Strategic Planning Analogy #576: How Strong is Your Foundation?

THE STORY

I think the scariest commercials on TV are sponsored by the companies that rebuild house foundations. They talk about how—if you neglect your house foundation—it will collapse and your house will be ruined. That sounds pretty scary to me.

THE ANALOGY
Businesses are like houses. They are built upon a foundation. The better that foundation, the stronger that business will be. Strategic planning is a tool to help build a strong foundation for your business.

But let’s take this deeper. Even the process of strategic planning is built upon a foundation. If the foundation behind your strategic planning is weak, it will become a weak tool in helping to build the foundation of your business. So if you want a strong business foundation, you first need a strong foundation in your strategy process.

THE PRINCIPLE
To me, the foundational assumption behind long range strategic planning is this:

“By planning, an organization can minimize its risk for failure by taking greater control over how its destiny will unfold.”

This is the foundation behind strong strategic processes. Focus your process on adhering to this foundation and the process will be strong. Focus on anything else and you may just end up wasting your time. And then, your organization’s foundation will also falter.

There are two key words in this foundation that I will focus on here: risk and control.

1) Risk

Nothing is certain in life except death and taxes. Everything else fluctuates in complex, interdependent ways. Strategies are built to be executed in such an uncertain, interconnected world. In fact, the mere exercising of your strategy will change the environment it is being executed in. 

Therefore, strategies cannot be structured in such a way as to guarantee success. There are too many variables. The best you can hope for is a reduction in the risk of failure.

As a result, a good strategic process will spend a disproportionate time focusing on those vulnerabilities where you are at greatest risk. These are chosen based on two criteria:

a) What situations will have the greatest impact on my chances for success?

b) What are the areas most uncertain in knowing how they will unfold?

If something has both high impact and high uncertainty, then it should be a key part of your strategic discussion. After all, a high impact, uncertain situation has the greatest potential for increasing your risk of failure.

Often times, these may be items that fall outside what is traditionally focused on in strategy. Yes, there is a place for mission statements, values, core competencies, goal-setting, metrics, and the like. But if you don’t spend enough time addressing the high risk issues, the other activities will not save you. You will be blindsided by a future that surprises you and you are unprepared for.

That is why scenario planning and contingency planning can be such valuable strategy tools. Scenario planning can help you discover the risky areas to focus on and contingency planning can help you prepare your responses to these risks so that you can minimize any negative impact.

This leads to a second aspect of risk. Because the environment is constantly changing, you cannot address all of your risks in a single, one-time strategy document. The world is dynamic, so the strategy process must be dynamic as well.

Notice that I keep using the word strategy PROCESS. Strategic planning should not be seen as a single annual event, but as an ongoing process which happens whenever there are decisions to be made. If you want to increase your likelihood for success, you need a strategic approach that adapts to the changes around you and helps you make the everyday choices that reduce the risk of failure.

This does not mean that your basic strategy will keep changing every day. A strategy with no lasting impact is worthless. But you may need to switch to different (well thought out in advance) contingencies as the future reveals itself.

As soon as you realize that strategic planning is about minimizing risk rather than about creating a perfect plan, you will see the folly in many strategic processes that spend way too much time trying to craft “perfection.” “Direction” is more important than “Precision” when it comes to planning. If I know my desired endpoint (i.e., direction), I will know what to do when all the changes occur: adapt so that my endpoint is still in front of me. However, if I only have a detailed roadmap as my plan with clear steps on what to do (i.e., precision), my organization can quickly become lost if the future blows up one of my steps.

Don’t waste time trying to create the perfect planning document. Instead, use that time to create the right general strategic framework (which minimizes my risk of failure).

2) Control

The second key word is “control.” Even though one cannot gain full control over the future, it is possible to increase one’s control over the future through planning. As Peter Drucker once said “The best way to predict the future is to create the future.” In other words, the more control you have over how the future is created, the less uncertainty and risk there is in the future. Therefore, one of the most important parts of good strategic planning is planning how to increase your control over how the future is created.

One thing I know for sure is that if your organization is not focused on increasing control, it will lose control to someone else who is  focused on increasing control (on creating a future that is detrimental to your organization).

This really gets down to the issue of power. The more power you have, the more control you have. And if you have both power and control, you can create strategies with less risk of failure.

Power is a relative term. To say one has power means that you have a greater ability to control the future than others who are also trying to influence how the future is created. Therefore, an analysis of power is very external in its orientation. It requires a deep understanding of all the players who can impact how the future unfolds. They may be current or future competitors, legislators, influential consumer groups, or whatever. Don’t limit your thinking here.

Your task is to figure out how to maintain your current power within this environment and increase it over time. This can include topics such as size/scale, public relations, lobbying, alliances/joint ventures, the setting of international standards, control of patents, branding, acquisitions, speed to market, and so on. You need to convince the world to march to your beat and heed to your rules (the ones which give you the advantage). Are these issues/topics part of your strategic agenda?

This idea of building strategies which increase control was a key point of focus in my previous blog, seen here.

This is one of the key advantages of the Blue Ocean strategy. If you focus on building a strategy in a place where there aren’t any rules yet, you have a better shot of gaining control over how those rules are written. There is often a better shot at creating the future if you go to a place where there is not an entrenched competitor who already has control (provided you enter the blue ocean with power).

How much of your strategic process is focused on internal issues versus trying to gain control of the eternal environment? My guess is that your process probably needs to increase the time spent on gaining external control.

SUMMARY
One’s foundational philosophy behind strategic planning will determine the type of planning process you adopt. I believe that the foundational philosophy that creates the best strategic planning process is this:

“By planning, an organization can minimize its risk for failure by taking greater control over how its destiny will unfold.”

This foundation will lead to a greater focus on the external issues of minimizing risk and controlling power. And that has the greatest return on your strategic efforts.

FINAL THOUGHTS
Some say that planning is no longer valuable because the world is changing too quickly. Well, if your strategic process is focused on the wrong foundation, that statement is true. However, if your strategic foundation is focused on minimizing risk, increasing control, and long-term destiny, then it is more important than ever.

Strategic Planning Analogy #575: You’re Fighting the Wrong War

THE STORY
There’s an old military saying that goes something like this: In peace time, military leaders prepare for the next war as if it is going to be played by the same rules as the last war. Unfortunately, each new war comes with a new set of rules, making all that planning obsolete.

In other words, instead of looking backwards to figure out how you could have done better in the last war, anticipate the rules of the next war and prepare a way to win under the new rules.

THE ANALOGY

This recommendation does not only apply to military strategy. It also applies to business strategy. The rules of the game in business strategy keep changing, just as in warfare. The leaders in many businesses are older and got to the top by following the old rules. As a result, these leaders have a tendency to prepare for the future by falling back on those old rules which made them a success in the first place.

Unfortunately, as times change, those old rules become obsolete. If CEOs continue to run their businesses by those old rules, their businesses (and themselves) run the risk of becoming obsolete. To prevent that, strategists must continually update their mindset to stay in tune with the rules of the times.

THE PRINCIPLE
In my opinion, we seem to be at a point where the rules of strategy are shifting again. This would be the third major set of rules during my adult lifetime. If the rules are changing as I think they are, then it is time for strategists to update their mindset again.

Ruleset #1: the Three P’s

Back for most of the latter half of the 20^th century, the rules of strategy revolved around what I called “the 3 P’s.”

During this period, the major strategic objective was to maximize cash flow over a sustained period of time. The best way to do this was by focusing on three areas:

1. Positioning: The idea behind positioning was to convince consumers to associate your product/brand with being the superior solution for a meaningful problem. Make the problem and your solution inseparable in the consumer’s mind so that no other brand can unseat you as the best way to resolve the problem. For example, different brands of toothpaste became associated with different solutions: Crest for getting rid of cavities, Sensodyne for sensitive teeth, Plus White for smokers, Colgate for healthy teeth and gums, and so on.

2. Pursuit: To hold a position over the long haul, a business had to act quickly and invest in whatever it took to maintain that position. For example, Walmart wanted to hold the position of being the low price alternative, so it would invest in whatever retail format had the advantage in holding the low price position. That is why Walmart migrated from discount stores to supercenters and added Sam’s Club. It was pursuing the winning path to hold the position.

3. Productivity: To maximize cash flow, the cost of investments in positioning and pursuit had to be less than the profit margins available from the business. Therefore companies also kept a keen eye on keeping costs down, pursuing tactics like re-engineering.

Ruleset #2: The Three F’s

As the 20^th century was winding down, a new strategic ruleset was evolving. One of the key forces behind this change was the movement from selling physical products (atoms) to selling apps. This was the world which spawned companies like Google & Facebook (and all the people that wanted to copy their success). Under the new rules of that era, there was a new major strategic objective. Instead of trying to maximize cash flow over the long term, the objective was to maximize the selling price when you flipped the ownership.

Not only was the idea of maximizing cash flow out, the entire idea of profits lost favor. It was okay to lose money so long as a future buyer would pay a lot for your business. In other words, your return did not come from the ongoing business but from what you could make when the business changed ownership. I spoke about that in more detail here.

And the idea of managing for the long haul was also tossed out. After all, if you are going to flip the business to a new owner in a few years, your time horizon is only as long as it takes to cash out.

In this new environment, the strategic rules were as follows:

1. Fund: Find venture capitalists who are willing to fund your business. This is where the money comes from, not the user of the app. So, in reality, the venture capitalist is the customer of your business and the product you are selling them is access to all the people using your app.

2. Flex: In the wild world of apps, one has to keep flexing the model until a version is found that resonates with a critical mass of users. Venture capitalists of the time knew that the end product app was rarely the same as what was originally pitched to them to get the money. Therefore, the venture capitalists were betting more on the flexing ability of the founders to eventually hit on a winner rather than on the original pitch.

3. Flip: Since all the value is created at the time the ownership changes, the strategic emphasis is on optimizing the flip—who to sell to and for how much. For example, a lot of people of the time thought that Cisco Systems might be a good potential buyer. Cysco said it would only buy businesses located in Silicon Valley CA, Austin TX or Research Triangle NC. Therefore, if you wanted to flip to Cisco, your strategy would be to locate in one of those three areas. If your plan was to sell out via an IPO, the strategic emphasis was placed on maximizing those factors/metrics which would sell well in the IPO pitch.

Ruleset #3: The Three S’s

Just as people were getting used to this set of rules, it appears to be changing again before our eyes. There are many reasons for this. First, future innovations do not appear to lend themselves to start-ups in the garage. They are too complex and costly. Starting small and flipping no longer works as well.

Second, the innovations of the digital age have sucked a lot of the value out of entire industries. For example, the news and entertainment industries have seen the overall profits of the whole industry shrink dramatically. When people expect things for virtually free, it is hard to rake in huge profits. A new way to move money in your direction is needed.

Third, the more recent flips in general are nowhere near as dramatic as in the days when Google and Facebook flipped. If flipping is much less of a “sure thing”, investors will hold back and IPOs won’t be as easy to create. The whole idea of flipping is being questioned as a primary way to think about business. You can’t sell to investors if they aren’t investing in the old type of startups like before.

So what is replacing it? I call it the three S’s.

In the world of the 3 S’s, the key objective is to exert maximum control/power over an entire business ecosystem. It is no longer good enough to just have a good product or a leading app. You need to control the entire business system in which you exist. If you do not control how the ecosystem evolves, it will evolve in a way that blocks you from achieving adequate profitability. Power becomes the great goal, because power dictates where the limited amount of money goes.

To do this, you follow the 3 S’s:

1. Size-Up: This strategic approach requires thinking big. You need to not only size up the space you compete in, but the entire ecosystem your space lives within. This includes not only your traditional competitors. It includes anyone who has influence on how your ecosystem will evolve and how ecosystem profits are divvied up. It can include governments, businesses and advocacy groups. You need to size it all up to get your arms around the magnitude of the ecosystem.

2. System: Your strategy must encompass more than just how your business works. It has to encompass how you want the whole ecosystem to work. You have to strategize for the entire system. Your best individual performance will still leave you in trouble if the ecosystem defines the rules against you. Therefore, you have to make sure you have a powerful seat at the table where the rules are made. And you only get such a chair if your planning takes an entire system point of view.

3. Structure: To get the system to work in your favor, you have to help determine how it is structured. You have to put all the ecosystem building blocks together into a structure where you have a disproportionately larger influence than others. Some of these building blocks you will own. Others will be partnerships. Others will be voluntary followers of your plan because your power makes it in their best interest to comply with your wishes.

Here are some recent examples of this type of strategic approach:

1.      CVS: CVS realized that it needed to be more than just a major pharmacy/drug store chain in the US. It needed to have control over the entire healthcare ecosystem. To accomplish this, it started in 2006 by acquiring MinuteClinic, who operated health care facilities inside a retail setting. This gave CVS some control over the practice of medicine. In 2007, CVS acquired the Caremark pharmacy benefit management company in 2007. This helped them have influence over how company pharmacy benefit plans would impact CVS. In 2015, it acquired Omnicare, a leader in pharmacy distribution to institutions. And this year, CVS announced the acquisition of Aetna, one of the leading health insurance providers in the US. CVS is no longer a drug store company. It is a strong player throughout the entire healthcare ecosystem. It even changed its name to CVS Health.

2.      Disney: Disney realizes it cannot just be good at parts of the entertainment system. It needs control over the entire entertainment ecosystem. As the digital aspects of the entertainment ecosystem evolve, Disney could get squeezed if it does not influence how the rules are written. Therefore, Disney just announced the acquisition of a huge chunk of 21^st Century Fox. The logic is that the combined content and distribution controlled by such a combination will be so powerful that nobody will want to make any moves in entertainment without them.

3.      Another recent announcement include the merger of Ascension and Providence to create the largest hospital chain in the US. It is like CVS in that it is trying to exert more power in healthcare. It is like Disney in trying to get such a large chokehold over a major aspect of its ecosystem that it becomes a force that cannot be ignored. In their words, they are trying to create a voice “that can’t be ignored.”

And Target recently announced the purchase of Shipt. Shipt is one of the largest providers of the software and trucks used in the home delivery of items like food.  In this way, Target is expanding its influence in the consumer retail ecosystem by getting a big share of the out-of-store experience.

This is just the beginning….

SUMMARY
The environment is always changing, so the rules of strategy must adapt. We’ve moved from the 3 P’s to the 3 F’s. Now we are moving to the 3 S’s. If you’re still doing your strategy under the older rules, you may lose your grip on the future and be left out in the cold.

FINAL THOUGHTS
Don’t fight future wars with the rules from prior wars. Fight with the rules appropriate to the times.

Strategic Planning Analogy #530: The Power of Power

THE STORY
I once had to sit on a long plane ride next to a woman who wouldn’t stop talking to me. She kept going on and on about all of the products she had “invented” over her lifetime. Although she used the word “invented”, I think that was a bit of a stretch. Actually, a better term would be “dream up.”

She would tell me how she thought of an idea for a new product and then years later a company would actually bring it to market. For example, she told me that she had dreamt up the idea for disposable diapers long before Proctor and Gamble invented them. She never really pursued any of these ideas. She just had an idea that someone else would later also have. The difference was that she never did anything with her idea and they did.

There was only one of her “inventions” which really came to life. It was a brush for cleaning grease traps at fast food restaurants. And it only came to life because she worked for a brush manufacturing company and she had the company actually do the work of bringing it to life.

THE ANALOGY
Just having an idea is not enough to be a successful inventor. You need to bring your idea to life and get it successfully marketed. Lots of people have ideas. The successful ones find a way to make money off their idea.

The lady on the plane didn’t bother to do anything with her vague notions, so she never profited from them. They did her no good. She really was not an inventor—just a thinker.

Strategic planners can fall into the same trap. You can dream up all sorts of cool strategic ideas, but if the ideas are never put into practice, you haven’t really done much. You really aren’t a strategist—just a thinker.

THE PRINCIPLE
The principle here is that strategies are only useful if they are used. Therefore, a successful strategist does not stop with just an idea. Instead, the strategist finds a way to put the strategy in motion.

Making a strategy useful involves three steps: thinking, acting, and attaching.

1. Thinking

Thinking is the process of coming up with the notion of what strategy to use. This is an essential and necessary first step. It bothers me how many modern companies skip this step. They usually say that there are no competitive advantages and that things change too quickly, making strategic notions passé.

So they skip the thinking step and go right to actions. They work to be fast and agile. They want to get things done. But if you have no strategic notion, then what exactly are your actions leading to? Getting nowhere faster isn’t very comforting. You’re still nowhere.

I’ve written hundreds of blogs and numerous books on the importance of strategy. It makes a difference. Don’t skip the step of developing great strategic ideas.

2. Acting

A lot of us are like the lady on the plane who stop at step one. We have an idea, but don’t act on it. Great ideas don’t just stand up and do the work on their own. You have to do the work to bring them to life.

Thomas Edison said that invention is 1% inspiration and 99% perspiration. I’m not sure if those percentages are correct, but his point sure is. If you’re not willing to do the hard work that creates perspiration, your inspiration won’t be very useful. That applies to inventions and to strategies.

This is why it bothers me how strategic planning and operations are so isolated from each other in most organizations. Strategists and operators rarely interact. This makes it hard to connect the inspiration to the perspiration.

Worst case scenario is when the wrong type of outside strategy consultants are brought in, who do little more than just put their strategic notion on a powerpoint slide which only top management sees. The consultants then leave before the implementation stage. The consultants have no vested interest in the act of implementing. They already got their money and have moved on to their next client.

Similarly, the operators have no vested interest in the ideas of these outside consultants. The operators never met them and the operators think that those “ivory tower” consultants are out of touch anyway, so they can be ignored. The result is a failure to get the thinking converted into acting.

That is why I recommend that operators be an integral part of the thinking process. I also recommend that strategic planning departments have a combination of strategy professionals and operating professionals in them. That way, there is a more natural bond between the thinking and the acting, so the thoughts are more likely to be acted upon.

3. Attaching

Good intentions by the ones acting does not ensure that the strategy will be properly implemented. Usually, it takes some form of power to bring the strategy to a successful implementation. Without that power, you will hit a road-block on your path to implementation that you cannot overcome.

That power can take many forms. It could be the power of deep pockets of money. It could be the power of brand recognition. It could be the power of control over distribution channels. It could be the power of knowing the right people. Good strategists figure out what kind of power they need and attach themselves to that power.

It could mean attaching yourself to a venture capital group for cash. It could mean doing a joint venture with someone who has power you are lacking, like distribution. It could mean finding someone who has the power to introduce you to the right people.

The only successful invention of that lady on the plane occurred because she had attached herself, through employment, to a company who had the power to bring brushes to life. If she wasn’t attached to that power, I’m sure that grease trap brush invention would not have occurred, either.

Therefore, successful strategists consider what types of power are needed to make their idea come to life. Then, they include within the strategy a means of acquiring that power.

SUMMARY
Bringing a strategy to life has three steps:

1. Thinking: Coming up with the great strategic notion.
2. Acting: The hard work of implementation.
3. Attaching: Finding ways to get access to the power needed to overcome the barriers to success.

Many people try to skip steps. That typically leads to failure.

FINAL THOUGHTS
Good strategists understand that power is powerful (I guess that’s how it got that name). Make sure you have a way to attach yourself to power.

Strategic Planning Analogy #450: Pushing the String

THE STORY
Here’s an experiment. Take a long string and stretch it out on the floor. Go to one end of the string and try to push the string across the floor. That effort will essentially be a failure.

Now re-stretch the string on the floor. Go to one end of the string and try to pull it across the floor. This should be a great success.

Conclusion: It is much easier to pull a string across the floor than to push it.

THE ANALOGY
What was the difference between pulling a string (success) and pushing a string (failure)? When you pull a string, you are in front of the string. When you push a string, you are behind it.

You organization is like a string. Strategic planning tries to move an organization to a better place, sort of like trying to get a string across the floor. Just as getting in front of a string (to pull) is the best way to move the string, getting a strategy in the hands of the person in front of the organization is the best way to get the organization to a better place.

By definition, followers need leaders up in front. Strategic leadership, then, is a pre-requisite to strategic followership. Trying to move the organization from another position is far more difficult.

THE PRINCIPLE
The principle here is that strategic planners are not typically positioned at the front-most end of the organization. Therefore, if strategic planners want to effectively move the organization forward, they need to work through those people who are at the front and capable of pulling the string—top management. This becomes their primary audience.

Like it or not, strategists are not in front of the string. In most cases, they are usually further down the ladder. It is common for them to report to a CFO, who then reports to a CEO. Without the mantle of top leadership, strategists cannot directly pull the string.

If the primary force for change in an organization is the strategist, then the effort to move the organization is more like trying to push the string. The string will not respond as desired, because the effort is coming from too far back in the organization.

Mistake #1: Having the Strategist Lead
There are many reasons why having strategist lead the strategy movement is sub-optimal. First, consider the audience—the organization. They will ask themselves a few questions:

1) If this is the person we should be following, then why aren’t they in a position of leadership?

2) Since they are not the leader, what gives them the right to ask me to follow?

3) If this were really important, wouldn’t the real leader be leading us?

They will think: I’ve got enough responsibilities on my plate handed down from my direct superiors to worry about. Why worry about the ranting of someone who has no direct control over me?

Therefore, the organization will not wholeheartedly follow the strategist. It will be like trying to push a string.

Now think of it from the position of the real leader of the organization. Leadership from anywhere else can be seen as a threat to their power. Most leaders don’t like potential threats to their power. Consequently, they will not abdicate enough power to the strategist to really be able to effectively pull the string on their own. Others in the organization will see that the power has not been handed down to the strategist. Therefore, the strategist will not have enough power to pull the string. They can only push.

Mistake #2: Having the Strategist Merely Keep Score
So if the strategist cannot lead, should we just take them out of the leadership equation? No. As we’ve talked about many other times in these blogs, the strategist provides an important leadership function. They can provide a unique perspective which can be gained almost nowhere else, because:

1) Strategists are the least vested in the status quo. Therefore, they can most objectively look at the status quo versus alternatives.

2) Strategists are the least captive to the “Tyranny of the Immediate,” those daily crises that tend to capture the immediate attention of the operators of the business. This allows the strategist to focus on long-term implications more than anyone else.

3) Strategists spend the most time focused on understanding the big picture (and where it is heading). They can look for the holes in the marketplace yet to be filled. As a result, they can offer an important perspective not available elsewhere.

Therefore, it is mistake to lower the position of the strategist to little more than a mere scorekeeper (as we saw in the prior blog). To do so will be to lose the power of these insights.

Solution: Become the Strategy Whisperer
So how do we take advantage of the needed leadership of the strategist while understanding they do not have enough leadership power to pull the string? I refer to it as becoming the “Strategy Whisperer.”

The idea is based off of the book The Horse Whisperer by Nicholas Evans (which was made into a movie starring Robert Redford). The book and movie made popular a form of horse training known as “natural horsemanship.”

The basic idea of natural horsemanship is that wild or unruly horses will become more effectively useful to their riders if they are approached with respect rather than with force. The idea is to work sympathetically with a horse in order to obtain cooperation (rather than submission). Instead of trying to destroy the horse’s will by overpowering it, you gain its respect so that the horse’s natural power is voluntarily given over to the desires of the rider.

And this is an effective analogy for strategists. Their goal is not to overpower the leaders of the organization. The task is not to break the will of the leader. No, the strategist needs to come to the leaders showing great respect for their power. Rather than posing as a threat to the leader, the strategist merely seeks mutual respect in return. And once gaining that non-threatening respect, the strategist can then whisper into the leader’s ear what he or she needs to hear from the unique perspective of the strategist.

As a result, the leader is still the unquestioned leader. Their power to pull the string is not threatened by the presence of the strategist. Yet, because the leader is listening to the whispering of the strategist, the leader is pulling the string in a direction which is more strategically correct.

The Strategy Whisperer approach may not come naturally to the strategist, especially if the strategist wants to be the one with the hands on the string. But if you want to effectively help move the company, this can be the best approach.

SUMMARY
The best way to move a company in the proper strategic direction is to get the leader of the organization to want to lead the organization in that direction. This requires positioning the strategist as far more than just a scorekeeper, but far less than a threat to the power of the leader. The optimal spot is that of a Strategy Whisperer—a respected advisor who has the ear of the leader.

FINAL THOUGHTS
It’s better to have your hand on the shoulder of the real leader (so you can whisper in his/her ear) and let them effectively pull the string in your desired direction than to insist that the string be put in your hand and only be able to ineffectively push it.

Strategic Planning Analogy #421: Tapping the Power

THE STORY
One year for Christmas I decided to put up a larger than normal Christmas light display in my front yard. I bought all sorts of new items to place in my yard, including a metal deer covered in lights with a motor that made its head go up and down.

Everything worked fine for a few days. Then it stopped working. The lights went out and the motor stopped working. I spent many hours over many days going over everything in the front yard trying to get it to work again. I assumed that something in the display was broken, so all I need do is fix the display and everything will be fine.

So I spent hours looking for the brokenness in the display. I wiggled all the wires in the display. Nothing helped. For the rest of the season, the display at my house was dark and lifeless.

After Christmas, I started to take all of the lights and displays down. It was then that I saw a switch in my garage that I had never noticed before. It was a circuit breaker switch. I pushed the button, and all of a sudden the remaining parts of the display began to work.

If I had only spent a second at the beginning of the season pushing that button in the garage, I could have saved all of those many hours wasted in the front yard trying to get that display to work.

THE ANALOGY
My goal was to have a great Christmas light display. Therefore, that is where I focused my efforts. When my goal was not being achieved, I spent my time looking for a solution somewhere in the display.

Unfortunately, the problem was not hidden within the display. It was back behind the scenes in the garage. Had I only taken my eyes off the goal, I would have seen that the display was fine and that the problem was that there was no electrical power getting to the display. Had I spent more time thinking about the power behind the display, I would have had a working display that year.

A similar situation can occur in strategic planning. We can get so focused on our strategic goal that we forget about looking at how well the goal is connected to the corporate energy source. Since the goal is what we want, we look at fixing the elements of the goal when results fall short. This can all be a waste of effort, since the problem often is a result of insufficiently tapping into corporate energy. Turn on the power of the organization, and the results will come on their own.

THE PRINCIPLE
The principle here is about discerning the difference between power and performance. Performance is the output—it is what we want to happen. It is our goal. Power, by contrast, is the input—it is the energy needed to accomplish the goal.

Strategic planning is usually pretty good about managing the performance. It helps us decide what we want to happen (goals) and how we are going to measure the results (metrics). Many times, however, the process comes up short on managing the power. It doesn’t go behind the scenes to ensure that sufficient energy is focused on the plan.

Power is often just assumed to be there. Just set the goal and the work will get done. Therefore, all the effort is spent on getting the right goal and measuring the progress towards the goal. Nobody bothers to go back into the garage to make sure the power switch is set in the “on” position.

The real problem occurs when performance falls short of plan. If you focus only on the performance, you may not be able to fix the problem, because the cause may be insufficient power.

For example, let’s say that you have a goal to achieve dramatic sales growth for a particular product and performance is falling short. To fix the sales problem, you may look for a sales solution. You may look to change the advertising, or change the pricing, or start a new sales promotion, or some such similar tactic. This would be similar to when I tried to fix my Christmas display by tinkering with pieces of the display. And, like with my Christmas display, all those efforts may not work.

However, if you stepped back to consider the power in your organization, you may have found that there was nothing wrong with the original plan (as far as it went). Instead, the problem was insufficient motivation amongst those required to do the selling (not enough power). Perhaps they do not believe in the product. Perhaps they have put their power behind a different product in the portfolio. Perhaps they just aren’t motivated to work hard because they feel no loyalty to the company. If you fix the power, the performance will come all on its own, because highly motive employees can accomplish much.

Problem #1: No Power
There are two ways in which a company can mismanage power. First, they may not create sufficient power. I have personally witnessed how much performance is impacted by the level of power running through the employees.

For example, I worked with a company that used to have a lot of power flowing through the employees. They were highly motivated to “do whatever it takes to win.” They loved the founder and would go the extra effort in response to that love. The place felt like a family and everyone worked hard for the good of the family. The power was huge and performance was outstanding.

Then something happened—the founder retired and the new leadership destroyed the feeling of family. As a result, work became nothing more than just a job. People went from voluntarily working 70 hours a week (because they loved doing it) to working only 50 hours a week. The energy levels during those 50 hours went down as well (because they didn’t love doing it as much and they didn’t care as much). The power of family love was replaced with unproductive in-fighting. Personal goals replaced doing whatever it takes for the greater good. And, not surprisingly, performance started to suffer.

The company is scrambling to find ways to get performance back up. But the focus in on adjusting the tactics rather than the power behind the tactics. As a result, they are fighting a losing battle.

In essence, the company had unknowingly turned off the switch in the garage, not realizing how much impact that would have on the display out front. And now they are trying to fix the problem by tweaking the display rather than turning the switch back on.

By contrast, I had the privilege to work in the past with the employees of Save-A-Lot, a hard discount, low price food retailer similar to Aldi. When you walked into the Save-A-Lot headquarters, you could feel all the energy and buzz around you. The power switch was on full power.

When you talked to the people, the conversation wasn’t around doing a job of pushing groceries at a profit. Instead, people talked in terms more similar to a religious revival. They talked about the pride they had in providing a higher standard of living to those who society tended to overlook. They talked about bringing “greater dignity” to the poor by packaging the food products to look like the brands the rich people ate. They not only wanted to feed these people, but improve their sense of self-worth. It was as if they weren’t grocers, but missionaries on a mission to save the poor from malnutrition and humiliation. They were united in purpose and focused on this larger, more personal motivation. And guess what? This power lead to great performance.

To achieve high levels of power, you need to supply high levels of purpose. This purpose needs to transcend just working for a paycheck. It requires tapping into the inner desires of your people. This concept seems to be taking on greater significance, as the Millennials who are now entering the workforce seem more focused on this greater purpose than the Baby Boomers they are replacing. If you do not provide a greater purpose, you will lose a lot of the power potential in the Millennial segment.

Strategic Planning can help by infusing a higher purpose into the Vision and Mission Statements. Planners can help ensure that strategic processes not only looks at managing performance, but also proactively manages power. They can make sure that power issues get sufficient attention.

Problem #2: Power Unlinked
Even if the company is full of power, performance may still suffer if there is insufficient connection between the power and the performance. My Christmas display only worked when plugged into the power source in the garage. Similarly, strategists need to connect the strategy to the power in the people.

Strategists need to show how the strategy is connected to the higher purpose. They need to show how achievement of the strategy not only improves performance, but improves achievement of the higher purpose. They need to show that putting effort behind the plan gets them closer to the higher purpose that doing something else.

SUMMARY
Often, the best way to ensure that strategic goals are met is to take your focus off the goals and focus instead on ensuring that the organization is powerfully motivated to achieve the goals. This typically requires bonding with employees at a deeper level (than merely meeting the goals) by instilling a higher purpose into what people do. The higher their motivational power, the more likely the effort will be there to get the task accomplished. If you can connect that power to the task at hand, then the results will pretty much take care of themselves.

FINAL THOUGHTS
This deeper bonding can also work with customers. If consumers identify with your higher purpose, then they will want to support your efforts by purchasing from your company. This can lead to higher unit sales volumes at higher prices.

Strategic Planning Analogy #389: Ransom Pricing

THE STORY
My wife and I recently purchased the DVDs for all eight seasons of the TV show “24.” As you may recall, each season of 24 consisted of a terrorist attack on the United States. Jack Bauer and his co-workers at the government agency CTU (Counter-Terrorist Unit) had only 24 hours each season to stop the terrorists.

A common plot device used over the eight seasons of the TV show was the hostage/ransom situation. Typically, someone Jack Bauer cared deeply about would be taken hostage by the terrorists. The hostages would then make outrageous ransom demands. If Jack did not follow through on the demands, the person he loved would be killed.

This taught me something very important: Don’t ever let Jack Bauer care deeply about you. For when that happens, you get captured by terrorists and there is a good chance they will kill you.

THE ANALOGY
In the TV show 24, terrorists could convince Jack Bauer to do things he would not normally do in order to save his loved ones. Jack was willing to pay a high price to get his loved ones released, including putting his own life at risk. Jack didn’t spend a lot of time trying to negotiate a lower ransom fee. Jack didn’t wait until the terrorists decided to hold a Clearance Sale on Hostages, where ransom demands were reduced for a limited time. No, Jack would ask what the demands were and then try to satisfy the demands as soon as possible (no matter what the price).

Most companies would love to be in the position of those terrorists when it comes to pricing. The terrorists could charge pretty much whatever ransom fee they wanted. There was no fear of getting into a pricing war. They never had to put the hostages “on Sale.” And the terrorists knew that Jack would rush to pay that price as soon as possible.

Unfortunately, most companies find themselves in the opposite situation. Intense competition gets them into price wars, where margins are eroded to next to nothing. And then customers wait for even further price reductions. If the company makes customers work too hard to get the product or service, the customers will lose interest and go somewhere else. Rather than being able to collect whatever “ransom”-sized fee they want, the companies find themselves having to pay whatever “bribe”-like incentives are needed in order to get customers interested.

THE PRINCIPLE
The principle here is that if you want to be able to charge ransom-like fees for your product or service, then you need a strategy more akin to that of a terrorist holding a hostage. Otherwise, you will become a victim of low-margin price wars. This is not to imply that you need to become a terrorist. It just means you need to borrow some of their strategic tactics.

There are three tactics terrorists use to create a favorable pricing situation for themselves.

1) Create/Exploit Deep Emotional Ties
Jack Bauer would only cave in to terrorist demands if it involved people he cared deeply about. How deeply do your customers care about what you have to offer? Is there a deep emotional tie between your brand and your customer? To what extent will your customers go to maintain that emotional bond?

For example, would you pay a higher ransom to get back your mother or your refrigerator? Most of you, I assume, would pay more to get back your mother, in large part because you have a stronger emotional attachment to your mother than your refrigerator.

Most of the companies which command premium (ransom-like) prices have positioned their products to hold a strong emotional tie to their customers. Examples include Harley-Davidson (motorcycles), John Deere (tractors), and Apple (iPods, iPads, iPhones). The tie is so tight that one’s own sense of identity is wrapped up into the identity of the product. The product represents who you are as a person. Abandoning the product would be like abandoning a piece of yourself. You will pay almost any ransom to maintain that emotional identity.

Harley-Davidson owners have owner clubs (Harley Owners Group, or H.O.G.s). Even though other companies make higher quality motorcycles at lower prices, emotionally loyal Harley owners will never consider them at any price. It is common for these owners to get tattoos of the Harley Davidson logo. This emotional attachment allows Harley-Davidson to stay out of price wars and charge more ransom-like pricing.

There were lots of firms which came out with music players to compete with the iPod, but they didn’t stand a chance, because of the emotional bond and attachment between the iPod and image-conscious teens. To own another brand would be to commit severe damage to your coolness image. As a result, while the competition kept lowering prices to lure away business, the iPod kept both the business and the premium (ransom-like) price.

I have always been fascinated by the cars and trucks I see on the road with a particular decal posted on the window. The decal is of a young boy urinating on the logo of a competing brand. If you can create such a strong emotional bond that your customers see the competition as good for nothing but urinating on, then you know they will not be easily swayed to switch to that competing brand merely due to a small price reduction. You have earned the right to charge ransom prices.

2) Create a Unique or Irreplaceable Offer
I think there is another reason why you would pay more to ransom your mother than ransom your refrigerator. You have only one mother. She is irreplaceable. By contrast, you can always get another refrigerator, perhaps even better than the old one. And the food inside is also easy to replace. Why pay a huge ransom to a terrorist to get the old refrigerator, if you can just go to a store pay less to get a brand new replacement?

That’s why terrorists hold up for ransom items which are unique and difficult to replace, like your mother. It is worth more to you, because you have no way to replace it. And the same idea applies to business. If you want to be able to charge ransom-like prices, you need to offer something which is unique—where there are few alternatives.

It sort of goes along with the idea of The Godfather in wanting to “make an offer he can’t refuse.” You cannot refuse an offer if there are no suitable alternatives.

That is why there is such a big movement among retailers to sell unique products and brands not available at any other store. If the retailer can convince you to desire that product, then the retailer knows that you will have to go to them to get it. With no other options, the retailer stays out of price wars. They can charge a higher price, because you have no other choice if you want that product.

Apple products link the hardware to the software to the apps to the app store. If you want a unique killer app, you have to link into the whole Apple system (no matter what the price). There are no other choices, because it is a closed system. Even though people did not prefer the AT&T mobile network, they accepted it as part of the cost of getting an iPhone in the US, since at first it was the only system iPhone worked on. You cannot haggle on prices for the various parts because of the unique linkage.

General Motors is the only firm in the US to offer the OnStar service on its cars. If you are the type of person for whom the OnStar service is critically important, than you have to own a GM car, no matter the price.

If people see your product or service as no different than the competition, then you become a commodity. With no perceived difference, sales go to the firm with the lowest prices. The only way to get out of that price war is to find a way to differentiate yourself from the pack. Find some sort of unique added value that a group of people will pay more for. Or link up and bundle yourself to other desirable products. Make it impossible to do direct comparisons with competition. Only then can you extract ransom-like prices.

3) Have the Power to Follow-Through on Threats
Usually, the terrorists told Jack Bauer on 24 that if he did not do as he was told, they would kill Jack’s loved one. Jack obeyed because he knew that these terrorists had the will and the power to carry out their threat. These terrorists were used to killing and had no qualms about killing a loved one of Jack.

Conversely, if the terrorists did not have the will or the power to carry out their threat, the ransom demand loses value. If you know that the threat to kill is a hollow threat they will not carry out, then you can ignore the demands. I’ve often seen this with children in public places. When parents tell an unruly child to behave “or else”, some immediately behave while others continue the bad behavior. Although there can be many reasons for this, one reason is because children know whether the “or else” is a hollow threat. If it is a hollow threat, then there is no reason to take it seriously.

One of the reasons why Best Buy was so profitable at its peak was because its vendors knew that Best Buy followed through on its threats. When a new technology was developing, Best Buy would tell all the vendors in the field that they would not support all of the brands trying to claim a position in this space. They would point to history, where the brands Best Buy supported thrived, and the ones they did not back usually failed. Then, they would essentially ask the vendors how much of a “ransom” they were willing to pay to get the support of Best Buy (and avoid not getting their support). Because Best Buy carried out its “threats”, people took these negotiations very seriously, and Best Buy reaped higher profit margins.

Lots of people procrastinate and wait for sales when they know that a retailer does not have the will to resist holding a sale. However, if a retailer gets a reputation for following through on a threat of not holding sales, then customers will tend to not wait and buy early at full mark-up prices.

SUMMARY
If you want to escape endless price wars and instead charge prices with healthy margins, think like a terrorist in a hostage situation. Terrorists can extract a huge ransom price because they:

1) Choose Hostages with High Emotional Value
2) Choose Hostages with are Unique and Difficult to Replace
3) Follow through on their Powerful Threats

As a company, you can do similar things to create your ransom-like pricing.

1) Create Strong Emotional Ties Between Your Brand and the Customer
2) Create an Offering which is Unique and Irreplaceable in the Marketplace
3) Follow Through on Your Threats.

FINAL THOUGHTS
A strategy to follow the leader will never set you apart in a manner which allows ransom-pricing. Instead, strike out on your own and create a unique offering which has high emotional appeal.

Strategic Planning Analogy #352: Tug o’ War

THE STORY
Tug o’ War is a simple game. All you need are two teams and a large rope. The two teams each grab onto the opposite ends of a rope and pull as hard as they can. The team which out-pulls the other, causing the other team to cross into their territory, wins.

Having played the game a few times, I know it can be a very difficult and strenuous game if both teams are of equal strength. When the teams have equal strength, the game seemingly goes on forever and you get extremely exhausted. It’s more fun if your team is a lot stronger than the opposition. Then, you don’t have to work as hard and you win more quickly and more often.

THE ANALOGY
In Tug o’ War, winning comes from amassing more power at the point of struggle than your competition. The one with the relatively larger strength wins. The same is true in the business world. The one with the larger relative strength usually wins.

Think of the rope in Tug o’ War as being like your supply chain. The person on the other side of the rope is someone else in your supply chain, either upstream (supplier) or downstream (distributor, customer). Within a supply chain, there is a certain amount of revenue and a certain amount of costs. These revenues and costs need to be allocated amongst all the players within the supply chain. If you are a good negotiator, you can get a disproportionately higher percentage of the supply chain revenues while absorbing a disproportionately lower percentage of the costs. Your gains come from the losses of others within your supply chain.

Of course, while you are trying to get a disproportionate advantage against others in the supply chain, others in the supply chain are trying to do the same to you. Hence, the big struggle, like a game of Tug o’ War. And, like in the game, the one with the most power typically wins the struggle.

As mentioned earlier, Tug o’ War is more fun if you are stronger than the team on the other side of the rope. The same is true in business supply chains. I’ve worked with retailers who were very strong relative to their suppliers and I’ve worked with retailers who were weak relative to their suppliers. Let me tell you, those experiences are very different.

When with the weak retailer, we were forever going to the suppliers begging for access to sell their product. We were willing to promise almost anything to get them to cooperate and sell to us. Needless to say, even if we did successfully get access, we didn’t make much money on the deal because the negotiation favored the supplier, who was much stronger.

Conversely, when the retailer was relatively much stronger, the roles were reversed. The vendors came knocking at the doors of the retailer, begging us to sell their wares. To gain access to our stores, they would offer almost anything—even including some equity ownership in their company. In this case, retailer got the most favorable end of the negotiation.

The more power you bring to the supply chain, the better your negotiation of who gets the revenues and who pays the costs. Getting such power rarely comes by accident. It takes strategic effort.

Therefore, when strategizing about the battles ahead, don’t just build your strategy around the struggles against your competition. Remember, you also have this tug o’ war with your supply chain as well. In fact, your ultimate profitability may have more to do with how your supply chain tug o’ war turns out than how your competitive battle turns out. This is because a winning tug o’ war strategy in the supply chain not only makes your individual transactions more profitable, but it can also give you an edge in your fight against the competition (particularly if their tug o’ war within the supply chain was less successful).

How much of your strategic effort is focused on your supply chain tug o’ war?

THE PRINCIPLE
The principle here has to do with accumulating the right amount of power within the supply chain. The key here is determining what the right amount of power is and what it takes to get it. This is not just about getting the most power you can. Remember, it is not absolute power which is important, but relative power. It does little good to focus on building your power if you still end up significantly less powerful than your supply chain partner on the other end of the rope. Also, as we will see later, there can be risks if you gain too much power. The goal is not to obtain all of the power, but only enough to gain advantage.

So what can we learn from the game of Tug o’ War to help us with this supply chain strategy?

1) Don’t Let the Other Side Get Too Strong
In Tug o’ War, you can still win if you are weak. All you need to do is ensure that the opposition is even weaker. There are steps you can take in your strategy to proactively try to keep other players in your supply chain weaker than you. Take, for example, the relationship between franchisors and franchisees. If you are a franchisor, you have a choice in whom you franchise to. Are you making those early front-end choices strategically for the long-term Tug o’ War between franchisor-franchisee?

At first, it may seem easier to franchise your concept to a small number of large franchisees. After all, this eliminates the hassles of dealing with a lot of small operations. Through only a few deals, you can quickly get huge geographic penetration for your concept. In addition, these large franchisees tend to be successful and well financed, reducing the risk of failure.

Unfortunately, when you take such a move, you have made the franchisee relatively stronger in the franchisor-franchisee tug o’ war. A large franchisee has more leverage in the negotiations and can gain more advantage. Your one-time decision has created decades of tougher Tug o’ War battles than there needed to be.

Take, for example, NPC International. They own about 1,200 Pizza Hut franchises. Just their volume alone would make NPC a top ten fast food retailer in the United States. Worse yet for Pizza Hut, NPC now controls about 20% of Pizza Hut’s volume in the United States. That gives NPC a lot of power in negotiating with Pizza Hut. For example, instead of accepting the typical supply distribution arrangement Pizza Hut offers its franchisees, NPC in August negotiated a separate deal to get their supplies from McLane Foodservice. I’m sure that this deal between NPC and McLane Foodservice puts disproportionately less of the total supply chain profits in the hands of Pizza Hut.

And it is Pizza Hut’s fault, because they allowed this franchisee to get too powerful. NPC International got large by buying up other franchisees. Strategically, it might have been in more beneficial if Pizza Hut had outbid NPC and then placed those units in the hands of others where the power of the franchisees would have been more dispersed. Then Pizza Hut would have had more power when distribution decisions by the franchisees were being made.

2) Build Your Own Strength With the Help of Others
Even if your team is small and weak you can still win Tug o’ War if you can partner with others who will pull along with you on the same side. In other words, if your negotiating clout is weak, then don’t negotiate alone. Form alliances with others.

The internet has shown that if individual consumers work together en mass, they gain a lot more clout and get better deals (think firms like Groupon). Cooperative buying organizations have been around a long time, where groups of people or companies negotiate together in order to get a better deal. Technology is making such buying even easier. Take advantage of these opportunities increase your relative strength at the point when Tug o’ War negotiating occurs.

3) Keep the Game Fun for Both Sides
If you build up too much power, nobody will want to play Tug O’ War with you because they won’t have any fun. The same is true in business. If you gain too much power, and exploit that power too strongly, nobody will want to play with you. And if nobody in the supply chain wants to play with you anymore, you cannot run your business anymore.

Think of the U.S. automobile industry. The manufacturers had used their power so aggressively to squeeze concessions out of their suppliers that the suppliers could no longer make a profit serving the automobile industry. Many suppliers started diversifying away from the automobile industry and started to no longer bid on projects in the automobile industry. Those suppliers which remained started going bankrupt, causing all sorts of problems for the automobile companies purchasing from them. The result was that the automobile companies now had fewer supply options and the remaining options were shakier. This is all because they had taken the power principle too far.

Remember, the goal is to win with your supply chain, not to obliterate it. Although they may be on the opposite side of the rope, they are still your partners. You cannot survive without them. Getting a disproportionately better deal does not mean taking it all and leaving them with nothing.

Besides, the cost to get that much power may be more than what you can get in concessions (diseconomies of scale). And if you exploit your power too much, you can have government agencies coming after you.

4) Be Careful When Pulling on Both Sides of the Rope.
Some people argue that the best way to avoid problems in the supply chain is to diversify into the rest of the supply chain. In other words, become your own supplier and/or distributor. Now there can be some benefits to this approach, because you cut out some middleman expenses. However, this approach can often be a disaster.

The problem is this—if you own both sides of the negotiating table, then you cannot get a disproportionate advantage. Although you get to absorb all of the revenue, you also have to absorb all of the costs and all of the risks.

It is like trying to play Tug o’ War while holding both ends of the rope at the same time. There is no way to win an advantage.

In addition, if you own a supplier or distributor, that often means that your competition will no longer want to use that same supplier/distributor for fear that it will put more profits in the hands of their competition. As a result, your ownership could weaken the power of that supplier/distributor in its own Tug o’ War battles.

SUMMARY
A large part of a company’s success may be due to how well they play Tug o’ War with their supply chain partners. Therefore, supply chain power management should be a key part of any strategic planning exercise.

FINAL THOUGHTS
Negotiations with supply partners do not always have to be adversarial. Sometimes you can find some win-win alternatives where you can make your whole supply chain more competitive against competing supply chain alternatives. But don’t be naïve when negotiating and assume your partners always have your best interests at heart. I remember one wholesaler saying that his suppliers all told him that he was their favorite customer. At first he was happy because he thought that was a compliment. Then he realized that he was their favorite customer because they got their best differential advantage when negotiating with him. He stopped being happy and started negotiating harder.