Strategic Planning Analogy #439: The Certainty Within Uncertainty

THE STORY
Every so often, I’ll check out some of the online discussion boards on the topic of strategy. A common discussion topic is about whether long term planning is useful anymore.

The line of reasoning usually goes something like this: There is so much uncertainty in the world that the future is completely unknowable. Therefore, any projections into the future are worthless.

What I find interesting is this: These people seem so certain that the future is uncertain. So doesn’t that make “uncertainty” a certainty? And if that is the case, then there is a measure of certainty to the future (certainty about uncertainty), so that you can make long-range plans.

THE ANALOGY
The connection between what happens in those discussion boards and what happens in corporations is fairly straightforward. If you have a defeatist attitude towards the viability of planning, then you will not take planning very seriously. However, if you take a more positive approach, you can still extract significant value from the discipline.

Planning takes place within a context. You plan to win within the future marketplace (your context). Yes, it is true that nobody ever knows 100% of what that future will look like. But that is no excuse to abandon planning. There are still many certainties embedded in that uncertainty—enough so that smart people can take advantage of them in their planning.

And even knowing in advance that uncertainties will rule is knowledge you can use to develop your context. The “certainty of uncertainty” lets you know a lot about the type of world you are trying to win in. Just having that knowledge can make long range planning viable.

THE PRINCIPLE
The principle here is that there is a way to do effective planning in a world of uncertainty. Long range strategic planning can still put your company at a competitive advantage when the world is full of uncertainty. You are still better off doing the strategic planning than not.

1) Regardless of Infinite Causes, there are Finite Outcomes
Uncertainty means that a lot of different things may or may not happen. There are an almost infinite number of unknown situations that could occur. Since one cannot realistically create an infinite number of plans, this knowledge of near infinite unknowns can be intimidating to a planner.

But it needn’t be. Fortunately for the planner, even if there are an infinite number of unknown factors causing change in the world, there are a relatively small finite number of effects which these factors cause.

The most important thing is usually not the cause, but the effect, because the effect is what effects your ability to win.

For example, regardless of the cause, most of the effects fall into a few simple categories like:

a) Markets Open or Markets Close
b) Competitors Get Stronger or Weaker
c) The Economy Gets Better or Worse
d) The Current Business Model Becomes Obsolete (a Better Model or a Different Technology Comes Along)
e) The Supply Chain is Disrupted
f) Government Regulations Change the Rules

Since the effects make up a much smaller list, you can manage them from a planning perspective. For example, in a previous blog we looked at how Caterpillar built a strategic plan in advance for what to do when an economy suddenly turns bad (regardless of why). When the economic crisis occurred in 2008, they pulled out that plan and weathered the great recession better than they would have otherwise.

Similarly, when the automakers in Japan were hit in 2011 by the Tsunami in Northern Japan followed closely by the flooding in Thailand, supply chains were severely disrupted. It pointed out the flaw in the close-knit just-in-time supply strategy. A more flexible strategic approach to the supply chain would have been beneficial regardless of what caused supply chain disruption.

2) Not Everything in the World Can Change Suddenly
If uncertainties act slowly enough, there is time to make these unknowables “knowable” before it is too late. Things like world dependence on oil and climate change can change, but the transition will be over decades, so there is time to build strategic plans around them.

And then there are knowables like the age of a population. Aging is tied to the chronological year. People cannot suddenly age faster or slower than the pace of the calendar. Therefore, age-related strategies can rely on a relatively stable and knowable environment.

Similarly, future adult population growth depends upon births which have already occurred. This adds some level of certainty to market-sizing of adults.

And finally, many core attitudes don’t change much. Maslow’s hierarchy of needs stays constant over time. Regardless of what is going on around them, people want to feel loved, they want to feel a sense of self-worth, they want to eliminate guilt, and so on. Although the manifestations may change, the underlying motivations are fairly constant and can be counted on.

3)There Are Still Things Completely Under Your Control
Yes, there many things outside our control. But there still many things under our control. The question is how we should act regarding those things under our control. We have options and alternatives regarding those decisions. Some of those options and actions would create better long-term outcomes than others. Strategic planning can help determine which alternatives to take.

For example, we have control over where we spend much of our company’s time and money, where to invest our efforts. Companies do not have enough resources to do everything. Therefore, they have to make choices, make trade-offs.

In particular, we can choose which position we want to own in the marketplace. We can choose which attributes we want to win on. We can choose who we want to target and what the message should be.

In addition, we can choose our corporate culture and management style. To a large extent, we can even choose our business model. We can also choose where to focus our R&D efforts.

In other words, businesses still have to make a lot of decisions. Choosing one path means rejecting another. In the absence of a long range strategy, these decisions will tend to be more erratic and more contradictory. Instead of reinforcing each other to build a stronger long term position in the marketplace, they become almost random—swaying back and forth in the winds of the latest fad. Everyone (customers, employees, other stakeholders) becomes confused about what you stand for, so you end up standing for nothing.

By contrast, strategic planning helps get all those decisions aligned so that they reinforce each other. You can move more quickly, because everyone knows the general direction. And being able to move quickly is important in a world of uncertainty.

We do not have to be victims of our environment. We can take control. As Peter Drucker said, “The best way to predict the future is to create the future.” Spend some time making decisions to create the future you want.

Here’s The Action Plan
Given what has been mentioned, how should we use strategic planning in a world of so-called uncertainty? There are five steps.

Step #1: Choose
Choose your position, your point of differentiation, the place where you will win in the marketplace. Choose the general direction of your trade-offs. Take command of those things under your control.

Step #2: Institutionalize Flexibility
In a world where frequent small adjustments are necessary, one needs a flexible operating structure. Make becoming flexible a part of your strategy—flexible supply chains, flexible factories, less cumbersome decision-making procedures, flexible balance sheets, etc. The certainty of uncertainty makes this essential.

Step #3: Prepare for Scenarios
From the finite list of potential effects, build a list of scenarios. Then create the proper strategic response if those scenarios are to occur. That way, like Caterpillar, you can immediately respond in a rational and proper manner when a particular scenario comes to pass.

Step #4: Encourage & Discourage
Although there are uncertainties in how the future will unfold, that does not mean that we are helpless in our ability to influence that outcome. Through efforts like lobbying, public relations, charitable giving, investing, and other such actions, we can help influence the course of history. Rather than being a victim of change, we can help mold how that change comes about. Have as part of your strategy actions to encourage a future more to your benefit and to discourage a future less to your benefit.

Step #5: Keep Monitoring the Situation
If you assume that the world is changing all the time, then keep watching it so that you know what is going on as soon as possible. Frequent change is not an excuse to ignore the environment, but to watch it ever more closely. In particular, find the key leading indicators that scenarios are changing and monitor them on a regular basis. That way, you know when to

a) Pull one of those scenario plans off the shelf; or
b) Where to place your encouraging/discouraging efforts; or
c) When and how to make adjustments in order to stay on course.

SUMMARY
Just because there is a lot of uncertainty in the world does not mean we should abandon long-range planning. There is still a lot of certainty within that uncertainty, even if the most certain thing is the knowledge of continued uncertainty. Long range planning allows a company to rise above the seemingly random swings of change and stake out a position of strength. Rather than being a victim of the whims of change, you can take charge and even help influence how that change occurs (to your benefit).

FINAL THOUGHTS
Look at the world as being like an ocean constantly in change, and your company as a small boat. If you don’t want to be tossed around and out of control, you need an anchor. Strategic Plans can be your anchor.

Strategic Planning Analogy #426: The Gotcha Guys (Part 2)

THE STORY
There’s an old saying that “absence makes the heart grow fonder.” That may be true, but absence certainly does not make the relationship easier.

My son works the day shift. His fiancée works the night shift. As a result, they do not see as much of each other as they would like and that adds difficulty to the relationship.

I can empathize with that. When I first moved to Columbus, my wife stayed back in Minneapolis for awhile (about 750 miles away). That was tough.

THE ANALOGY
For a relationship to thrive, there needs to be interaction. This is not only true with marriage. It is also true with the various aspects of one’s business. In particular, I am thinking about the people in charge of long range strategic goals and the people in charge of monitoring near-term financial targets (like annual budget and bonus targets).

If these two groups are not interacting together on a regular basis, they can get out of sync with each other. It can get as dysfunctional as when married couples drift apart and no longer interact on a regular basis.

If the near-term monitors and the long-term strategists are not in regular communication, their agendas may no longer be compatible. Achieving the near-term targets may no longer move the company towards the long-term goals. They might even do the opposite and move the company further away from the long term intent.

As we saw in the previous blog, many problems can occur when the near-term monitoring of the “Gotcha Guys” loses the context of the long-term goals. The Gotcha Guys can end up rewarding bad behavior and punishing good behavior. They can also stifle the creativity needed to achieve ambitious long term goals.

In this blog, we will look at some suggestions to help avoid these problems (and keep that context in place).

THE PRINCIPLE
The principle here is that long-term goals are only achieved if they are part of the daily discussion when near-term targets are being decided and monitored. Therefore, it is essential to have frequent interaction between the near-term Gotcha Guys and the long-term strategists. Here are some ideas to help make this a reality.

Suggestion #1: Set More Strategic Targets
Most of the near-term targets used by companies are simple financial metrics, like “sales” or “expenses.” As we saw in the last blog, it can be easy for people to “game the system” and use tricks to achieve these types of simple metrics in ways that have nothing to do with achieving strategic goals.

Some try to avoid this problem by trying to make the metrics more complex by using ratios. Then you might have metrics like “Sales per Labor Hour” or “Expenses as a Percent of Sales.” But, as we saw in an earlier blog, even ratios can be abused and lose their link to the bigger strategic picture.

Therefore, I suggest that some of the near-term targets avoid numbers altogether. Instead create some monitoring questions which are more subjective—requiring more of a yes or no type of answer.

In its roughest form, the question would be “Did this area take the desired steps to move the company closer to its strategic objectives?” Now this is probably too vague to use in this form. But if you have a well thought out strategy, you should be able to figure out what types of key activities need to take place to make it a reality. Then you can determine which areas of the business need to participate in each activity and how they can impact it. Some examples of key activities might be:

a) Adding some specific capacity where it is lacking.
b) Adding some specific capability where expertise is lacking.
c) Convincing consumers to believe in the claims of your positioning.
d) Creating superiority in a particular attribute essential to winning in the marketplace.
e) Properly resolving a key strategic issue.

By holding people accountable in the near-term for specific activities directly linked to the long-term strategy, one is more likely to get the long term strategy achieved. These types of questions are more difficult to “game” because you are more directly measuring actual long-term activities.

Now some people will take this one step further and try to create fine-tuned metrics around these activities. This is usually referred to as a balanced scorecard. Although having a balanced scorecard is better than just the simple metrics mentioned earlier, it may still be less ideal than the more vague and abstract version of the question “Did you move us closer to our goal?”

I have two reasons for saying this. First, if you keep the question more vague, it requires more interaction between the long-term folks and the Gotcha Guys in order to interpret the target and the performance. And as we said at the beginning of the blog, more interaction is a good thing.

Second, the more we try to push this into a metric rather than a question, the easier it is to sever the linkage between near- and long-term. The temptation is there to focus on just “hitting the number” rather than “doing what’s right.” Why provide that type of temptation?

Now I’m not saying that all the targets should be in this format. Just do enough so that the near-term and long-term people are forced to work together to ensure that people are rewarded on their activities in a long-term context.

Suggestion #2: Use Scenario Planning
As we said in the last blog, near-term targets can get out of sync with long-term goals when the environment changes (or we learn of a need to adjust our assumptions). One way to get around this problem is to analyze various scenarios in the beginning and think through their ramifications to the desired metrics.

Then, if the situation changes, the long-term people can tell the short-term people to shift the program to the alternative scenario and its alternative metrics. By using this process, it gives more opportunities for the two groups to work together (when setting up the scenarios and when changing scenarios). In addition, it is a quick way to keep everyone in sync when times change.

Suggestion #3: Force Interaction
Finally, if these other suggestions do not create enough interaction, then mandate it through policy.
Mandate periodic cross-functional meetings. Rotate people between the two departments. Put them on project teams together. Make increased interaction one of their goals. Have them sign-off on some of each other’s work. Do whatever it takes to ensure that the short-term Gotcha Guys are confronted with the long-term context.

SUMMARY
It is easy for near-term targets to get out of sync with long-term goals. To help prevent this from happening, it is a good idea for the groups responsible for near-term and long-term to interact on a regular basis. Three suggestions to do this are:

1) Add some abstract action-oriented questions to the near term criteria (“Did you do what was required to get us closer to our goal?”);

2) Use Scenario Planning;

3) Force interaction through policy decisions.

FINAL THOUGHTS
If couples stop communicating altogether, they can end up getting a divorce. Let’s keep our communications frequent between the near-termers and the long-termers to prevent an ugly divorce in our business.

Strategic Planning Analogy #351: Does Your Strategy Smell?

THE STORY
The human senses fall into two categories—dependent and independent. By dependent, I mean that the use of these senses are dependent on us directing them to sense in a particular way. The dependent senses are sight, taste and touch. For example, sight is a dependent sense, because we only see what we proactively choose to look at. If we do not want to look at anything, we can close our eyes. It all depends on us.

Conversely, the remaining two senses—hearing and smelling are independent. Independent senses are always on and taking it all in, without our control. We will hear every sound in our environment, whether we want to or not. We cannot turn it off or be very selective in what we choose to hear out of the environment. I experienced this the hard way a couple of weeks ago when the people next door decided to have a party in their backyard with extremely loud music (loud enough to shake the house I was in). I could not escape the sound unless I left that environment (which I did, along with most of the other families in the neighborhood until the party was over).

The same is true of smell. This was made painfully clear to me recently when a car ran over a skunk in my neighborhood, causing me to smell the awful skunk odor all day, whether I wanted to or not.

Having both dependent and independent senses ideally suit humans in their ability to live in a dangerous environment. The independent senses (hearing and smell) will alert us to dangers even when we are not actively seeking them out. For example, we could be asleep, and the sound of an intruder or the smell of a burning house will wake us up so that we can protect ourselves. They make for an excellent early warning system.

On the other hand, the dependent senses help us to focus our attention on particular specifics in order to better proactively assess potential dangers. For example, if a sound wakes us up, we can then focus our vision in the direction of that sound to better evaluate exactly what is going on there (is it friend or foe). Dependent senses are excellent analytical tools, because we can direct them to specifically analyze a particular area.

The power is in having a combination of both independent and dependent senses.

THE ANALOGY
Our senses help us survive in the environment we are in by helping us become more aware of the nature of that environment (where the rewards and the dangers are). Similarly, strategic planning’s goal is to help companies succeed by better understanding and adapting to the environment the business is in. That is why traditional strategic planning spends a lot of time trying to understand the environment and predict what the future environment will look like. This activity helps the business understand where its rewards and dangers are.

Just as there are advantages to having both dependent and independent senses, there are advantages to having both dependent and independent planning systems. Independent planning systems are like hearing and smelling—always examining the environment without the need for us to actively intervene. They act as an early warning system, tipping us off to environmental changes even when we are not actively looking. Many dashboard planning systems act like independent senses, always monitoring the state of the environment in near real time—even while we sleep.

By contrast, dependent planning systems are more like seeing or touching. Examples would be actions such as specific in-depth environmental analysis projects, where a planning team focuses on specific issues, like competitive actions or the impact of recent government regulations. By focusing on key issues, one can better understand the cause and effect in the environment, making for better forecasts.

Having both in your planning arsenal will give you the best of both worlds.

THE PRINCIPLE
The principle here has to do with balance. Are your planning systems sufficiently balanced between dependent and independent planning tools? Do your planning systems smell as well as see? You will not have a complete picture of your environment unless you achieve this balance. You will not be able to respond quickly unless you have both, either.

All Eyes, No Ears
The strategy process is weakened if all of the effort is imbalanced and placed on dependent processes (all eyes, no ears). Although there is great benefit from proactively studying specific issues in depth (using our eyes), it does not tell the whole story. In particular, there is the problem that you will only gain knowledge in the areas where you look. Other environmental issues will come as a complete surprise, because you were not monitoring them.

In talking with people in the food industry, I’ve been amazed at the level of detail they knew about how their products were used out in the environment. A gentleman from Pillsbury once was telling me about how much of their logs of uncooked cookie dough get eaten raw at slumber parties by girls with oversized spoons. And the things the Cheerios people know about how those little o’s are purchased and consumed would boggle your mind.

This is all well and good. But it is not enough. It provides great depth about what is on their agenda to study. It says nothing about the places where they are not looking. Eyes can only see what they are looking at. They need the ears to hear everything, even things not being looked at.

For example, what is the benefit of knowing how a cereal fits into breakfast at home if people decide to no longer eat breakfast, or decide to eat breakfast from a restaurant? Changes tend to start at the fringes, outside the periphery of where our sights are focused. By the time the change has impacted our field of vision, it may be too late to properly react. Precious time is lost.

Therefore, we need to balance out focused looking with unfocused hearing. We need data gathering and monitoring of the background noises throughout the environment, to pick up the sounds of change on the fringes. We need early warning systems to wake us up to changes while there is still time to react.

Does your planning system routinely monitor the bigger picture to hear the rumbling on the fringes? Do you have a daily dashboard to warn you when the status quo is shifting away from its norms?

Most strategies are only viable if assumptions stay within a narrow range of possibilities. If assumptions fall outside that range, the strategy is no longer valid. Do you know the environmental trigger points at which point your strategy is no longer valid? Do you have “always on” independent sensors monitoring the situation to determine and alert you when assumptions are moving towards the trigger points? If not, your focused efforts could be leading to great insights in areas that are no longer relevant.

All Ears, No Eyes
The opposite type of imbalance is also dangerous. As we have seen, listening for changes is a good thing. However, if that is all you do, you have only half the data you need. You are missing the depth of insight that comes from focused research.

It’s great to know that a trigger point has been reached, but without an in-depth knowledge of related issues, you will not know how to react to the change. It is like someone whose nose wakes them up to the smell of a burning house, but they still die because they never researched what to do when a house is burning.

The moment of crisis is not the time to become educated. It is the time to act. Education needs to be processed in advance. If you have no idea how to act at the point of change, then you have gained little advantage from having your advance warning system. Time is wasted.

This is where tools like scenario planning come in. It is a focused effort to try to understand how certain types of changes impact outcomes. It allows you the depth of understanding to properly react if these types of changes eventually occur. Without in depth knowledge, it is difficult to even know which trigger points are even worthy of monitoring. How much time to you spend learning about specific nuances of your environment which are critical to strategic success?

Directed focus provides the context, so that you know which noises are friends and which are foes (and which are relevant and which are not). Lose the context, and all you have is a lot of noise.

SUMMARY
Successful strategic planning needs both direct and indirect knowledge gathering processes. The indirect processes provide an early warning of what is happening on the fringes of change. The direct processes provide the depth and context so that you know what to do when the early warning alarm goes off. One is not very useful without the other.

FINAL THOUGHTS
Of course, the worst thing to do is neither type of information gathering. Sticking your head in the sand and ignoring the environment is not the path to sustained success. “See no evil, hear no evil, speak no evil” does not make the evil go away. The only thing which goes away in that situation is your business’ future.