Strategic Planning Analogy #517: Dirty Rice

THE STORY
Today I made myself a batch of Dirty Rice for lunch. As I was eating it, I pondered the irony of it all. Dirty Rice was originally developed in New Orleans as a way for impoverished people and struggling restaurants to stretch their food. The idea was to take the scrapings of leftover bits from the pots and pans of the prior meals and stir it into rice. Suddenly you had a meal made out of food scraps that would have normally been thrown away.

Yet I made my Dirty Rice out of fresh ingredients. Rather than being made out of leftovers, my fresh dirty rice created leftovers.

This seems to happen a lot in cooking. Foods originally created to help struggling people survive somehow eventually become gourmet food for the rich.

For example, the French are known for their gourmet cooking using great sauces. The origin, however, came out of poverty. At one time, there were large shortages of food in France. To make the meager portions stretch to feed an entire family, they were covered in sauces. The sauces made a little food look like a lot of food. Now, people who can afford as much food as they want pay premium prices at French restaurants to get food based on sauces designed to stretch food for the poor.

In many warm climates, the gourmet food tends to be rather spicy. This was because poor people in hot climates had a difficult time preserving their foods. The heat would make the food start to smell rancid. So to cover up the bad smell, they would cover the food with hot spices. Today, one of the top gourmet choices in the UK is spicy food from India. The climate and food preservation in the UK certainly does not require the spicy cover-up, but they love it nevertheless.

I suppose that someday in the future the microwave will be made obsolete by newer technology. Yet, I’ll bet there will be gourmet restaurants in the future specializing in the obsolete art of microwave cooking. Upscale microwave restaurants will be seen as reviving a lost art in gourmet cooking.

THE ANALOGY
There is usually a reason why certain products, traditions and processes exist. Dirty Rice comes out of a tradition of stretching kitchen scraps. French sauces come out a tradition of making meager portions large enough to feed a family. Spicy foods come out of a tradition of covering up rancid smells and tastes.

Over time, many of those reasons for existence go away. Improved economies, food production, food preservation and other factors have made the original need for dirty rice, French sauces and spicy foods no longer as necessary. Yet the traditions live on. Ironically, the original need for these products (poverty) is not the driving force anymore. They became gourmet products for the rich of the world.

Similarly, businesses are filled with lots of products, processes and traditions which are no longer essential. Sure, there were good reasons for these products, processes and traditions when they were first initiated. But times change. The reasons for continuing down these traditional paths may no longer exist.

Just as silly as it was for me to use expensive fresh ingredients to make a recipe designed to use up cheap table scraps, it is silly for companies to continue old so-called “cost-cutting” practices which over time have become inefficient and expensive. It’s time to re-think those traditions.

THE PRINCIPLE
The principle here is that change impacts relevancy. Products and processes which were highly relevant and useful at one point in time usually become obsolete as times change. We may continue the practices of the past with no understanding of what caused those practices. They become part of the fabric of “how things get done” without being questioned.

Yet, if we questioned these practices, we might discover that change has rendered them to be counterproductive to success. New and superior approaches may now exist. Just because something was the right thing to do in the past does not mean it should be done today. One of the keys to strategic success is knowing when to abandon the past to embrace the future. This includes a look at internal processes and structures.

Different Economy

Consider the fact that the world has largely moved from a production-based economy to a knowledge-based economy. Yet many knowledge-based companies are still using internal processes and structures designed during the production era.

Are those processes still relevant? Are there new processes and structures more suitable to a knowledge-based business? To use the analogy, are we trying to serve the rich with food originally designed for the poor? When is the last time you challenged the way things get done to see if they are best suited for a knowledge-based era?

For example, production-based businesses tend to centralize more power at the top, whereas knowledge-based businesses have often found value in pushing power far lower in the organization. This is just one of many assumptions to look at in how things get done.

Different Technology

Back when data was scarce and communication difficult, companies developed large infrastructures of middle-management. Their primary role was to gather information and communicate it to the proper people. At the time, middle-management was the most efficient way to do this.

Now, we have amazing new technologies to gather data and communicate it. Smartphones and tablets are more efficient ways to do what middle management used to do. Is middle management even relevant anymore? Are traditional in-person meetings still relevant? Are traditional offices still relevant? When is the last time you challenged tradition to see if new technology has rendered that process obsolete?

New Visionaries

Fortunately, there are people out their helping us answer these questions. One that comes to mind is Gary Hamel. He is part of an organization called The MIX, which stands for Management Innovation eXchange. This organization tries to tap into the business world’s knowledge base to find out what internal processes and structures are best for the changing business environment.

And then there are programs like six-sigma, lean, and a host of innovation tools to help companies get rid of obsolete processes and become more relevant for the times.

There are also plenty of leading-edge companies out there trying unconventional approaches. They are worthy of examination for ideas.

SUMMARY
One of the major roles of strategic planning is to help companies become relevant in an ever-changing world. Often, that focus is primarily external—deciding who are the relevant consumers to target and what innovative, new product/service should be offered. Yet, the external adaption to change is only part of the battle. There are also internal considerations. We need to make should that our internal processes and structures are also relevant in the changing world. Do we have the right organizational structure? Do we have the right internal work rules? Is power located in the right places? Is modern technology being optimized? How should people be compensated?

Getting the internals right may give you more of a competitive edge than getting the externals right. They are worthy of serious concern as part of your strategic planning process.

FINAL THOUGHTS
Next time you eat in a fancy gourmet restaurant, remember the irony that the food eaten by the rich often was designed by those in poverty. Use it as a reminder to look at your internal processes, to see if they are equally out of touch with their original intent. Then change your processes to get them relevant to the future.

Strategic Planning Analogy #514: Working the Wrong Mine

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

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

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

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

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

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

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

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

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

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

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

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

Chris Bradley went on to say that:

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

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

Example

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

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

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

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

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

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

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

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

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

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

Strategic Planning Analogy #474: Weighing Money

THE STORY
Back in the 19^th century, the US was primarily a rural nation.  In those days, if you wanted to purchase something, you didn’t have all the malls with all the stores nearby like we have today.  Instead, if you needed something, you got out your Sears or Montgomery Ward paper catalog and ordered what you needed by mail.  Then, a few weeks later, the mailman would deliver to you what you ordered.

Not only weren’t there many stores back then, there weren’t many ways to pay for the things you bought.  No credit cards or PayPal existed.  Only the very rich had checking accounts.  As a result, almost everything was paid for in advance with cash—usually with coins.

This caused a problem for Sears and Montgomery Ward.  Thousands upon thousands of orders would come to them by mail—each of them in envelopes filled with coins.  Trying to figure out if the right amount of coins were in the envelope to match the cost of the order was a logistical and financial nightmare.

Sears eventually came up with a way to simplify the process.  In fact, they eliminated the process.  Instead of counting the money, they weighed the money.  As it turns out, Sears discovered three things:

1)      The vast majority of people are honest about putting in the right amount of coins;

2)      You can get a reasonable (but not exact) estimate of the value of a pile of coins by weighing them; and

3)      Weighing coins is a lot faster, easier and cheaper than counting them.

By switching from counting to weighing, Sears could process the orders faster with a lot fewer employees.   The big shortages of money would still be caught.  And whatever little shortages that slipped through were small and infrequent.  The money saved from not counting more than made up for any losses from shortages in payment.

So everybody won.  The consumers got their orders processed faster and Sears made the process more profitable.

 

THE ANALOGY
Sears could have spent a lot of time and money to perfect the system of counting all those coins.  And I’m sure they could have made significant improvements to the money counting process.  But I’m also sure that those improvements would never have been as cost efficient as abandoning the process altogether to switch to weighing money.

At first, it seems counter-intuitive to say that profitability goes up when you stop accurately checking to see if you were properly paid.  How could a company like Sears stop counting its payments?

Well, as it turns out, the top line on the income statement is not the most important line.  The long-term prospects for the bottom line are far more important.  If a little less accuracy on the top line can create far more money on the bottom line, then we should be happy with that. (and, by the way, Sears eventually knew the exact total of all coinage coming in—even if they couldn’t tell which order the coins came from).

I bring this up because a lot of businesses are focused on increasing accuracy all over the place.  Using a host of processes like Six Sigma or Lean, a great deal of time and effort is used to gather tons of data to figure out how to do things better or faster or cheaper or with fewer defects all over the company. 

These practices may improve the individual areas being studied.  But, like Sears, perhaps even more improvement to the consolidated bottom line would have occurred if the study had not occurred and the process was entirely eliminated.

Precision and improved performance is not always the right answer for every process. Sometimes, the bigger picture is better served when some processes stay a little looser or are eliminated altogether.  The secret is in knowing when to apply these tools and when not to.

  

THE PRINCIPLE
The principle here has to do with the difference between efficiency and effectiveness.  Efficiency is about focusing on making a process operate as well as possible (speed, cost, accuracy, etc.).  Effectiveness is about focusing on doing those things most critical to long-term success (pleasing customers, gaining competitive advantage, improving long-term cash flow, etc.).

The Folly of Putting Efficiency Ahead of Effectiveness

The difference between a focus on efficiency or accuracy can be great.  For example, I could create the most efficient process for sending messages in Morse Code, but that would never be a more effective way of communication when compared to smartphones and the internet.  If the end goal is communication, I should abandon the Mosrse Code and adopt smartphones and the internet.

Focusing on perfecting Morse Code while ignoring smartphones may seem silly, but companies do things almost as silly all the time. 

Most companies never really have an adequate answer to what I call “The Most Important Question,” which is:  What is it about your business strategy which would cause customers to naturally prefer you over the alternatives?  In other words, they have never figured out what will make the company uniquely effective in the marketplace. 

Instead, they do pretty much what everyone else in the field is doing.  They offer essentially the same solution in the same way.  Then the hope is that they can eke out a small advantage by doing the whole thing just a little bit better. So, they use tools like six sigma and lean in an attempt to make everything they do a little more efficient than the competition.

The problem with this approach is that:

1)      Perfecting the status quo does you no good when the status quo becomes obsolete (like when smartphones and other communication tools made Morse Code obsolete).  Being the best obsolete alternative is not much to brag about.

2)      The competition rarely stands still.  They are also trying to become more efficient.  As a result, it is difficult to get a meaningful long term advantage in doing what everyone else does just a little better.  Think of the battle between Fuji and Kodak to become the best at producing photographic film.  They alternated having small temporary advantages until digital technology made both of them obsolete (see more here).

3)      If you don’t start first with understanding what is most critical for effectiveness, you have no way to prioritize what efficiencies to work on.  In addition, you don’t know which approach is best to improve them (is it by reducing costs, reducing defects, saving time or something else?).  As a result, you can end up working on the wrong projects (like improving money counting instead of moving to a less accurate process of money weighing).

The irony is that putting efficiency first is not the most efficient way to improve your long-term prospects.  It wastes a lot of effort on doing things that do not meaningfully improve the really important things, such as winning in the marketplace.

The Benefits of Putting Effectiveness First  

True, lasting efficiency only comes when effectiveness is given top priority.  Effectiveness focuses on finding a way to win.  That “way to win” involves understanding the underlying problem you are trying to solve (your solution) and differentiating attributes where you will excel in order to be the best at that solution.

For example, Wal-Mart’s solution is to improve the lives of lower income people by making the things of life more affordable.  The differentiating attributes they focus on are lowest cost and lowest price.  Wal-Mart doesn’t waste a lot of effort perfecting service or luxury, because that focus won’t improve their ability to win with their strategy.  Instead, they place all of that efficiency and perfection emphasis in areas which lower costs and lower prices.  And Wal-Mart didn’t stop at just trying to perfect the status quo discount store.  When they discovered that supercenters were a more effective way to solve their problem, they quickly made the switch.

The key to strategy execution is knowing which trade-offs to make.  It is virtually impossible to be the best at everything.  If you try to simultaneously be best at low prices, high quality, speed, service and innovation, you will probably end up being inferior to someone on all of these attributes.   No, if you want to be meaningfully superior, you have to focus on only a couple of attributes.  You trade off (do less) in the areas less important to your effectiveness so that you can afford to trade on (do more) in the areas critical to your effectiveness.  

Starting with effectiveness lets you know where to prioritize you efficiency efforts.  And it lets you know which aspect of efficiency (speed, price, etc.) to focus on.  And, most importantly, it lets you know where not to direct your efficiency efforts.  And, finally, it keeps an eye open for non-status quo approaches which are more effective at solving the underlying problem.  This provides an effective way to win year after year after year.

 

SUMMARY
If you focus too hard on trying to be perfectly efficient at everything you do:

1)      You can end up never winning superiority at any attribute relative to competition (because your efforts are dissipated over too many conflicting areas); and/or

2)      You end up perfecting the obsolete.

However, if the primary focus is first on being effective at owning a solution, you will know how to make the right trade-offs, so that you can become perfectly efficient in the places necessary for you to win in the marketplace.

 

FINAL THOUGHTS
Tools like Six Sigma and Lean should not be looked at as substitutes for strategy (or as being your strategy).  No, they are merely tools.  Tools in the wrong hands can be dangerous.  Tools in the right hands can produce great things.  If you want those tools to do great things, you need to first understand your effectiveness strategy.  This provides the context for knowing where and how to apply those tools.