model or trying to repair a broken business model. As we can see in the story, Sears was working on the latter approach. Its business model, a middle of the road department store, was broken.

A natural reaction when one sees something broken is to try to fix it. But eventually one of the executives at Sears decided to question that assumption. His point was that the business model was broken for a reason—it was obsolete. The middle was not the right place to be anymore—success was at the extremes. Either become a low end discount store or a high end department or a specialty store. Even if you fixed the model to become the best middle of the road department store possible, it is still not the place you want to be. So why try to be there?

Often times, I think executives rush in to fix things before taking the time to ask the question “Is this worth fixing?” A lot of wasted strategic effort could be avoided if we spent more time asking ourselves if the broken business model is worth fixing in the first place.

THE PRINCIPLE
The principle here is that not all strategic pursuits are worth pursuing. Before spending a lot of time and effort running down a strategic path, make sure it is a path worth running on. Although this advice seems obvious—especially when working on new ventures—it can be overlooked when working with core legacy ventures. We want to preserve the core so badly that we forget to ask ourselves if the core is worth preserving.

Example of Intel
Consider the story of Intel. Back in the 1980s, Intel was trying to fix its core legacy business of memory chips. Nobody at Intel wanted to give up on the business, even though the legacy business was not doing well. Emotionally, people wanted to hang on and try to fix it. Andy Grove, COO at the time, finally went in to see President Gordon Moore and said something like this,

“What would a new management would do if we were replaced? [which was a real possibility if they couldn’t fix things] The answer is clear: They would get out of the memory business. So we go through the revolving door, come back in as if we were the new management, and just do it ourselves.” You can read more about this story here.

Andy Grove stopped to ask the tough question: Is the legacy core worth fixing? As a result, he stopped trying to fix it and moved on to building on Intel’s new strength in processing. And instead of being fired, Andy Grove eventually was made CEO of Intel.

When meeting resistance to abandoning the core, keep these principles in mind:

1) All Strategic Initiatives Eventually Fail
Sometimes strategies fail due to mistakes in execution. Other times they fail because the marketplace has changed to the point where the core strategy is no longer valid. For example, the digital era has made the core photographic film business of Kodak obsolete, no matter how well it is executed.

When you have a problem with your core, start by asking what the source of the problem is. Is it from poor execution or from obsolescence? If obsolescence, then don’t waste a lot of time trying to fix it. If poor execution, determine if it is too far gone to be salvageable before trying to salvage it.

Remember, all strategic initiatives eventually fail, because a changing environment changes what is most appropriate. There is no shame in admitting that the old core is no longer in sync with the most recent changes. It is inevitable. The real test is whether simple modifications can get it back in sync or if its time has passed and it can no longer be brought back in sync. And that should be the focus.

2) Most of Your Other Stakeholders Don’t Care About the Past
Lenders, shareholders and customers are probably nowhere near as attached to your legacy as the people inside the company. Lenders and Shareholders get their returns from future cash flows, not past cash flows. If abandoning the core leads to better cash flows, then they are usually quite okay with that. If you stick too long with a legacy that is no longer producing cash flows, then they are typically quite okay with changing the management (as Andy Grove feared). If the new management would abandon the core anyway, why not do it yourself?

Customers are typically not enamored with the past, either. They want to purchase what is the best thing to purchase right now, not what was the best thing to purchase in days gone by. If an iPhone is available today, why purchase an old rotary dial desk phone? Providing what customers used to want is not a formula for success, even if they used to want it a lot. And if your customers no longer want your offering, there isn’t much reason to try to preserve that offering.

Therefore, resistance from the outside to abandoning your core may not be as large as you fear. In fact, the outside world may cheer you on for abandoning the core.

3) The earlier you ask these questions, the better you can resolve them.
If you wait until a core business is fully obsolete before changing, you are working from a severe disadvantage. By that time, the core has no value, you have no cash flow to use for a transformation, and your reputation may already be tarnished.

It is better to consider abandoning the core earlier, when it may still have value to sell off, or at least provide enough cash flow to fund the transition to a replacement business. Transitions are always easier when moving at a time of strength. Customers are more likely to follow. Your best employees are still around. There is more money to fund the shift.

Therefore, start asking the questions early, even when the present looks good, because the future may not be a repeat of the present. Negative change may be just around the corner.

SUMMARY
Even though there may be a strong emotional attachment to the legacy core business, that does not mean that one should always try to preserve that business. The core may no longer be relevant today, or perhaps your execution of that strategy has drifted too far to be repairable. Therefore, before embarking on a massive program to fix a broken legacy business, ask yourself these questions: If I were starting over from scratch today, is this a business worth trying to be in? If not, why work so hard to be in it?

FINAL THOUGHTS
After Eddie Lampert’s investment company (ESL Investments) bought Sears, a lot of analysts were angry because Eddie Lampert was not pouring a lot of time, effort or money into preserving its core. They wanted him to fix the core business. However, Eddie Lampert was smart enough to ask the right questions. He knew the answer was not in fixing the core. He was merely using it as a foundation to become a major force in the on-line retail space. That was where he concentrated his efforts. This was where Eddie Lampert could see the possibility of a favorable return on investment. The analysts should have been happy that he wasn’t pouring money down the drain into the core.

Strategic Planning Analogy #131: Gimme Shelter (In a large Infrasructure)

THE STORY
In 1993, Walt Disney Pictures released the movie Cool Runnings, which was the story of the beginnings of the Jamaican Bobsled team. Although the movie took great liberties with the facts and showed little resemblance to what really happened, it did get a few things right:

The Good News:
1) The Jamaican Bobsled team had some very talented athletes.
2) The Jamaican Bobsled team had some talented coaching
3) The team worked hard to condition itself for competition

The Bad News:
1) The Jamaican Bobsled team had difficulty getting sponsorship and funding.
2) Relative to other Bobsled teams in the 1988 Calgary Olympics, The Jamaican team had virtually no support infrastructure and very little practice time on a bobsled course.

As a result, the Jamaican Bobsled team did poorly in the 1988 Calgary Olympics. The fans loved them, but love alone was not enough to win.

THE ANALOGY
Many businesses start out like the Jamaican Bobsled Team. They have several key components necessary for success. Just as the Jamaican team had talent, coaching and conditioning, these businesses may have talent, great ideas, and great managers.

However, visions of greatness can be shattered without the proper infrastructure. If the Jamaican team had been part of a stronger Winter Olympics infrastructure, had better financing, and better training facilities, it most likely would have seen far greater success. Similarly, if a business tries to seek success with insufficient infrastructure, it can also fare very poorly.

Consider tiny East Germany, which won far more Olympic Medals in the 20th century than a country of its size should normally expect. Was East Germany blessed with exceedingly better athletic breeding? No, East Germany had unusually good success because it built one of the finest Olympics infrastructures in the world.

Therefore, when considering a strategic plan for success, do not forget to consider the Strategic impact of your infrastructure.

THE PRINCIPLE
A couple of blogs back (see “Time for a Change”), we talked about how it can be a mistake to throw away a company just because its current business model is obsolete. Rather than abandon the firm and shift investment to a new start-up in a growing industry, it is often better to reinvigorate the established firm with a revitalized strategy. This blog will expand on that topic by looking at the power of an established infrastructure.

In the December issue of Portfolio magazine, there is an article talking about this very issue (and was referenced in the November 20, 2007 issue of the Wall Street Journal).

According to the article, Andy Grove (co-founder of Intel) has been working with Stanford University on research into business innovation. The conclusion? Firms with large infrastructures are often best suited for tackling the problems of innovation.

To quote the reference in the Wall Street Journal: “When people think of radical innovations, they usually think of start-ups that shake an industry from the ground up. Some sectors are hobbled with ‘intractable, industry-wide problems’ that only a large company can solve.”

The research found that large companies from outside the industry have two factors which make them most successful in innovation. First, they are not hampered by outdated internal industry conventions because they are outsiders. Second, their large size and infrastructure give them the clout and credibility necessary to effectively get the industry to rewrite the rules.

For example, many small startups tried to rewrite the rules of the music industry to innovate it out of the CD era and into the digital downloading era. All of these small startups failed. It wasn’t until a large established company from outside the industry (namely Apple) entered the game that the innovation was possible. Apple’s large position and infrastructure was necessary to budge the artists and labels into accepting a new paradigm.

On the other side of the issue, the problems of the small start-up can be seen in the story of Robert Black and Clean Shower. Back in 1993, Robert’s wife asked him to clean the shower. He hated the task and vowed never to do it again. Being a chemist and inventor, Robert Black decided to invent a product that would prevent the need for cleaning showers. His research lead to the invention of Clean Shower.

By the late 1990s, Robert’s innovation was selling well and starting to look like a huge success. And he got that far with virtually no infrastructure. The big consumer product companies could see the potential and were starting to make big offers to buy his company.

Robert decided at the time not to sell out to any of the big infrastructure companies. Instead, he decided to go it alone. However, once the big companies discovered they could not buy Clean Shower, they decided to compete against it. They used their huge infrastructure and large budgets to out advertise and to influence the retailers. Over time, the big companies with the big influence, big money and big infrastructures started to win the battle for market share. Robert Black and his little company began to suffer.


Eventually, Robert could see that his little company was not in a position to win against the big firms, so he sold out to the Arm & Hammer folks (presumably at far less than he could have gotten earlier). Eventually, even Arm & Hammer couldn’t compete against the lead of firms like Dow and they discontinued the product.

So here is the point. Great, innovative ideas are important, but so are other factors. Many people had the great idea of rewriting the rules of music, but only someone with clout the size of Apple could pull it off. Robert Black had a wonderful innovative idea, but it was the firm with the big infrastructure (Dow) who benefited from it.

So, if you want to innovate and rewrite the rules, here is what you need to consider:

1) Do I have enough clout to break through the conventions of how things are done today and get the rules of the game rewritten?

2) Do I have enough staying power to withstand competition from the big players once they start going after my success? (And they will attack. For more on this, see my blog “Bombs Start Wars”)

If you answer no to at least one of these questions, then you may want to seek shelter by joining up with someone who can say yes, either by selling out early to a big company or by forming joint ventures/strategic alliances. And if you are a big company, perhaps your strategy should involve looking for places in other industries where you can change the rules.

SUMMARY
In many cases, the best way to innovate is not by starting up a small little company. Instead, the best way to innovate is to be a large company with a strong infrastructure and be from outside the industry. As an outsider, you have nothing to lose in changing the industry. As a big player, you have the resources and clout to get the job done.

FINAL THOUGHTS
After doing the research with Stanford University, Andy Grove decided that one of the best ways to get breakthrough innovation in the automotive industry and lessen our dependence on oil would be if GE decided to build an electric car. According to his logic, GE has little to lose by rewriting the rules of the automotive industry. In addition, they have the technical know-how and credibility to pull it off.

Eat Your Children

THE STORY
Back in 1729, Jonathan Swift wrote an essay entitled, “A Modest Proposal.” In this essay, Jonathan Swift was writing about the deplorable situation that existed in Ireland at that time. In particular, he was concerned about the large number of children in Ireland living in poverty. In the words of Swift, his goal was to “find out a fair, cheap, and easy method of making these children sound, useful members of the commonwealth.”

In the essay, Swift makes “a modest proposal” for achieving this noble goal: Sell the children at the age of one for the purpose of being eaten by the wealthy. In a cold and unemotional writing style, Swift calmly points out many benefits from the proposal, including the elimination of problem children and an improvement to the economic condition of the community.

Naturally, this is just one of the many satirical pieces Swift wrote during his life. You can find the entire essay at http://art-bin.com/art/omodest.html.

THE ANALOGY
The thought of eating one’s babies is disgusting. This was anything but a “modest proposal.” Of course, this was the point of the essay, that the real disgusting thing was that society had become callous to the societal ills around them. By pointing out the absurdity of the eventual outcome of extreme callousness, Swift hoped to encourage more compassion.

The business world is full of its version of babies—all of the products and services that the company has nurtured over many years. Just as people would find it disgusting to kill and eat their children, businesses often find it disgusting to think about killing off their products and services. The emotional ties are difficult to sever.

However, sometimes the best strategic options for a business include the need to kill and/or sell off our corporate children. It may not be pleasant, but it may be necessary for the survival and prosperity of the firm. The trick is to find a way to make the move without destroying the emotional fiber of the company.

THE PRINCIPLE
The principle here is that all strategic initiatives eventually fail. If you stick it out with a product throughout its entire life cycle, when that product or service reaches the end of its life cycle, your company will die along with that product. To avoid the premature demise of a company, it must at times be willing to let go of the heritage of the past and adapt the strategy to the changing environment.

A great example of this dillema occurred at Intel. Intel’s heritage had been in memory devices. In the 1980s the memory chip was called the DRAM ( Dynamic Random Access Memory) chip. Employees thought of memory devices such as the DRAM as being a part of the heart and soul of the company. It was how they defined the company in their mind. It was what put Intel “on the map.” To abandon it would be like abandoning your parents. One middle manager, for instance, said that the idea of Intel getting out of DRAMs would be aking to “Ford deciding to get out of cars."

Emotions aside, reality was telling a different story. Intel was increasingly becoming a non-factor in DRAMs. The DRAM business was unprofitable for Intel and was putting the fate of the entire company at jeopardy. A rational person could see that microprocessors were the more logical future of Intel. Yet humans are not entirely rational people. Emotions also drive decisions. And the emotions kept Intel in the DRAM business longer than it should have.

Emotions are important to strategy, because without an emotional commitment, it is difficult to endure the difficulties which come with trying to bring a strategy to life. An emotionless strategy rarely gets the company’s rank and file motivated to go the extra mile to achieve greatness. So it is important, when taking a new strategic path, to make sure that the emotions and morale are not destroied in the process.

Intel COO at the time Andy Grove knew that the company needed to move on. The dilema as he saw it, and the way he resolved it was like this:

“Don't ask managers, What is your strategy? Look at what they do! Because people will pretend. . .The fact is that we had become a non-factor in DRAMs, with 2-3% market share. The DRAM business just passed us by! Yet, many people were still holding to the "self-evident truth" that Intel was a memory company. One of the toughest challenges is to make people see that these self-evident truths are no longer true. . .I recall going to see [President] Gordon [Moore] and asking him what a new management would do if we were replaced. The answer was clear: Get out of DRAMs. So, I suggested to Gordon that we go through the revolving door, come back in, and just do it ourselves.”

The solution was to:

A) Get people to see that their version of the truth really wasn’t the truth; and

B) Point out that if they didn’t make the change themselves, new management would probably be brought in to do it without them.

In today’s era of hedge funds and activist shareholders, the risk of being replaced or having the change thrust upon you anyway is a far more frequent and real threat. Why let the outsiders come in and make all the changes and reap all the profits? If it is going to happen anyway, do it yourself and allow current management and current stakeholders reap the benefits. At least if you do it, there will probably be more compassion and understanding. The emotional aspect may be easier to take and the healing may be more rapid if the insiders do it rather than the unknown outsiders.

It can hurt to abandon one’s children, like the DRAM. It can hurt more if you do not. The company may die along with the death of the product. Another related problem is the fear of cannibalization. As discussed in an earlier blog, “This Candy Melts in Your Hand”, many companies over the years have failed to invest in the next big thing in their industry for fear that it would cannibalize the sales of the current portfolio of products. By avoiding investment in the new, these managers hope to prolong the life of the old.

Unfortunately, just because your company does not invest in the new does not mean that others will do likewise. Firms with less to lose will dive into the next big thing and ruin your business anyway. It is better that you ruin the the business yourself by killing off your baby and at least own an entry into the next big thing, than to have someone else kill your baby and leave you with nothing.

However, using only a rational justification to do so is rarely as effective as combining it with an appeal to people’s emotions and sense of heritage. Jonathan Swift’s cold and rational essay could never pursuade anyone to kill babies, because it did not address the moral outrage. Similar feelings of outrage could occur in your business if you appear as cold as Jonathan Swift.

For example, there could be emotions of fear to be dealt with—fear that by leaving the old, everyone will lose their jobs and that one’s personal stake in the company will disappear. This is a real threat to company employees. In the case of Intel, leaving the DRAM business resulted in the loss of 3000 jobs. Although not all jobs can be saved, one should point out that change can often lead to greater growth, and greater growth can lead to greater opportunity.

There could be great sense of loss in purpose. Although the paycheck is great, people are happier and more productive if they feel like their work has a greater sense of meaning and purpose. By severing the heritage with the past, the company could appear like a cold uncompassionate piece of money-grubbing capitalism. This could disrupt morale to the point that productivity drops and good people leave to find a more fulfilling position elsewhere. It is important to link the killing of the corporate baby with a shift to an even greater sense of purpose which builds on the heritage of the past.

Finally, it is important to continually manage the perception of the company by its employees. If the identity of the company is too wrapped up in a single product, or the perception is based on a false “self evident truth,” then you could have problems down the road. It is better to manage this image prior to the need to kill off a baby then to wait until the last minute.

SUMMARY
Because the world is changing, strategic initiatives become obsolete. At some time, it may become necessary to kill off the babies that made the business what it has become in order to ensure a better place for where it must go in the future. Although this sounds great on a rational level, people live and act based on emotions as well. The emotional aspect should be addressed when making this change. If it is not addressed, either powerful internal forces will keep the change from occurring or the transition will not be as smooth and successful as it could be.

FINAL THOUGHTS
Companies are only as good as the people who do the work. If you destroy the morale, you destroy a part of what makes your company great.