Strategic Planning Analogy #553 Part 3: Operations Statement

BACKGROUND
We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In the last blog, we looked at the Revenue Statement. In this blog, we will look at another one of the documents to use in their place—the Operations Statement.

THE OPERATIONS STATEMENT
The purpose of the Operations Statement is to provide a strategic framework for understanding operations. “Operations” consists of those activities directly related to producing what you sell. Yes, the income statement also has lines describing various costs related to operations. However, the income statement doesn’t tell you why these numbers were chosen and what the strategies are to reach these numbers. That’s why I designed the Revenue Statement.

Since there are so many different types of business models out there, the Operations Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Operations Statement is used to determine the baseline. This is what operating costs would be if nothing changed and there were no new strategic initiatives.

As a result, the baseline is more or less a continuation of what you have done in the past. It would be tweaked to correspond to the projected baseline sales volume created in the Revenue Statement (which we talked about in the last blog).

2) Strategic Changes to the Operational Business Model

Strategy is often about change, about adapting to the future. This adapting usually requires business model changes which impact the operations. Change is not just done for the sake of change, but in order to achieve strategic goals. Therefore, one must first understand the strategy goals before embarking on operational changes. Otherwise, you may end up making changes with move you further away from your strategic goals and objectives. That is why the second part of the Operations Statement looks at the impact of strategic goals on operations.

a) Cost Control: One of the simplest strategic goals is to reduce the cost of operations. If that is a goal, then you would place here what the cost control strategy is and how much you expect it to lower operations expenses (by individual operational line). Some of these cost reductions may require up-front capital investments. This amount gets transferred to the Investment Statement (which we will talk about in a later blog). If you plan on using the cost reductions to support price reductions, then those price reductions would be reflected on the Revenue Statement.

b) Quality Improvement: Perhaps a strategic goal is to do a better job of owning the “quality” position in the marketplace. Increasing quality may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of quality improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

c) Service Improvement: Perhaps a strategic goal is to do a better job of owning the “service” position in the marketplace. Increasing service may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of service improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

d) Speed Improvement: Perhaps a strategic goal is to do a better job of managing the speed to market (reducing cycle time and getting to market faster). Increasing speed may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of speed improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.

There are many other strategic goals (besides the ones listed above) that could impact operations. They would be handled in a similar manner to those mentioned above. In all of these cases, the important parts to be included on this statement would be:

1. What is the strategic goal?
2. What changes will occur to operations to achieve that goal?
3. What are the incremental financial impacts from these changes:
1. Impact to Operations
2. Impact to Sales (Transferred to Revenue Statement)
3. Impact to Investments (Transferred to Investment Statement)

3) Net Results

The third and final section looks at the net impact of the first two sections on operations expenses. Basically, you take the baseline operational expenses (by line) and add to it changes from cost control, quality improvement, service improvement, speed improvement, or any other new strategic initiatives. The end result is your estimated costs per operational line item for baseline PLUS changes.

BENEFITS
The benefits from using an Operations Statement are as follows:

• It proactively links all of your strategies to specific operational activities.
• It quantifies how the implementation of each strategy will impact the costs of operations.
• It separates all of the components of strategy, so that you can critique each one for reasonableness.
• It separates operational issues to its own document, making it easier for those in charge of operations to see what they are being held responsible for.
• It forces one to consider issues beyond cost control when looking at changes to operations.

SUMMARY
To more comprehensively understand the operations portion of a strategic plan, it is recommended that some form of an Operations Statement be used. An Operating Statement has three sections:

1. Calculation of Baseline Operations
2. Calculating Impact of Strategic Initiatives on Operations
3. Net Results

FINAL THOUGHTS
You wouldn’t undertake a new strategic initiative unless you believed there was some benefit to doing so. Usually that benefit is either some form of improved external marketplace positioning (which would improve sales), and/or some form of internal efficiency improvement (which would reduce costs). This form helps you incorporate these improvements into your financials. If you are having trouble finding sales or cost benefits from a strategy, you may want to ask yourself why you are bothering to do the strategy at all.

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 #359: Does It Fit?

THE STORY
I’m a real sucker for a great bargain. Unfortunately, not all great prices are great deals.

Take clothing, for example. I’ve seen lots of really great clearance prices over the years on clothes. Unfortunately, the clearance assortment usually leaves a lot to be desired. They almost never seem to have my exact size left in stock. Therefore, I’ve been known to buy clothing that doesn’t quite fit me exactly, just because I couldn’t resist the low price. Sometimes, I can make the clothing work. Other times, it just sits in my closet, never worn.

I may have paid a terrifically low price for the item, but it was a lousy deal because it didn’t fit and I never wore it.

THE ANALOGY
It really doesn’t matter how little I paid for the clothes. If they don’t fit, they are worthless to me. It was wasted money.

The same can be said of certain strategic initiatives. They may appear to be excellent opportunities, but if they don’t have a strategic fit with the organization, you will never reap the full benefits of that opportunity. If fact, that great so-called “opportunity” could end up destroying value for your firm because of all the time, money and energy wasted in trying to make it fit, when in fact it does not and can not. You will always be at a competitive disadvantage versus others in that space who have a greater fit with the strategic initiative.

Just as you do not want a closet full of clothes you cannot wear, you do not want a business full of initiatives where you had no strategic advantage/fit. No matter how great the opportunity looks, it has to fit to be a great opportunity for you.

THE PRINCIPLE
The principle here is that great strategies produce great cash flows over their life.

Two Factors Impacting Cash Flows
Two factors impact how much net cash a strategy will produce over its lifetime:

1) The amount of money/time/effort needed create and execute the strategy. These are the efforts which produce the INPUT for your strategy. For example, if your strategy is to become a major player in the smartphone business, you need to expend money/time/effort to design/develop your technology (hardware and software) and find a way to get the smartphone manufactured. Once this infrastructure is developed, you need a process to ensure your technology remains up-to-date and that daily operations run smoothly and efficiently. Without these inputs (a phone, software, and operations to produce them), you cannot be in the smartphone business.

2) The amount of money/time/effort needed to get customers aware of your strategy and make it easy to purchase what you are offering. These are the efforts which produce the OUTPUT for your strategy. Using modern terms, this is the concept of “monetizing” your strategy. For example, to monetize your smartphone, you need things like arrangements with the supply chain (mobile phone carriers and retailers), marketing campaigns, distribution capabilities, and a sales force. And if your business is advertising based, not only do you need a sales/marketing arm to reach end users, but also a sales/marketing arm to reach advertisers. In the case of the iPhone, Apple also needed to develop an infrastructure for developing and selling apps in order to fully monetize the strategy.

To maximize cash flow, one typically needs to keep the costs of inputs low and the net revenues from outputs high. A key way to do this is via strategic fit. Strategic fit is critical in both the inputs and the outputs. Without strategic fit, you will both expend more effort AND get less in return on your inputs as well as your outputs. And in a competitive marketplace, it is difficult to have a winning strategy when others, using strategic fit, can spend less and get more out of the same initiative.

Strategic Fit And Inputs
On the input side, strategic fit occurs when the competencies, skill sets, and infrastructure needed to get a strategic initiative up and running are similar to the competencies, skill sets and infrastructure already possessed by the firm. For example, it is easier to develop the software and hardware needed for a smartphone if you already have the engineering and technical experience to develop things like this in-house. Having brought similar technology to market in the past will put you further down the learning curve. This will make the process more efficient, more timely and more likely to succeed.

Similarly, experience in manufacturing similar products will give you an advantage in delivering the new product you have developed. You will get down the learning curve faster for everyday operations, thereby increasing the efficiencies of your input. If you can build the product using manufacturing infrastructure you already own and experienced employees who are already in place, you not only avoid the added expense of new infrastructure and new training, but you also get to spread your current infrastructure cost over more products. This makes your entire portfolio more profitable.

There was a strong strategic fit for Apple to enter the smartphone business, because it built upon the learnings, expertise and infrastructure developed for the iPod. This allowed Apple to get a quality, innovative product to market quickly and successfully. Conversely, Microsoft has been slow and far less successful in its smartphone strategy due to a poorer fit. Microsoft’s expertise and experience is more suited to developing and producing business productivity software. It knows little about designing gadgetry and is not the most savvy in understanding the consumer market.

Strategic Fit and Outputs
Outputs have a strategic fit when the necessary requirements to distribute, sell, market and monetize the strategy are similar to (or can piggy-back on) the distribution, selling, marketing and monetizing expertise/infrastructure already in place in the firm.

For example, the Apple iPad can take advantage of all of the expertise and infrastructure already in place to distribute, sell and monetize the iPod and the iPhone. Apple already has the needed relationships with the retailers and the phone carriers. They already have the apps infrastructure in place. Apple can use the same sales force and distribution infrastructure. They already know how to successfully market cool new technology to the target audience. This cuts out a lot of time and costs, as well as improving efficiency and effectiveness.

Contrast this to the experience Dell had in adopting its strategy from selling computers to business to selling computers to consumers. At first, you would think this to be a reasonable fit. Further examination says otherwise, particularly as it relates to outputs. Selling to consumers is quite different than selling to business. You need a different type of sales force, with a different type of sales pitch. You need different channels of distribution. You need a different product mix (less desktops, more laptops). You need a different marketing appeal (based on different attributes) which uses different advertising media. There are different after sales service expectations, since consumers don’t have their own IT departments. You need to be “cool.”

By not having expertise in all of these outputs to the consumer market, Dell was at a competitive disadvantage to HP/Compaq. HP/Compaq had a greater strategic fit in the consumer space, so they won the strategy battle in computers. HP/Compaq could move faster and more efficiently in the consumer space, giving them the edge over Dell.

Remember, even if you have a superior product, your strategy can still fail if the competition has a superior way to get their product sold. Just ask anyone who has tried to win against Frito-Lay in salty snacks in the US. It is almost irrelevant how good your snack is. Frito-Lay has such a lock on the distribution channels that you cannot get adequate access to the customer at the point of sale. Even a giant like Anheuser Busch had to abandon their strategic initiative into salty snacks (Eagle Snacks) in failure because of its disadvantage to Frito-Lay in snack distribution. Anheuser Busch could not transfer its beer distribution expertise, so there ended up being little fit on outputs.

Overcoming A Lack of Strategic Fit
Given the importance of strategic fit, companies try to find ways to quickly overcome a lack of strategic fit. There are two ways to do so. First, one can seek fit via acquisitions. The logic is that if you do not have a strong strategic fit within your company, then buy a company that already has that strategic fit. That way, your firm will have the strategic fit once the acquired company is assimilated.

Although this approach can sometimes work, it has two big drawbacks. First, you typically have to pay a large premium to acquire a company with the desirable knowledge and infrastructure needed for entering a hot new opportunity. You end up paying so much for the business that nearly all of the financial benefit goes to the seller, rather than the buyer. Unless this expertise and infrastructure is very scarce, others will also have this fit. And if the others already had the fit in-house, they will have attained it at a far lower cost than your acquisition, putting you at a competitive disadvantage.

Second, the expertise and infrastructure in the acquired company is only useful if it can be integrated into the new strategy. Transfer of expertise is always difficult, but it is more difficult when done via acquisition.

The alternative to acquisition is outsourcing. The idea is that if you do not have the fit, then outsource that work to someone who already has the fit. The problem here is that you can lose any competitive advantage. If everyone can outsource to the same experts, then you cannot gain an edge on anyone else using the same source.

Sony used to be very strong in conventional tube televisions because of its proprietary expertise in manufacturing. However, with the new TV screen technology, all the manufacturers are basically outsourcing the key manufacturing to the same few third-party manufacturers. Sony is sourcing from the same place as everyone else. Now, Best Buy can go direct to the same third-party manufacturers and build a comparable TV, cutting out Sony and keeping more of the profits.

In global automobile manufacturing, a lot of the parts were outsourced to manufacturers in China. Now, the Chinese want to become world players with their own automobile brands. They can rely on the local outsourcers to provide them the same quality parts as the established brands. And because the manufacturer and outsourced firms are both Chinese, they have some added synergies unavailable to global firms.

Therefore, don’t think of acquisitions and outsourcing as magic bullets that automatically achieve strategic fit and strategic advantage. There are significant risks involved. It is better if your strategy can rely on expertise and infrastructure that you (and only you) already have in place.

SUMMARY
To win in a competitive environment, it helps to have a strategic advantage. An excellent source of advantage is strategic fit. The closer the fit between a new strategic initiative and your core expertise and infrastructure, the more likely you will have an advantage. Strategic fit not only applies to what is needed to develop/create a product/service, but also what is needed to monetize that product/service. Therefore, when choosing a strategy, look for options with a strong strategic fit in both areas. If the fit is not there, do not assume that acquisitions and outsourcing can automatically fill the gap and make you a success.

FINAL THOUGHTS
There are a lot of exciting new growth opportunities out there. But if they don’t fit, they won’t be exciting growth opportunities for you. Don’t follow the crowd and chase the latest hot idea. Look for the unique opportunity which fits who you are and is hard for others to copy because it doesn’t fit them. Wear the clothes that fit and you will always look good.

Analogy #188: Advice on Advice

THE STORY
Once there was a king who gathered his close advisors around his round table. He asked them this question: Do you think I should invade the neighboring kingdom?

The first advisor was head of the military. He thought to himself that his fighting men hadn’t been in battle for awhile, and he had an updated version of bows and arrows he wanted to try in real battle. Therefore, he answered “Yes.”

The next advisor was in charge of the King’s money. He knew such a battle would be expensive and use up much of the reserves. Later, if the King asks for spending money, he knew that he might get his head chopped off if he had to tell the King he was out of money. Therefore, he advised “No.”

The next advisor knew that if the king won the battle, there would be opportunities for promotion within the larger kingdom. Thinking he would benefit the most from this opportunity, he said “Yes, let’s invade our neighbor.”

The next advisor thought to himself that if the king wins the invasion, he will take all the credit. However, if the king loses the battle, he will blame the advisors. Therefore, seeing no personal upside to the invasion, but seeing plenty of downside, he advised, “No.”

As they continued this around the table, there were about as many people advising “yes” as advising “no.” The king was unsure of what to do. Therefore, he told his advisors “Give me your answer once again, but this time explain why your prior answer is in the best interests of the kingdom.”

The group of advisors started to panic, because none of them had answered based on what they thought was best for the kingdom.

THE ANALOGY
At some point, all leaders need to seek out advice. In the story, the king wanted advice on an invasion. Similar situations can occur in business, such as whether to invade a new sales territory, attack a particular competitor, introduce a new product, etc.

All of the king’s advisors give the king advice. Unfortunately, each advisor gave their advice based solely on what was best for their own personally-biased interests. None of them had considered the bigger picture.

When asking for strategic advice, it is important to frame the question in a manner which forces the advisor to look at the bigger picture. Otherwise, the advice is as worthless as what was given to the king.

THE PRINCIPLE
The principle here is about understanding the difference between strategic advice and implementation advice. If one is not careful, one may think they are asking for strategic advice, but get implementation advice instead. This confusion can prove to be disastrous.

Strategic advice is needed to determine what the optimal strategy should be. This is big-picture thinking. Implementation advice is used to determine the best way to achieve the already agreed upon strategy. This is more about tactical expertise. Both are important, but they require a different thinking process.

Although your advisors are probably not as selfish as the one’s in the story, they probably do have personal biases based on their area of expertise. These specialized areas of expertise are very useful at the implementation stage, but can get in the way if too narrowly applied at the strategic advice stage.

Let’s illustrate this with four types of expertise: legal, financial, marketing and operations.

Legal
Lawyers are trained in finding ways to reduce liability risks. This is an important area of knowledge, but if applied too narrowly at the strategic level, it can create bad advice. I once was working with a private school that took over a new school building. The question came up about what to do about a playground area. The legal and insurance advisors advised them to not have any playground at the school, so the school did not have one.

The legal and insurance advice was based on doing what produced the least liability. It was not based on what would produce the best school. The overall strategy—to run a great private school—was not factored into the advice. I’m sure that if you had asked these same advisors, they would have recommended that all the children stay home and never visit the school, since having children in the school would increase the liability risk significantly.

A wise person once told me that the role of a lawyer is not to tell you what to do, but rather to listen to you tell him or her what strategically correct thing you are doing and then have the lawyer advise on how to do that with the least legal liability. In other words, the specialized legal expertise is applied at the implementation level instead of the strategic level.

Financial
Pure financial discipline tends to look for ways to conserve cash and avoid risky investments. The best way to do that is to stop reinvesting in the old business and not venture into new areas. Over time, this will tend to choke off the future growth of the company. The company will starve to death because the money is horded, rather than fed to the business through investment.

As we saw in the story, the man in charge of the king’s money was reluctant to invade because that did not conserve cash, and it was risky. The financial bias always leans towards “no” when it comes to spending.

All profit streams, if not reinvested in, eventually dry up. If you take no financial risks, you will achieve no long-term financial rewards. You must continue to take risks and feed the business. Again, pure financial advice is great for finding the most prudent financial way to implement a strategy, but it may be poor approach towards finding that strategy. We talked about this in greater detail in a prior blog (see “Oh, my!”)

Marketers
Marketers are biased towards communication and selling. As much as pure financial biases tend to starve a business to death, pure marketing biases tend to spend a business into bankruptcy. Focusing only on the top line (sales) and forgetting the rest of the income statement and balance sheet can create a “growth at all costs” mentality. Rarely can you afford “all costs.” The marketing bias for “Yes” can be as deadly as the financial bias to “No.”

The dotcom bubble should have taught us that a single-minded quest only for market share can lead to poor long-term strategy. Marketing concerns need to be balanced with other priorities. Once again, a pure marketing expert can advise on the best way to market an already chosen strategy, but may give bad advice when choosing which strategy to market.

Operations
Most of the great operations people I have met are like great soldiers. If you tell them to “take that hill,” by golly they will find a way to accomplish that mission. Unfortunately, they are not always the best at deciding which hill to take.

Operations experts often have a bias towards cutting costs, since that is something they feel some control over, and something for which they have been rewarded in the past. However, if you don’t know what is the best strategy, then it is hard to know which costs are least critical to the strategy, and therefore the best things to cut.

A pure operations mindset tends to react with a bias to action—just do more of what we’ve done before, but do it a little more efficiently. However, sometimes the best strategy is to stop and do something differently.

As mentioned earlier, let these experts advise on how to take the hill (the tactics), but not necessarily listen to their advice on which hill to take.

This is not to say that people in these fields are incapable of strategic decision making. Many of them are actually very good at it. But this is only possible when they consciously take off the bias of their “departmental expertise” hat and put on their broad- thinking “corporate” hat. And this becomes easier to do if the leader makes it clear which times they are looking for the corporate hat strategic advice and which times they want the tactical expertise hat.

SUMMARY
The process of finding the best strategy requires a different type of thinking from the process of finding the best tactics. Strategy thinking requires a broad-based multi-disciplined approach. Tactical thinking requires more specific discipline expertise. Be clear about which type of advice you are looking for, or you may not get the advice you need.

FINAL THOUGHTS
Back in 2000, there was a move called Thirteen Days, which looked at the decision making that took place at the White House during the Cuban Missile Crisis of 1962. In the movie, President Kennedy kept asking all his advisors about what he should do. The military advisors were portrayed as being in a rut. Their advice on every question was to kill someone or blow up something.

President Kennedy kept telling them that his primary strategy was not the use of the military for killing or destruction. Yet, in spite of this, the military kept giving the answer formed by their military expertise bias. They were incapable of making the leap to broader strategic thinking. Make sure you surround yourself with people who can make that leap. (For more on this inability to leap outside one’s expertise, see “Henry the Hammer.”)

Henry the Hammer

THE STORY
Once there was a hammer named Henry. Henry the Hammer loved to fix things around the house. There was nothing he didn’t feel capable of fixing.

Today, Henry the Hammer was looking around the house for something to fix when he heard a squeek. “Aha,” said Henry. “One of the floorboards is loose. I can fix that.” So Henry took a nail to the floorboard and BAM! BAM! BAM! He nailed the floorboard back down so it would not squeek.

Then Henry the Hammer saw a picture which needed to be hung. Resourceful Henry found a stud in the wall, took a nail, and BAM! BAM! BAM! He made a hook out of the nail so that the picture could be hung.

Then Henry noticed that the television set was not working. Henry examined the situation and said, “I can fix that.” So BAM! BAM! BAM! CRASH! After examining the debris from hammering the TV, Henry said, “Hmmm…it’s still not working. It looks like this problem is going to need additional hammering.” But before he could get to it, he noticed that all of the windows were dirty.

“I’d better get to those windows right away,” thought Henry. “The TV can wait.” As a result, Henry went to all of the windows around the house with a BAM! BAM! CRASH! BAM! BAM! CRASH! BAM! BAM! CRASH!

Moral of the Story: To a Hammer, every problem looks like a nail.

THE ANALOGY
Strategy is about solving problems. Great strategy is about getting in front of a situation and making it better before the problem has a chance to get too large.

Just like strategists, Henry the Hammer liked to solve problems, too. Unfortunately, Henry—being a hammer—knew of only one way to solve problems: He would hammer them like a nail. BAM! BAM! BAM! Sometimes that was a very appropriate action, as in the case of the floorboard and the picture. Sometimes, it was a very inappropriate action, as in the case of the television and the windows.

But since Henry knew only one way to solve problems, he used that method to try to solve every problem. Even when it didn’t work, as in the case of the Television, he did not blame his methods. Instead, he felt that maybe he just didn’t hammer enough.

We can sometimes be like Henry the Hammer. We know a way to fix some problems, so we think this method is appropriate to fix every problem. And it may work often enough to make us believe that when it doesn’t work, the problem lies somewhere else. Unfortunately, along the way we break a lot of windows, causing more harm than good.

THE PRINCIPLE
The principle here is to embrace diversity. It is general human nature to want to surround ourselves with people who are similar to us. However, to quote former US Secretary of State Colin Powell, “If you surround yourself with people who think like you, then some of you are redundant.” We need to surround ourselves with people of different backgrounds and perspectives, so that we have more options on how to solve a problem. Having diversity is like having an entire toolkit rather than just a hammer. With an entire toolkit, you can find the right tool for each problem.

For example, people with a financial background tend to see problems from a financial perspective and, if working alone, will try to find a financial solution. Marketers tend to see problems from a marketing perspective and, if unchecked, will tend to look for a marketing solution. People from an operations perspective look for a solution via changing the operations. And so on…

Sometimes the problem actually is a financial one best served with a financial solution. Sometimes the problem really is about marketing. However, never are all problems just financial or all just marketing or all just operations. One approach cannot effectively solve every problem. In fact, quite often the problems are larger and more complex than any one discipline and require a multi-discipline solution. This requires getting people of diverse backgrounds working together.

From my experience, if you always take the same narrow focus to all problems, the result is like breaking windows. Even good individual solutions, if narrowly repeated too often in the same direction, can have unintended negative consequences from the cumulative impact. For example, one-dimensional financial approaches tend to avoid risk, hoard cash, minimize reinvestment and over the long haul can starve a company to death. One-dimensional marketing approaches try to buy their way out of a problem—which may be the right approach sometimes—but if done all the time tends to overspend a company to death.

One dimensional operational approaches look at trying to find a better way to do what works today. Eventually, however what works today may not work tomorrow, so the operators eventually end up working at trying to make an obsolete approach more efficient, causing death through becoming irrelevant. One dimensional technology approaches place the company in a perpetual cycle of waiting too long for something that costs too much and is too cumbersome, while someone else more nimble gets to the future sooner.

A glass of water is refreshing. A tsunami of water is destructive. Too much of one thing—although good in small doses—can destroy a company. Multiple approaches can help keep a better balance.

Even though we are smart and successful, we all have blind spots. The very disciplines that have helped us become successful cause those blind spots. Left to ourselves, those blind spots can start taking us down some of these paths of death before we realize what is going on.

Effective strategies are built upon a broad analysis of the situation. A broad analysis requires looking at the problem through different lenses—the lens of finance, the lens of the consumer, the lens of production, the lens of suppliers, the lens of human capacity, the international lens, the regulatory lens, and so on. Some people have better eyes to see through some of these lenses than others. Get the best eyes on your team.

Solving the mess in front of you is important. But wouldn’t it be better to get out in front of a situation and prepare a path to avoid future problems? Or even better, instead of getting bogged down in problem avoidance, work on how to take your company to the next great business opportunity before others get there? Then, instead of always trying to get out of a mess, you are moving towards greater success. This is where strategy is most effective, and diversity is important here as well.

When seeking the best future, one not only needs functional diversity, but also perspective diversity. Strategist Gary Hamel referred to this as “listening to new voices.” You need people on your team who are more in tune with leading edge thinking. These people tend to be younger, and also tend not to always look or act the part of a corporate executive. They may make you a bit uncomfortable, but they have a perspective you may need to hear.

Don’t surround yourself with just hammers. Get a whole toolkit.

SUMMARY
Past successes can give a false sense of security. It can get us to believe that because we have had he right answers in the past, we will always have the right answers in the future. Unfortunately, not all problems are the same. Different problems may require different answers. To ensure that we make the right decisions, it is a good idea to get multiple perspectives on the problem from a diverse group of individuals. If one is looking towards finding future strategies, it is often even more critical to bring into the discussion a diversity of new voices that may be more in tune with the leading edge.

Otherwise, you may end up like Henry the Hammer, whose intentions are good and who has a good solution for some problems, but can cause a mess if left alone to do what he is comfortable doing. Remember, not all problems are a nail, even if they sometimes look like it to a hammer.

FINAL THOUGHTS
Even the idea of embracing diversity, if taken to an extreme, can cause problems. It can lead to endless discussions which go nowhere, because the diverse group cannot reach a consensus. Just because you bring in a diversity of ideas, does not mean that the diverse group has to make the decision. At the end of the day, a leader needs to lead by making a timely decision.