Strategic Planning Analogy #577: What do you March To?

THE STORY

John Philip Sousa (1854-1932) was considered to be the best composer and conductor of American marches who ever lived. His nickname was the “American March King.”

When I was in college, I heard a story about a time when Sousa had visited my college. He supposedly told the heads of the college that he thought our college fight song was one of the best marches he had ever heard. That made me feel proud.

However, now that I am older, I have heard many additional stories about Sousa. As it turns out, John Philip Sousa visited a lot of colleges over his lifetime. And each college tells a similar story about how Sousa told them that their college fight song was one of the best he had ever heard.

Suddenly, Sousa’s stated opinion of my alma mater’s fight song seems a lot more meaningless.

THE ANALOGY
Strategists talk a lot about how companies should try to please their customer. But you hear far less about how customers often try to please the company…and this is a bad thing.  Sousa is a perfect example of this phenomenon.

Think of the college as being like a company and their fight song is their product. Sousa is the customer. In an attempt to try to please all of the “companies” Sousa tells them all that he loves their “product” (the fight song). So, in his attempt to please all of the “companies,” Sousa’s opinion of their “product” becomes worthless.

Customers in today’s world are often giving as worthless an opinion to companies as Sousa did to colleges—all in an attempt to please (not offend) the company. This desire to be nice and no-offensive results in consumer opinions which are as worthless as Sousa’s.

Many companies today use customer opinion surveys as a Key Performance indicator (KPI) to judge their strategic success. Unfortunately, there is often a Sousa-like bias in the customer to please the company and give opinions which turn out to be meaningless. KPIs with meaningless data can be very dangerous.

THE PRINCIPLE
The principle here is that even though it is important to please the customer, don’t judge your success by asking customers if they were pleased. There is too much bias in the desire of many customers to please companies, making answers to those types of questions worthless.

One example which comes to mind are the quick auto oil change companies. After you get your car’s oil changed, they send out a survey to ask you if you were pleased with the service. This sounds reasonable until one digs deeper.

As it turns out, many of the mechanics will tell their customers about the survey they are about to receive. Then the mechanic tells them that if they rate him with anything lower than a perfect score, the mechanic will get no credit towards his performance bonus. Many customers don’t want to keep their mechanic from getting a bonus and besides, who wants to return to a mechanic who is upset at them for giving him a low score? You want your mechanic to like you. So all of the sudden, almost all the mechanics are getting superior grades (the Sousa phenomenon—worthless information).

To remedy the situation, on a recent oil change survey I saw a new question asking if the mechanic told you in advance how your ranking would affect him. I guess that was put in there to “weed out” some of the bias. Unfortunately, just putting that question in the survey creates more of that same bias. Who wants to get their mechanic in trouble for talking about the scores?

Preference is Better than Opinion

One way to get around opinion bias is to stop asking people’s opinion about your product. For example, you could instead ask about preferences. Using our analogy, that would be like instead of asking Sousa about his opinion of your fight song, you would ask him to rank order the top 25 fight songs from favorite to least favorite. Sousa may still like them all, but at least now you will know which ones he likes more.

Knowing customer preference (compared to numerous options) is more important than opinion about a single product, because we don’t always buy what we like, but are more likely to buy what we prefer.

I might like nearly all cars, but I don’t buy nearly all cars. I am more likely to buy the car I prefer. Therefore preference among choices is a better indicator of future success than mere opinion on a single item.

Behavior is Better than Preference

But even here biases can creep in to distort the results. In a desire to please the company, I might rank it higher in preference than I should. Therefore, an even better question is to ask about past behavior. For example, I could have asked Sousa how many times he listened to each of the college fight songs in the past two years. Past behavior is less prone to bias. Looking at what Sousa actually listens to is probably a better indicator of what he actually likes than asking his opinion.

I would have far more confidence in a KPI measuring behavior than one that measures opinion or preference.

SUMMARY
KPIs are a key part of strategy. Choosing a KPI that gives inaccurate or distorted information can be very dangerous. KPIs based on asking customers if they like you is one such dangerous KPI. It is better to ask for preferences against competition. Better yet, just ask about past behavior.

FINAL THOUGHTS
This problem is even worse if you are asking customers about new concepts or products for which they have to prior experience. As Steve Jobs of Apple used to say: “You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.”  And when commenting on what kind of consumer research Apple did for the iPad, Jobs said, “None. It is not the consumers’ job to know what they want.” In other words, KPIs on future concepts should steer clear of consumer opinion even more than others. When it came to the future, Jobs marched to the tune of the future, not to the obsolete marches still in the heads of the customers.

Why Most Strategies Fail: Reason #2

BACKGROUND

I recently saw a blog by the Cascade strategy software company entitled “The 5 Reasons Why 70% of Strategies Fail.” You can read it here.

Since I disagree with their conclusions, I decided to write my own blogs on why strategies fail. I came up with three major reasons. The first reason why most strategies fail is because they are too internally focused at the expense of an external orientation. I covered that topic in the first blog.

The second major reason why strategies fail is because they focus too much on “doing” rather than “being.” That is the topic of this blog.

PROBLEM #2: STRATEGIC FOCUS ON DOING RATHER THAN BEING
In an earlier blog I started by looking at children. Children don’t talk about what they want to “do” when they grow up. No, they talk about what they want to “be” when they grow up. Strategists need to imitate children by asking what their companies want to be in the future rather than what they want to do in the future.

“Being” Keeps You Relevant

Why is a focus on “being” so important? One reason is because the world is full of change. Technology changes, competition changes, social norms change, and so the list goes on in so many areas. The cumulative impact of all of this change causes behaviors and actions which used to be right and normal to appear quaint and obsolete.

Just think of all the change resulting from the internet or the smart phone. They have turned many conventional behaviors on their head. The right behaviors before the internet and the cell phone now look so add and out of place. This is one reason why many millennials cannot tolerate watching old movies and TV shows. The activities in these old shows seem so wrong or odd from the millennials’ modern perspective that they cannot relate to them.

This is why a strategic focus on “doing” can lead to failure. If you do the “right thing” for a long enough period of time, the changing world will eventually make it the “wrong thing.” Your strategy becomes obsolete and you fail.

Just look at Kodak. It didn’t matter that Kodak perfected the way to do analog film. Digital imaging made that type of doing obsolete. A strategy that finds the best way to do something is worthless when customers no longer want you to do it.

That is why focusing on “being” is so much better than a focus on “doing.” “Being” transcends a changing environment. For example, if instead of focusing on “doing” film, Kodak had focused on “being” the best solution for capturing memories, it could still be a thriving company today.

There is always a need to capture memories. The best solution may vary over time, but a solution will always be needed. If you focus on the big picture of what you want to stand for in the marketplace (your choice of what to be), you will remain relevant. By contrast, if you focus on what you want to do, you will become irrelevant.

Example: Wal-Mart

Over the decades, Wal-Mart had had a relentless focus on what it wanted to be. It’s founder, Sam Walton, wanted the company to be the best at offering retail value, starting first in rural communities.  Back in the 1950s the best way to “do” that was with variety stores. So Sam Walton operated Walton’s variety stores.

By the late 1950’s Walton could see that discount stores were becoming a superior solution for being the best at offering retail value, so he abandoned doing variety stores and began to do Wal-Mart discount stores.

In the early 1980’s it looked like warehouse clubs could be an even better way to be the best value provider, so in 1983 the first Sam’s Club was opened. By the late 1980’s Walton could see that supercenters had the potential to be a better value than either discount stores or warehouse clubs, so he stopped doing discount stores and started doing supercenters.

Now, shopping by smart phone appears to consumers as the best value, so Wal-Mart is pushing very hard to become a major player in that space.

Through it all, Wal-Mart has changed many of the ways they have done things. But it has stayed true to what it wanted to be: the best value in retail. By focusing on the being rather than the doing, it has survived around seven decades, whereas most of its competitors (who focused on doing) during that time have disappeared.

“Being” Increases Preference

Nearly every wildly successful brand creates a meaning and purpose which transcends the current product offering. It is this added purpose which causes customers to want to identify with the brand. 

As we talked about in the prior blog, successful strategies create natural preference without resorting to bribes. When your company becomes something grander that customers want to be identified with, they will prefer your brand and pay a premium to do so.

Think of Nike. It does not make shoes. Others own the factories and do the work.  Nike focused instead on being the embodiment of what is aspirational in athleticism. Anyone wanting to identify with that aspiration became attracted to Nike and was loyal to them.  That strategy allowed Nike to successfully expand into many athletic areas beyond shoes while charging premium prices.

BMW’s success is not due so much to “doing” automobiles as to “being” the purveyor of “the ultimate driving machine.” Everything BMW does is focused on this higher level of being. Those desiring to be associated with that type of being flock to BMW and pay a premium for the privilege.

Apple’s success has far more to do with the being it represents than the products it offers. It became the essence of coolness and hipness. Those who also wanted to be seen as cool and hip flocked to Apple.

This is not just a consumer products thing. Back in the days of the big mainframe computers, IBM won the day. It was not just because IBM was good at doing mainframe computers. It was that they created this aura of professionalism and service which transcended the product. It impacted everything all the way down to the professional-looking dress code of the service technicians who came to the customer’s building for repairs.

IBM executed becoming this sense of being professional and reliable so well that there was a saying back in those days that “nobody ever lost their job recommending IBM” for their company. It was the brand IT professionals wanted to be identified with.

Being Needs to Influence Everything

As IBM and other successful brand show, strategy focused on being is a lot more than just a clever slogan or public relations. It has to become a consistent way of life for the entire organization. The corporate culture has to have a similar sense of being. Every facet of the business has to reflect that sense of being, from product design to customer service to how the brand interacts with society.

Steve Jobs made sure everything in every area of what Apple did lived up to what the brand wanted to be. Similarly, there is no tolerance at BMW anywhere for something that is not driven towards being the ultimate driving machine.

These companies show that success comes not from a completing a list of tasks but from an integrated approach aimed at becoming something with a much higher purpose that permeates the essence how a company sees itself. This goes well beyond just a check list of tasks. It is an exercise in identity management.

Dire Consequences When Strategy is more about Doing than Being

When doing dominates strategy, activities are drawn towards performance metrics rather than how a company is perceived. As long as you do what it takes to meet the performance metric, you are rewarded. Unfortunately “what it takes” can destroy who you are.

For example, Wells Fargo got so focused on the task of doing more multiple account activities that it lost sight of its role to be a financial institution preferred by its customers. The result was that Walls Fargo angered its customers by opening many accounts in the customers’ names without their approval. Now they have a big mess to clean up.

Similarly, Volkswagen got so hung up on doing whatever it took to get good diesel mileage ratings that it resorted to lying and cheating. This severely damaged Volkswagen’s ability to be the type of company customers want to identify with. And now they are paying a steep price (in both money and image).  

Warning Signs that Your Strategy is on a Path to Failure

So, what are the warning signs that one is more focused too much on doing rather than being?

First, how seriously do you take your business mission? Do you even know what you want to be? Does your mission explain a higher reason for being that customers will want to identify with or is it just some clever phrase? Does the company try to live out the mission or is it just meaningless rhetoric?

After the collapse of Enron, I talked to many former employees looking for a job. They all said that Enron had a business mission paper explaining the essence of what Enron wanted to be. It was called RICE and it stood for Respect, Integrity, Communications and Excellence. However, they also said that Enron totally ignored this paper.

Instead, Enron became one thing: a place for doing whatever it takes to increase short-term stock price. The incentives all hinged on doing that one thing. So that is what people did. At the extreme, it became illegal stock manipulation.

This leads to the second warning sign: what do you measure? Wells Fargo, Volkwagen and Enron were measuring an activity (adding cross accounts, increasing fuel economy, raising stock price) rather than measuring how their being was perceived in the marketplace. This destroyed their strategy.

That is why I see KPIs as a necessary evil rather than a salvation for strategy. KPI’s tend to focus on doing, because doing is easier to measure and attribute to an individual. Too many and too much focus on these doing-related KPIs lead to the problems at Enron, Wells Fargo and Volkswagen.

Instead, we need more measurement tools that look at how we are managing our image and sense of being that we want customers to identify with.

The third warning sign is how a company reacts to the changing environment. Does it change with the environment so that its being remains relevant (like Wal-Mart) or does it stick with improving the old process and become obsolete (like Kodak)?

A fourth warning sign is a strategic process where corporate culture is not integral. As the saying goes, “culture eats strategy.” Ignore culture at your own peril.

SUMMARY
Depending on which study you look at, somewhere between 60% and 90% of strategies fail. If we don’t address the deep-seated reasons why strategies fail, we will not be able to raise the percentage of strategic successes. I believe that there are three major reasons why strategies fail and my reasons do not always agree with conventional wisdom. The second reason I believe most strategies fail is because the strategic effort is too focused on doing rather than being. Real success occurs when everything about a company reflects the reason why customers would want to identify their sense of self-worth with the identity of your brand. This requires a strategy that is rooted in knowing what your represent (your sense of being) and what type of culture is needed to personify it. Otherwise, employees will do the activities that boost personal gain and destroy the brand and the strategy behind it.

FINAL THOUGHTS
If you don’t look in the mirror, you won’t know how attractive you are. A key role in strategy is to be the mirror, so that the company can see how attractive it is becoming to its customers

Why Most Strategies Fail: Reason #1

BACKGROUND
This week, I saw a blog by the Cascade strategy software company entitled “The 5 Reasons Why 70% of Strategies Fail.” You can read it here.

The title lured me in. However, after reading the article, I was completely dissatisfied. I so fundamentally disagreed with almost everything said in the blog that I wanted to write back as to why I felt the blog totally missed the point.

However, because we approach strategy in such fundamentally different ways, I couldn’t find any common ground from which to start. It was as if we were from different planets speaking a different language.

Therefore, I will just write my own set of blogs on why I think most strategies fail. It boils down to three things. I will devote a separate blog to each reason.

PROBLEM #1: STRATEGIC FOCUS IS TOO INTERNAL
For a strategy to succeed, it must succeed in the external marketplace. It is out in the world, where the customers and the competition are, that you have to win acceptance. If the consumers vote for your competition, you lose—no matter what internal goals you have achieved. Too much internal strategic focus at the expense of external focus misses the point and often leads to failure.

The Most Important Question

Therefore, strategy needs to start in the external world by asking this question: Do you have a reason why customers should naturally prefer you over the competition? In prior blogs (here and here) and in a book, I referred to this as The Most Important Question.

There are three key concepts in this question. The first is the idea of “preference.” A good strategy provides a reason to be preferred by a meaningful segment of the population. This means that you perceived as providing a superior solution to an important problem faced by the customer—a solution worth choosing over other alternatives. Does the foundation of your strategy start with a compelling reason for being preferred by the external marketplace? Do you even know what problem your offering is even trying to solve and what others are doing to solve that same problem?

The second key concept in this question is “natural.” A natural preference is a preference rooted in the attributes of the value proposition. It is not artificially added on top. It is naturally embedded in who you are and what you offer. If you do not have a natural reason to be preferred, then you will be perceived as offering a commodity—no better than anyone else; no reason to be chosen over the others.

In the world of commodities, you cannot create preference naturally. Instead, you have to add incentives—or what I like to call bribes—in order to create artificial preference. These bribes can be lower prices, free add-ons, or other gimmicks to create the excitement that your commodity offering cannot do on its own. The problem with these bribes is that they suck the profitability out of your offering. And since competition can usually copy these external bribes, you end up in a downward spiral to bankruptcy.

So, if you have to resort to bribes to create preference, you strategy is a failure from the very beginning.

The cell phone networks in the US are a perfect example of this. The top firms (Sprint, AT&T, and Verizon) have not done a very good job of creating a natural preference for their network over the alternatives. To many, they are pretty much the same commodity, offering similar phones, similar coverage and similar services. The fact that there is so much switching between the firms indicates a lack of reason for preference.

Since there is little natural preference, these mobile network firms use a lot of bribery tactics to win customers, such as with price incentives and free features. These bribes often have only a temporary impact on preference, since the others copy the incentives. The only long-term impact is a reduction to profitability potential. Without the profits, long term success is threatened.

This is why AT&T is trying to buy up all the content companies. It is an attempt to create a natural preference rather than a preference via bribes.

One way to know if you have created naturel preference is to ask the market if your offering would be missed if removed from the marketplace. If alternatives work so well that you are not missed, then you have built a strategy that has no reason to succeed, no matter how well it is executed. I dare say that most companies fail because they never created a strategy that gave the market a reason to want you to succeed.

The third key concept in the most important question is “consumers.” It doesn’t matter whether or not I like my product. It doesn’t matter if independent testing says my product is superior. What matters is the consumer perception of my product. Theirs is the only opinion that matters. Strategies succeed or fail in the mind of the customer. How much of your strategic plan is focused on the mind of the consumer?

The Rise of the CMO

In my opinion, the beginning of the demise in the prominence of strategy was when businesses created the position of Chief Marketing Officer (CMO). The CMO was given responsibility for the external marketplace factors. It was snatched away from strategists. This created a number of disastrous outcomes.

1. It forced strategists to only work in the realm of internals—things like financial outcomes, project management and maintenance of the metrics of performance measurement. These are all a waste of time if your strategy is not rightly rooted in building natural preference in the marketplace. So the strategists could no longer control the key to strategic success.
2. CMOs really only have significant influence over bribes, like pricing and advertising and consumer gimmicks. They really don’t have much influence over how the company fundamentally functions in order to create a natural preference. Therefore, instead of focusing on natural preference, CMOs turned the company’s focus towards bribery. This ruins the essence of strategic success.
3. Although CMOs have lofty job descriptions with long-term goals, if you look at what most of them spend the majority of their time on, it is short-term advertising. Short-term advertising so consumes their schedule that they never get around to giving the long term marketplace the attention it needs. Because traditional strategists were almost exclusively long-term oriented, they were able to do a better job of making sure the long-term strategy could overcome short-term concerns (more on this when we get to the blog on reason #3 for why strategies fail).

Warning Signs that Your Strategy is on a Path to Failure

So, one of the first places I would check to see if your strategy is likely to fail is the balance in the strategy between internal and external orientation. If your strategy (and the process behind it) has too much of an internal focus, your strategy will probably fail. By contrast, winning strategies tend to be far more externally focused on the marketplace.

Here are some clues that your strategy is too internal:

First, are most of your strategic goals focused on “What’s in it for me?” or are they focused on “What’s in it for my targeted consumer group?” “What’s in it for me” goals are things like:

1.      Profitability Goals

2.      Growth Goals

3.      Shareholder Return Goals

These all may be nice things, but they are outcomes, not strategies. They do not tell you how to achieve them. There are lots of ways to increase profits or growth in the short term that will destroy a company in the long-term. In fact, often the fastest way to achieve internal goals in the near term is to screw your customers and give them no reason to prefer you over the long term.

As a general rule, if you get the external marketplace issues right, the internals tend to take care of themselves. However, if you only look at the internals, there is no guarantee that the externals will survive. A lack of external orientation in your goals often leads to failure.

A second warning sign is how you are measuring success: Are you mostly measuring what is going on inside your buildings or are you measuring what is going on in the minds of your customer?   Keep in mind that the perfect internal execution of a strategy which is seen as irrelevant in the mind of the customer is a waste of time and a certain path to failure. So measure what really matters.

Look at your KPIs (Key Performance Indicators). Are they mostly measuring internal achievements or external marketplace achievements?  Unless your strategy is making an impact on the marketplace, your strategy is worthless. Therefore, load up on KPIs that measure what’s happening out in the market where results really matter the most.

A third warning sign is to look at what your strategists focus on. Are they mostly focused on internal issues like financials or project management or KPI management? Again, these are nice things, but they are not the essence of what makes a strategy successful. Successful strategies put a company in a position where they can win in the marketplace.  If that is not job #1 for your strategists, then why should you expect to ever win in the marketplace?

I could say more on KPIs, but I will save that for the next blog, which will focus on the second reason why most strategies fail.

SUMMARY
Depending on which study you look at, somewhere between 60% and 90% of strategies fail. If we don’t address the deep-seated reasons why strategies fail, we will not be able to raise the percentage of strategic successes. I believe that there are three major reasons why strategies fail and my reasons do not always agree with conventional wisdom. The first reason I believe most strategies fail is because the strategic effort is too focused on internal issues. Real success occurs when a company is properly positioned to win in the external marketplace. This requires a strategy that is perceived by the customer as providing a superior solution to one of their problems in a natural way. If these external concerns are not met, then all the internal manipulations are a waste of time. So, if you want to have a successful strategy, put the emphasis on the issues which have the largest bearing on success. These start with getting the externals right.

FINAL THOUGHTS
I am not trying to imply that the internals do not matter at all. They do matter…just not as much as the externals. We will be addressing the internal issues more in failure reasons #2 and #3 (the next two blogs).

Strategic Planning Analogy #569: Strategic Multivitamins

THE STORY

My most recent blood test showed I was low in vitamin D, so I went to a healthy food store to look for vitamin D supplements. The man at the store said that to get the maximum benefits of vitamin D, you need a supplement that also includes vitamin K. Others say that vitamin D needs to be paired with calcium, because calcium is absorbed better when paired with vitamin D.

There are lots of other pairings in vitamins and supplements. Folate needs to be taken with B12 if you want it to work properly. Potassium needs to be paired with sodium to keep things in balance in your body. The list of pairings go on and on.

As a result, I did not leave the store with a vitamin D supplement. Instead, I got a multivitamin supplement.

THE ANALOGY
Many of the tools used in strategic planning, like KPIs and tactical outcome targets, are a lot like vitamins. They help make a business stronger and healthier. Regular emphasis on them keeps a business from feasting on the bad “junk food” which leads to poor performance.

The problem with that these strategic vitamins is that we tend to focus on only one or two at a time. When that happens, a company can get out of balance. Just as some vitamins need to be paired with other vitamins to work most effectively, most KPIs and targets work most effectively when paired with other KPIs/targets. The singular focus can get a company out of balance and turn a good tool into a business health nightmare.

Therefore, companies need to apply strategic multivitamins, so that everything stays in balance.  

  

THE PRINCIPLE
Yes, it’s true that one of the key benefits of strategic planning is the advantage of getting a company more focused.  However, there are dangers in getting TOO focused.  Vitamin A is important for health, but if all you take is vitamin A, you will suffer in two ways:      

•  You will starve yourself of other vital vitamins;
•   You will get vitamin A poisoning.

Similarly, if you narrowly focus a company on achieving just one thing, you can starve it of other essentials and turn that one good thing into a poison for your company. KPIs and targets need to be balanced and paired.

Although Warren Buffett did not use the vitamin analogy, he said something very similar at the latest annual meeting for Berkshire Hathaway. Buffet said that profits need to be paired with growth. If you only focus on profits, Buffet says that you will take too much money out of the company today and starve it of future opportunities. For a healthy business, you need to pair the two (profits and growth). That way, a company is healthy both today and tomorrow.

Pairing Efficiencies With Investments

A similar pairing would be efficiency and investment. A focus on efficiency is a good thing. It helps root out waste. It makes your efforts more productive.

However, if too much effort is placed on efficiency—at the expense of everything else—then problems occur. It moves beyond rooting out waste and starts eliminating or delaying every expense possible in the organization. Maintenance is postponed and investments are eliminated. This can result in increased injuries and product failures. The Samsung smartphone disaster may have been caused by eliminating too many costs associated with testing in the mistaken guise of getting to market more efficiently.

The irony is that by eliminating virtually all expenses today, we just create problems later which cost even more in the future...or even cause business failure. That would be efficiency poisoning.

That’s why efficiency needs to be paired with investments. We can’t simply cut our way to prosperity. We also need to invest in our strategic future. We need to invest in maintenance, equipment, safety, new lines of business, advertising/promotions, etc. A healthy future requires balanced nutrition from both efficiency and investments.

Pairing Internal With Extermal

Another important strategic pairing would be a combined focus on both internal and external factors. It is easy to fall into the trap of getting too focused only on the internal. After all, the internal is far more under our own control. It’s easier to achieve our targets in places where we have more control. And don’t our executives want achievable goals?

As a result, we can put on blinders and only worry about perfecting our internal business model. But what’s wrong with perfecting our business model you may ask? Well, if you do this while ignoring external factors, you can miss shifts in the customers or in what competition is doing. Customers may no longer want what your model offers or competitors may have come up with a superior business model.

Consequently, an internal-only focus can lead to perfecting an obsolete business model. No matter how grandly you’ve perfected the obsolete, it is still obsolete and worthless.

Just look at Blockbuster. It was trying to perfect the traditional movie rental business model. Unfortunately customers were moving to better business models offered by new competitors (Netflix and Redbox). Now Blockbuster as we knew it is gone.

And what about the current disaster at Wells Fargo? Wells Fargo has been so internally preoccupied with a focus on its culture of pushing its model of multiple accounts to the extreme that it lead to corruption and a public relations disaster. Had they balanced this internal focus with an external focus, they would have understood better how the internal tendencies were hurting their external relationships with their customers. That would have led to a stronger long-term strategy.

Balanced Scorecard

This is where tools like the Balanced Scorecard come in. Although I have never been the biggest fan of the particulars surrounding the balanced scorecard, I do appreciate its intended goal.

The goal of the balanced scorecard is to create a more balance blend of KPIs/targets. It takes into account a lot of pairings, like internal and external, efficiencies and investment, profits and growth. It forces a company to stay away from being too narrow in its focus. You can look at the balanced scorecard as being a company’s multivitamin.

Just as there are many types of multivitamins, there are many ways to achieve balance in the KPIs and targets you focus on. The important thing is to get on the multivitamin approach.

SUMMARY
One of the benefits of strategic planning is getting a company focused on where it needs to be. And that’s a good thing. However, if we get too focused on the tactics we use to get there, we may never reach our intended destination.

Life is complex. To make it work properly, we need a balance of nutrients. In a similar fashion, the business world is complex. To make our business work properly, we need a balance of KPIs/targets. If we get these out of balance for too long, disaster is almost inevitable.

Examples of balance would be pairings like profits and growth, efficiency and investment, & internal and external.

FINAL THOUGHTS
When I bought my multivitamins, the label said I should consult my physician before taking the pills. Similarly, I believe companies should consult a strategist before taking a strategic multivitamin.

Strategic Planning Analogy #518: Deadly Serious

THE STORY
I recently saw the movie “Inside Llewyn Davis.” It’s the fictional story of a folk singer back in the early 1960s. I also recently pulled out and listened to some old vinyl records of folk singer Bob Dylan from the early 1960s.

A common element about much of the folk music scene in the early 1960s was a sense of utter seriousness about the music. I could feel it in both the movie and the Bob Dylan records.

Many of the songs spoke about big, serious issues, like Peace & War, Love & Hate, Life & Death, and Social Injustice. The audiences at performances were quiet and serious. They focused on the words as if they were oracles from God. The mood was a bit like going to a (godless) church. And the backs of the albums were full of long liner notes from reputable reporters and serious music critics. They wrote about the music as if they were critiquing the works of the greatest masters of art and literature. Many of the folk artists were willing to almost starve to get the message out.

That’s quite a bit different from the music scene of today. Today’s popular music has been downgraded to little more than a background beat—a soundtrack to a video where someone wearing little clothing prances about. The suggestive video gets the emphasis and the background music feels like an afterthought. The audience is loud and rowdy—more like a party than a church. Nobody takes the “artists” like Miley Cyrus or Justin Bieber seriously. And you can tell they are in it for the money, not the message.

Things have certainly changed.

THE ANALOGY
I think a similar change has taken place in strategic planning. If you go back in time—to perhaps roughly around the 1980s—strategic planning was taken very seriously. Like the folk music of the early 1960s, the strategy topics covered in the past were large and deep—of life and death importance to the company or brand. Positioning, competencies, structure, differentiation—a search for a sort of “eternal purpose”, a reason for a brand to exist, a reason to keep the company from dying.

People with the word “strategy” in their title back then were treated with respect. The most respected consulting firms, who hired the best and the brightest, specialized in strategy. People listened attentively when they spoke on the subject, like hearing a sermon in church.

And like the long liner notes on the back of the folk records, there were lots of people writing serious books on the topic of strategy.

Now, it seems that strategic planning has, like today’s music, fallen out of seriousness. Strategic planners today are often relegated to merely creating the background beat—the monthly rhythm of KPI (Key Performance Indicator) reports, plan vs. actuals reports, and other such monthly scorecard updates. The real focus has moved elsewhere. Strategy work is seen as merely a temporary stopping point for high potential employees or those seeking to become something else, like a CFO—it is not a serious career destination. Even the big consulting firms rarely do strategy work anymore.

There aren’t many forums left where the big “life and death” issues of the corporation get serious discussion. Some of the newer social media firms take strategy work about as seriously as one would a Miley Cyrus video.

Things have certainly changed.

THE PRINCIPLE
The principal here is that long-term success requires making the right choices on some major, serious topics. Make the right decisions on these major topics and your company lives. If you ignore them, or guess wrongly, your company will die. They are, quite literally, life and death decisions.

When strategic planning is relegated to being just the rhythm section (only producing the monthly reports), companies lose an important focal point for dealing with these larger, serious issues. And that makes survival a lot riskier.

I will bundle these serious issues into two categories—“Reason To Live” questions and “Reason Not to Die” questions.

1. Reason to Live

If you want your company or offering to live, then you need a reason for why customers would want it to live. Otherwise, your company will die.

There is too much competition; too many alternatives. With all of those choices, a consumer is not forced into choosing your offering. They can choose something else, and unless you give them a reason to prefer your offering, they will choose something else. That is why I have said many times that the most important question in strategy is: What is it about your strategy which will cause customers to prefer you over the alternatives?

Preference is caused by offering a differential advantage over the alternatives. There are many ways to create this edge: by being faster, lower cost, higher quality, better service, more features, more specialization, higher convenience, and so on.

The important point here is that differential advantages rarely come about by accident. If all you do is the same thing everyone else is doing in your space, you end up just like everyone else in your space. There is no difference. There is no advantage. There is no real preference. At best, you gain customers randomly.

No, if you want to be preferred you have to be different; you have to choose a different strategic path than your competition. You have to choose where to build an inherent advantage. And then you have to design and build a different business model in order to profitably deliver your different results.

All of that requires serious discussions. The answers won’t turn up in a monthly update report. You need serious time devoted to the issue.

It bothers me that so many people just look to where the hot business space is and then rush in to fill the demand—just like thousands of other companies. Yes, there can be big winners like Apple, Google and Facebook. But the vast majority of the ones jumping into hot spaces fail.

They are lured into the hot space just like people are lured by the hot singer prancing about in the music videos. It looks so inviting. But because there is no substance built behind the scenes, it fades away.

Before jumping into the hot space, ask yourself some serious questions. What would give me an inherent edge over everyone else jumping into this space? What would I need to do differently in order to create that edge? How do I build a business model that excels in delivering that edge? Where do I get the competencies and capacities to pull it off? How do I build a superior advantage over others who may want to create the same advantage?

Without these serious discussions, you are not designing a reason for living. You are merely playing the lottery and hoping to get lucky. And we all know that nearly everyone who plays the lottery loses.

2. Reason to Not Die

Just because a company is successful today does not mean that it will continue to succeed. Many one-time great and successful companies have died or nearly died. Just think of Kodak, Lehman Brothers, Tribune Co., Global Crossing, Woolworth’s (US), and Sears.

The problem is that the environment changes. What succeeds in one environment may fail when that environment changes. Past success is no guarantee that success will continue into that changing world. Instead, one needs to be examining the environment and asking the tough, serious questions about whether your business is falling out of favor with change and on a path to death. And, if the current path is death, what big changes need to be made to avoid death.

The companies above either ignored the changes or made bad choices about how to deal with the change. Kodak bungled the transition from analog film to digital imaging. Tribune Co. bungled the transition from newspapers to digital media. Lehman Brothers misread the future of mortgages. Global Crossing misread the evolution of communications. Woolworth’s and Sears stayed in the middle while retail bifurcated into high-end and discount.

If all you do is measure success over the past month, you will miss the bigger picture. Not only can it make you blind to the larger changes, it can actually make the transition even harder. For example, sometimes the path from the old strategic vision to the new requires taking a temporary dip in earnings, as investments are shifted from the old to the new. The only way to preserve the near-term results may be to delay or ignore investments into the new. As a result, you miss the transition to the new and you die like the examples.

Take time to stand back and seriously assess the bigger, longer term picture. That way, you can get in front of the change and successfully transition into the new environment. If you don’t, you will probably die.

SUMMARY
Companies fail all the time. Usually, they fail because they did not properly address the big, serious issues of life and death. Companies live/thrive if they provide a differential advantage by choosing the right way to be different. Companies avoid death if they adapt to the changing environment. Unless you devote significant time to seriously discuss these issues, you will not ultimately survive. That is why I am in favor of strong strategic planning disciplines which tackle these tough issues.

FINAL THOUGHTS
Just because serious strategic planning may appear to be out of fashion does not mean that many of its critical functions are no longer necessary.

Strategic Planning Analogy #514: Working the Wrong Mine

THE STORY
Let’s assume there are two miners, named Bob and Jason. Bob is a big believer in analytics and measurement. Bob has KPIs (Key Performance Indicators) for every part of his mining operation and measures them often. Bob receives spreadsheets every day, showing in precise detail exactly how everything is going in the mines. Using that data, Bob can make minor adjustments to improve productivity on an ongoing basis. Everyone in Bob’s mining business is trained in how to improve their KPIs.

Sure, all that time, money and effort into analytics leaves little left for anything else, but Bob is happy. After all, he attributes his devotion to analytics with allowing him to eke out a small profit from a poor mine. Bob believes that without that devotion, he would lose money at that low-yield mine.

Jason, on the other hand, takes a different approach to mining. Rather than fretting about having the latest mining equipment filled with gadgets to measure productivity, Jason just carries a simple pick axe to his mine.

And every day, Jason extracts trainloads of valuable ore from his mine. Jason is making a large fortune on his mining business.

And why is Jason doing so much better than Bob? Well, while Bob was focused on incremental improvements via analytics, Jason was devoting his time, money and effort on locating the best place to do mining. And, as it turns out, great productivity at a poor mine is less profitable than average productivity at a high-yield mine which is bursting with pure ore.

THE ANALOGY
It’s common sense that—all other things being equal—a mine full of high quality ore will be more profitable to operate than a mine with very little (and low quality) ore. Yet Bob was so fixated on improving operations at his current low-yield mine site that he never stopped to consider that maybe he’d be better off looking for a better place to mine. His head was down looking at spreadsheets rather than up and scanning the geography for better sites.

Jason, on the other hand, realized that the highest determination of mining profits was in the quality of the mining location. Therefore Jason spent his effort on what was the high determination factor. Jason first searched for a superior place to mine and was rewarded handsomely.

As obvious as this common sense may appear, it seems that there are a lot more people like Bob in the business world today than Jason. Look at all the current buzz in strategic planning. It’s about big data, analytics, and KPIs. Job descriptions for strategic planners today talk more about statistical analytic prowess than big picture positioning. I recently saw where a company was placing strategy in its M&E department (Measure & Evaluate).

Now I’m not against measurement or productivity efforts. But that’s not the major source of growth and profitability. As we will see later in this blog, positioning yourself in the right place is a greater determinant of success. Therefore, positioning should be of higher importance, since decisions there will have greater impact. We need to be more like Jason and less like Bob.  

THE PRINCIPLE
The principle here is that leaders need to focus their time and energy on activities which produce the highest impact. Positioning is one of those high impact areas. Therefore, positioning should be a high priority of leaders and their strategy group…higher than low impact issues such as analytics.

The facts back this up. The latest came this week in an interview on McKinsey.com.  McKinsey’s Chris Bradley and Angus Dawson were talking about the Art of Strategy and what we’ve learned over the last 15-20 years about the topic. In the interview, Chris Bradley said research shows that “80 percent of growth is explained by decisions about where to compete or by market selection.”

Based on this research, if 80% of growth is determined by position—where to compete, who to target, winning position—then that leaves only 20% for everything else, including analysis, productivity initiatives, market share wars, and KPI monitoring. Shouldn’t we be focusing on the 80% rather than the 20%? In other words, wouldn’t we be better off spending time finding the right place to mine rather than getting more productive in the wrong place to mine?

Chris Bradley went on to say that:

“Companies should be just as focused about positional improvement as they are on performance improvement. [The research] reveals the importance of strategy in that light, not as a method of how we gain market share or decide what our edge is going be in the next quarter, but as a way to fundamentally position the company against the right trends, catch the right waves, and put our bets on the right markets.”

As Chris implies, positioning is where strategy adds the most value, so all those other strategic tasks (like productivity, market share, or near-term KPI targets) should not be sucking up all of one’s focus.

Example

I can illustrate this principle using a company I worked with. This company had a portfolio of retail brands. One of the brands was doing poorly, so I helped investigate the cause of the problems and potential solutions.

One of the things we learned was that there were a lot of areas where productivity could be improved. This included areas such as labor, inventory, distribution, marketing and merchandising. We investigated what it would take to improve these areas of inefficiency (time, effort, money) and what the impact might be if efficiency was improved.

But we did not stop there. We also spent significant time looking at the big picture position of this retail brand. What we learned was that the position of this retail brand was a lot like Bob’s mine—a poor, low yield position. In particular:

1. The sites of the stores were inferior to competition.
2. Nearly every store was in an economically depressed market with declining population.
3. Past actions had so confused the customer that one would essentially have to start over in building a compelling reason for customers to prefer the brand.

Because of the enormity of these positioning negatives, the productivity initiatives would have only a limited ability to improve the business. Even a highly efficient store will struggle if it is in a bad location in a declining market with a confused customer. It would have been like Bob’s effort to improve his poor mine—much work with little benefit—because productivity focuses on the 20% factor rather than the 80% factor.

The only way to create the big leap in improvement would have been to fix the position (the 80% factor) by relocating the chain to better sites in growing markets with a dedicated effort to rebuild loyalty. The cost and risk on that was very high.

Therefore, rather than put in all the time, effort and money needed to incrementally improve the productivity of that retail brand, the company sold the brand and put all that time, effort and money into a different brand which had a much better position (more like Jason’s high-yield mine).

That was the right move, because it focused first on positioning (the 80% factor) before determining decisions on where to create incremental improvements (the 20% factor). By putting the effort behind the brand with a better position, it improved the return on that effort.

SUMMARY
Incremental improvements via analytics, statistics, KPIs, Six Sigma, Lean and other such productivity tools has its place. But it is not the place of prominence. The big rewards come from getting the overall position right. Positioning needs the place of prominence in the strategic planning process. This is because if the position is wrong, then all those other efforts are constrained by the lack of potential within the poor position. You can only get so much ore out of a bad mine, no matter how productive you are. Better to focus on getting the position right, so that subsequent efforts are focused on place where the potential rewards are high.

FINAL THOUGHTS
Now some of you may be thinking that you can afford to focus almost exclusively on productivity issues now, because you already have a great, winning position. The problem is that environments change. The great positions of today may become lousy positions tomorrow. Decades ago, that poor retail chain I talked about had a great position (before the cities went into decline and the consumer position was compromised). So one can never ignore the positioning issue. It needs to be consistently monitored to ensure that it remains in tune with the marketplace and relevant with the customer.

Strategic Planning Analogy #507: Hammers Are Lousy As Saws

THE STORY

Joe the carpenter wanted to be as efficient as possible, so he decided to only carry around only one tool—a hammer.

Joe had three tasks that day: hammer some nails, screw some screws and cut some boards. Joe decided to do all three tasks with his hammer. Hammering the nails went quite well with the use of the hammer.

Getting the screws into the wood with the hammer, however, was far more difficult. By the time Joe could bang the screw into the wood with the hammer, the screw was all bent, the wood was a bit shattered, and the screw was doing a lousy job of holding the wood together.

Finally, Joe discovered that if you whack at a board long enough with a hammer, you can break it into two pieces. But when compared to cutting a board with a saw, whacking it with a hammer was less accurate in getting the cut in the right place, and the edges where it was “cut” with the hammer were all distorted and ragged. This made the board less useful than if a saw had been used.

But in spite of all the problems with the results, Joe the carpenter was still proud of his work. After all, as Joe put it, “I simplified my work by having to carry only one tool.”

THE ANALOGY

Joe’s approach to his work was rather misguided. What good does it do to simplify the number of tools you carry if the end results are awful? Replacing the screwdriver and saw with a hammer lead to a rather useless outcome. Not only would the results have been better if Joe had used a different tool for each task, it would have taken less time and been easier.

Business leaders wouldn’t be as misguided at Joe, would they? In one way, I think many are. There is this tool that businesses use, called a “budget.” The budget is a good business tool, just as a hammer is a good carpentry tool. But just as a hammer cannot effectively do all the work of carpentry, a budget cannot effectively do all the work of business.

Three of the key tasks of business management are to:

1. Effectively manage the treasury function;
2. Make sure the business operating divisions are doing the right things; and
3. Provide incentives for employees to act in the best interests of the company.

Many companies rely primarily on the budget process to do all three tasks. But as we will see in this blog, that is like using a hammer to tighten screws and cut boards. The budget is an effective tool to help the treasury function, just as the hammer is effective in hammering nails. But for the other two tasks, there are better tools than budgets. By trying to use a single budgeting process to do all three, one ends up with a mess. There are better tools for monitoring the operating functions and providing employee incentives, and they should be used instead of the “hammer” of budgets.

THE PRINCIPLE

The principle here is that companies are not doing themselves any favors by using budgets as a tool where it doesn’t belong. It is great for the treasury function, but inappropriate for many of the additional places where it is used.

1. The Budget “Hammer” Works Well on the Treasury “Nail”

The key function of treasury is to ensure that the cash of the business is properly managed. It looks for efficient (and cost effective) sources of cash when internal cash flows fall short of need and looks for efficient uses of excess cash produced internally. Timing of these actions is very important, so that the proper level of funding is available to match the fluctuating cash flow needs.

The budgeting process is a rather good tool to help in this treasury function. It provides a broad overview of cash flows over time. This helps the treasury function plan in advance so that the right amount of money is in the right place at the right time at the best price. The budget is also a good tool to share with the debt and equity community, so that they will cooperate more favorably with your cash needs. It helps build trust, so that they will provide cash at a favorable rate. Treasury should be the primary goal of the budget.

2. The Budget “Hammer” is a Poor Choice for the Employee Incentive “Screw”

However, when budgets are also used as the primary tool to incentivize employees, it destroys the integrity of the budget. Employees will try to “game the budget system” in order to insure easier and higher bonuses. This creates a budget which no longer reflects best estimate of cash flows, because the numbers are padded to improve the likelihood of a bonus. As a result, it damages not only the ability of the budget to get employees to work harder but it damages the ability of the budget to accurately help the treasury plan accurate cash flow estimates.

In addition, employees understand that there is usually more than one way to hit a budget number—and not all of these ways are equally good for the long term health of the business. For example, this quarter’s budgeted profit number can be hit by doing lots of actions harmful to long term prosperity, like improperly cutting investment in the future, cutting research, cutting maintenance, cutting quality, cutting service, overcharging customers, and so on. Since both good and bad behaviors can be used to hit a budget number, the budget is not very effective as an incentive for ensuring right behavior. It is like trying to secure a screw by banging at it with a hammer.

3. The Budget “Hammer” is a Poor Choice for the Operational “Board”

Similarly, the budget is a poor choice as the primary means of determining the specific actions of the operating divisions. The main problem is that budgets are frozen well in advance, before the year begins. As we all know, the marketplace is a dynamic, rapidly changing environment. It is impossible to fully anticipate all of these potential changes. It makes no sense to tie up your operations into budgeting straightjackets, unable to adjust to the changing business environment just because the best guess estimate put into the budget nearly a year earlier has proven to be off.

Does it make sense to not exploit a great opportunity merely because that opportunity was not in the budget? That would be like a miner refusing to take advantage of a huge find of gold in the mountain because they only budgeted to take a meager amount of silver out of the mountain. And the opposite is also true…why continue a particular action merely because it is in the budget if the changing situation makes that action no longer viable?

Budgets are typically broad-based numeric documents. They are not good at understanding strategic nuances, competitive dynamics or the actions behind the numbers.  To expect that out of budgets is like expecting a hammer to effectively cut a board.

Recommendations

To get around these problems, I suggest the following:

a) Get A Screwdriver. Get a tool specifically designed for incenting employees. To insure people are incented to do the right things, specifically outline what right things those are and reward achieving behaviors instead of numbers. For example, if you want an employee to master a skill, make skill mastery the criterion for bonus. Or if you want an employee to successfully roll out a new product or enter the Brazilian market or reduce the time to convert a plant to a new production run, then spell it out IN WORDS (specific enough to be difficult to game).  In the old days, we called that Management by Objectives which then morphed into Balanced Scorecards and now Key Performance Indicators (KPI). I think the migration may be going in the wrong direction towards fewer behavior-based words and more game-able numbers, but at least it is better than bonuses based almost exclusively on budgets. In fact, I might suggest doing the “screwdriver” in the spring and the “hammer” in the fall in order to keep budgets from creeping too deeply into the incentive process.

b) Get A Saw. Get a tool specifically designed for directing operations on what is an acceptable approach to their sphere of influence. This tool would tend to set up measures using a more strategic language. It would explain the strategic role that operational unit has within the organization. It would explain what “winning” would look like for that group. It would explain what the proper trade-offs are on attributes and outcomes. It would point the direction in which the operations are to migrate to in order to reach future strategic goals. Then the company delegates the specifics, to free up the operating unit to bob and weave with the changing environment in order to exploit the moment, provided the actions remain within the strategic boundaries.

c) Improve the Hammer. Budgets can be more dynamic. Draw up some contingency budgets in advance (based on different scenarios) so that you are ready if situations drastically change. Consider rolling budgets that adjust quarterly or semi-annually (depending on your business). Note: this becomes easier to do when the budget is freed by no longer having to also work as a screwdriver and saw. Also, consider doing the screwdriver and saw work PRIOR to finalizing the budget. That way, the budget more accurately reflects what will actually be done, instead of being just a wish list. Remember, the budget shows financial outcomes which are determined by action inputs. So get the inputs figured out before declaring the outcomes.

This is not to say that budgets are totally ignored outside of treasury. The budget provides discipline for the more routine aspects of business. The budget can help to determine if the desired strategy is achievable under current cash constraints. And if the budget has no connection to actions, it ceases to accurately reflect what the future cash situation will really be. So a little bit of the strategy needs to permeate the other areas. But it shouldn’t be the primary driver.

SUMMARY

Budgets are very useful, but they should not be the master tool to drive all of your management concerns. Budgets are most effective when centered primarily on the needs of the treasury function. A second, more action-related tool would be used to incent employees and a third, more strategic tool would be used to manage operational units.

FINAL THOUGHTS

Efficiency is not the same as effectiveness. Having a single tool may appear efficient, but it may be so ineffective that it destroys your ability to properly run your business.

Strategic Planning Analogy #499: Planning by Intimidation

THE STORY

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

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

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

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

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

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

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

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

THE ANALOGY

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

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

THE PRINCIPLE

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

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

1. The Cost of Gaining Compliance Through Intimidation

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

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

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

2. The Lowered Response Due to Intimidation

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

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

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

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

3. The Inevitable Breakdown

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

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

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

4. The Better Approach

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

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

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

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

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

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

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

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

SUMMARY

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

FINAL THOUGHTS

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