Anticipation and Creation

THE QUESTION
By almost any measure you can think of, free-market economies are superior to the highly planned economies of socialism/communism.  Free market economies create more total wealth and do a better job of raising the general standard of living for the whole society.

Yet, for many years, I have been advocating strategic planning for businesses.  This begs the question:

If the economy in total is better off with free markets versus planned markets, then why do I believe that individual companies are better off having strategic planning?

This question is becoming more relevant based on the most recent book by Nasssim Nicholas Taleb, called “Antifragile.”  You may recall Taleb’s earlier book, “The Black Swan,” which caused quite a stir.

In Antifragile, Taleb takes a dim view of strategic planners.  His claim is that strategic planners do more harm to businesses than good in their attempt to gain control by way of rooting out the risk of randomness.  Taleb believes that the unintended consequences of these acts are to add delay, complication and inflexibility to the very business they are trying to improve.  As a result, instead of saving the business, the planning increases the risk of failure. 

This is a valid concern.  I have seen examples where this type of result has occurred.  For example, in the name of reducing risk by sharing knowledge and expertise, large shared services organizations are built.  These shared services organizations, if structured improperly, can add delay, complication and inflexibility to a business.  In two instances I am personally aware of, these negative results were so severe that the shared service organizations were dismantled.

So we cannot just dismiss the argument posed in this book.  We need an answer to the question.

 

ANSWER #1:  SURVIVING CREATIVE DESTRUCTION
One of the main reasons why a free economy is superior to a planned economy is due to the concept Joseph Schumpeter referred to as creative destruction.  The general idea of creative destruction is that great improvements to the economy do not come from proactively tweaking the status quo.  Instead, they come from allowing the status quo to die and be replaced by something far superior.  Only by freely allowing marketplace churn—letting old business models be destroyed by new business models—does the market make great leaps forward.

And the beauty is that, when left free of excessive planning, the market will do this creative destruction all by itself.  It is when we try to interfere and protect the status quo that we hinder the ability of the marketplace to make great strides. 

In a macro sense, allowing creative destruction has much merit.  But business leaders live in a micro world.  Their primary role is not the health of the total economy, but the health of their business.  Freely allowing their business to be destroyed in the name of Creative Destruction will not win them any praise from their stakeholders (shareholders, lenders, employees, etc.).  No, these stakeholders want the business leaders to cause their businesses to survive and thrive regardless of what is happening in the macro economy.

I believe that the best way to do this is via planning (we’ll discuss how to do this further below).

 

ANSWER #2:  NOT ALL PLANNING IS GOOD PLANNING
In his excellent book “Good Strategy/Bad Strategy,” Richard Rumelt makes the case that most of what is practiced today in the name of strategy is truly awful.  Worse than just poor execution of good processes, Rumelt believes that much of what is called strategy today is not strategy at all.  It is just terrible actions which hurt businesses. 

I suppose Rumelt would agree with many of the points made by Taleb.  In the name of strategy, a lot of negative activity is taking place.  But that is no reason to abandon strategic planning.

That would be like saying that just because some doctors conduct malpractice, we should abandon the science of medicine.  Or, because some reporters distort the facts, we should ban all news organizations.    

No, the proper response would be to eliminate the bad practices and promote good, healthy planning which works in concert with creative destruction rather than against it.

 

 
ANSWER #3:  GOOD PLANNING IS NOT ABOUT PRESERVATION
My first rule of strategy is this:  “ALL strategic initiatives eventually fail.”  My second rule of strategy is this:  “You are not an exception to rule #1.  YOUR strategic initiative will eventually fail.”

The primary reason why strategic initiatives eventually fail has a lot to do with the forces of creative destruction.  The environment in which you conduct business keeps changing.  What was the best thing to do in one environment is usually not be the best thing to do in a different environment. As the environment changes, your original strategic initiative becomes less relevant.  If you do not change, eventually your strategic initiative becomes irrelevant and you die—destroyed by creative destruction.

But here is where my rule #3 comes in: “Just because strategic initiatives die does not mean that your company has to die.  As long as you continually abandon failed strategic initiatives and replace them with relevant initiatives, the company will outlast any individual strategic initiative.”

The idea here is that good strategic planning is not primarily about trying to preserve the status quo or reduce the risk within the status quo.  It is about preparing yourself to prosper in a world where the status quo changes.

Hence, two of the most important words in good strategic planning are ANTICIPATION and CREATION.

Yes, the environment is changing.  But the change is rarely random.  There is logic behind the change.  The impact of an aging population can be roughly predicted.  The impact of business life cycles can be roughly predicted.  Advances in technology can be roughly predicted (like Moore’s Law).  As a result, the future environment should not be a complete surprise.  It can be ANTICIPATED.  And if something can be anticipated, then it can be prepared for.  And that is a key role for good strategy—to help companies better anticipate the changing environment in which they must prosper (and find ways to best exploit what is anticipated).

Why I would even argue that unusual Black Swans (events which have never before occurred) can be anticipated.  Sure, we won’t know the exact nature of the next potential disaster, be it a tsunami, earthquake, nuclear meltdown, housing crisis or whatever.  But bad, unusual things cycle through on a fairly regular basis.  And the best strategic response to negative black swans often doesn’t vary much.  There are only so many ways a black swan can impact the environment, no matter what it is.  Through the anticipative act of scenario planning, one can have a set of pre-planned responses which will work for almost any black swan.

However, even stronger than anticipation is CREATION.  Creative destruction occurs when a company reinvents the rules in a way which renders the status quo obsolete.  Those who are early masters of the new status quo typically gain disproportionate benefits.  Creative destruction has to be created by someone.  It may as well be you.  After all, isn’t it better to destroy someone else’s status quo than to have someone else destroy your status quo?

As Peter Drucker put it, “The best way to predict the future is to create the future.”  Therefore, good strategic planning looks at ways to reinvent business models—to create the next cycle of creative destruction.  In essence, the planning process is not used to preserve the status quo, but to become a leader in controlling how the status quo will be destroyed.

This is somewhat similar to the Blue Ocean approach to strategy.  The idea is to use planning to look for new, uncontested spots in the marketplace.  In other words, instead of trying to win in the highly competitive red ocean of the status quo, create your own new status quo (the blue ocean).

Strategic planning as a source for anticipation and creation might even be an approach that both Rumelt and Taleb would find acceptable.

 

SUMMARY
Even though highly planned economies tend to be inferior to a more free-market economy, that doesn’t mean that planning is a worthless activity for individual companies.  Planning is worthwhile for individual companies, because it provides a means for them to survive the forces of creative destruction—either through anticipation or creation.   However, not all processes labeled “planning” focus on anticipation and creation.  Some focus on trying to preserve the status quo.   In a world where all strategic initiatives eventually fail, that second approach is not a recipe for long-term success.

 

FINAL THOUGHTS
The best planning looks forwards, not backwards.  As hockey great Wayne Gretzky put it, skate to where the puck is going to be, not to where it has been.  Anticipation drove his actions.  You should be driven by the same thing.

Strategic Planning Analogy #462: American War-Idol

THE STORY
Imagine what would happen if military warfare shifted from the field of battle to a TV reality talent contest, like “American Idol.”  Victory would no longer depend on direct combat with the enemy.  No, the victor would be determined by how many in the TV audience vote for a particular army.

Instead of direct combat against each other, each army would perform a military exercise separately.  They would show off their talents at warfare skills. Then the TV audience would vote on which army appeared more skillful. Like on those singing talent TV shows, the singers rarely go head to head in combat.  They just sing their songs and hope the audience prefers their performance over the others.

If this were the case, then the whole idea of warfare would have to change.  Instead of focusing on the best way to physically defeat the enemy, the goal would shift to focusing on the TV audience.  Gaining votes from the viewers becomes the name of the game rather than the old measurements of territory won or lives lost.

I suppose this would cut down on the bloodshed, but it would require a radical rethinking on how to do the act of war.

THE ANALOGY
A lot of the terminology in strategic planning is borrowed from the military.  There are strategic campaigns, strategic attacks, competitive enemy assessments, and so on.  In fact, a lot of the beginnings of business strategy borrowed heavily from military thought.  Military books like “The Art of War” are often placed on the recommended lists for business leaders.

But I think we need to ask ourselves an important question.  Is the modern game of business more like the traditional military, or more like those singing talent shows on TV?  This is an important question, because the way you approach winning under these two scenarios is quite different. 

As we saw in the story, traditional warfare is about direct confrontation with a foe.  The focus is on overpowering the enemy with superior force.  On the TV talent contests, the confrontation is much more indirect.  Yes you still have to overcome a foe, but the decision is made by the audience.  In this case the focus is on wooing the audience.  The enemy is overcome by superior popularity with a third party.

In the modern world of business, the losers go bankrupt while the winners create cash flow.  And where does that cash come from?  It is not like the old traditional warfare or pirate warfare where you would conquer the enemy on the field of battle and then take their wealth as “the spoils of battle.” 

No, it is far more indirect in the business world.  You get the cash flow primarily from people buying your goods and services—your CUSTOMERS, not your enemy.  Yes, you have to convince customers to spend their money with you rather than your competition.  But that is an indirect assault on the competition.  This means that the real battlefield is not where the competition is, but where the customer’s mind is at.

Hence, victory in business today appears more like the American Idol TV show than old war battles.  You focus on trying to get the “votes” of the audience (customers vote mostly with their money in business) rather than directly vanquishing the foe. 

In fact, this trend appears to be getting even greater.  First, thanks to the social media, the customer is becoming even more powerful in determining the winners and the losers.  Second, governments are still legislating and prosecuting to protect companies from direct “anti-competitive” moves on other companies. 

So, direct confrontation is getting legislated away while the voice of the third party consumer is becoming more influential.

Therefore, if you want to get ahead in business, it may make more sense to put away those books on war and start watching more talent contests on TV.

THE PRINCIPLE
The principle here is that your strategic thinking may need to deemphasize the competitive warfare principles and embrace more of a talent show mindset.  In other words, you may need to fixate less on the competition and more on the consumer.

Too much of a fixation on beating the competition can have two major drawbacks.

1.  Too Much Focus on Improving the Status Quo Rather than Seeking Superior Consumer Solutions.

Consider the epic battle in the last century between Kodak and Fuji in the analog film business.  Each was focused on trying to beat the other.  First, a lot of effort was put into trying to have a superior film product over the other.  For a short period of time Fuji would be ahead of Kodak in quality and then Kodak would make a leap to superiority and so on.

Second, serious effort was spent trying to get superior product distribution over the other.  Finally, there was the battle over value/price.

And we all know what happened.  Customers abandoned the category and moved to digital imaging, making Fuji and Kodak both losers in imaging.  All that effort to have superiority over the rival in quality, distribution and value ended up being meaningless.  It didn’t matter who won the direct battle between Fuji and Kodak for superiority in analog film.  If the consumers stop voting for the category, the victory is very hollow.

I had a friend who worked in the US beer industry decades ago.  He would talk about the intense fixation in top management at Anheuser Busch and Miller at that time to try to destroy each other.  Each spent a fortune to try to get an edge on the other in the US market.  All the while, imports and micro-breweries were stealing the hearts of the customers.  AB and Miller were so weakened by the shift that they each had to seek shelter by selling out to larger international firms.

The point here is that the intense competitor fixation is usually placed on competitors doing pretty much the same thing in the same way in the same industry.   It is based on the current status quo and the goal is to be the best at doing what the status quo does.

The problem is that consumers shift, causing the status quo to become severely weakened or obsolete.  While you are staring at your status quo enemy, you miss the competitor of the future who is now only a blip on the horizon.  You miss thinking outside the box to find advantages that have nothing to do with superiority within the status quo competitive system.  Worse yet, you miss out on time that could have been focused on understanding the mind of the customer better (where the real voting takes place).   

Rather than building superior solutions for the consumer, you end up building superior obsolete products. Just because you beat up your enemy doesn’t mean the customer wants you.  A better version of a no longer desired solution still loses the war for votes.

2.  Missing Out on Peaceful Coexistence Options

Another important point is that you can win the hearts of the customer without having to completely destroy the competition.  Many of the losers on the American Idol TV show still went on to have successful singing careers.  Winning on the show did not mean everyone who did not win had to fail.   They could peacefully co-exist in the entertainment marketplace by appealing to different audiences.

This is very true in the business world.  If your strategic position is significantly different from another firm, you can both win by appealing to different segments.  For example, one technology firm can win in the consumer space (like Apple) where another find success in the business space (like Microsoft).   Or one brand can focus on the high-end luxury business while another focuses on the masses.

The idea is that rather than focusing on outdoing a competitor at the same thing, one can often be more profitable leaving the competitor alone and going in a different strategic direction.  In a head to head competitive battle, your advantages tend to be very temporary, because the enemy fights back to gain its own advantage.  In addition, price wars against each other wipe out the profits from any temporary advantages.

By contrast, if you ignore the enemy and go a different way, your efforts can be placed behind more dramatic and more lasting points of differentiation—because the whole strategy is based on being different rather than trying to be better at the same thing.  And with a stronger differentiation, there is less need to resort to price wars.

Strategy is about choosing the right tradeoffs—doing less of one thing so that you can do more of another.  If you choose different tradeoffs than the competition, then you sort of cease to really even be in competition any more.  So long as there is a large enough audience voting for your version of the tradeoffs, you can almost ignore that other company and just focus on being better at your point of differentiation.

If Apple had continued to try to beat Microsoft in traditional computing, it would have died a long time ago.  However, by repositioning itself in an entirely new business model, Apple could win while not having to really worry about Microsoft anymore, because they were no longer in direct competition.  Instead it had the luxury of just focusing on getting better at its point of differentiation (and make a lot of money doing so).

 

SUMMARY
Excessive focus on beating the competition can hurt your chances of success because it takes focus away from areas which can create consumers to spend more money with you.  In particular, it focuses one too much on the status quo, rather than on the superior business models of the future (which typically come from someone who is not a current competitor).  Second, money and effort is wasted on trying to outdo the competitor at the same thing rather than creating more lasting and more profitable superiority through differentiation in positioning.  Remember, the money comes from the customer, not the enemy, so focus on where the money is.

FINAL THOUGHTS
Even the military is starting to adopt more a TV talent show approach to warfare.  The turning point for the US in the war in Afghanistan came when less focus was placed on out-muscling the enemy and more focus was placed on pleasing the citizens living there.  By building roads and schools and other initiatives, the citizens started liking the US more.  As a result they gave less shelter to the enemy of the US, allowing the US to gain more victories.  If even the military is moving in this direction, shouldn’t you?

Strategic Planning Analogy #440: Mechanic or Designer

THE STORY
Once there was Juan, an owner of a trucking delivery business. Juan took great pride in how efficiently his trucks ran. Whenever there was a lull in his business, Juan would open up a hood and work to make the truck engine was operating as efficiently as possible. He had the heart of a mechanic and saw his mechanical skills as a key to his success. Juan had the best running trucks in the business.

Lately, however, Juan’s business had been seeing a lot more lulls than it used to. In fact, business was virtually non-existent. He popped his head out from under the hood to find out why business was so bad.

Juan discovered that his key customers had stopped shipping their products by truck. They had digitized their product and now sold it exclusively over the internet via downloads. There was no way Juan could operate his trucks faster or cheaper than an internet download.

Maybe if Juan had kept his head out from under the hood of the truck and spent more time looking at the environment, he would have seen this coming and been prepared. Now it was too late. Juan soon went bankrupt.

THE ANALOGY
Based on my observations over the years, it seems that most business leaders tend to have one of two tendencies. Either they have the heart of a mechanic or the heart of a designer.

The “mechanic” business leader is always trying to tweak the business, to improve the status quo. I’ve referred to this in the past as the “More-Better” approach—always looking for ways to make the status quo do more or do it better than before. Like a mechanic, this type of manager focuses on the inner workings of the business (what’s “under the hood”). It’s all about being the best at running the current business model. Juan was this type of leader.

The “designer” business leader takes a different approach. This leader is focused on trying to invent or design the next business model. Their focus is more external. Rather than starting with today’s model and trying to improve it, they start with the marketplace and look for new ways to serve it. Rather than making incremental improvements, the designer leader looks to reinvent the market to their advantage. Steve Jobs was more like this type of leader.

The problem with the mechanic approach is that eventually the status quo becomes obsolete. It doesn’t matter how well you can tweak an obsolete engine. The best-running obsolete engine is still obsolete. Juan’s best truck could never out-deliver a digital download.

And guess who makes the mechanic obsolete? It’s the designer.

If your strategic planning is dominated by a “mechanic” approach, you will be like Juan and have your head under the hood—focused on incremental internal improvements and blind to what is happening around you to reinvent the status quo. Although that approach can work for a period of time, it will eventually lead a company to obsolescence.

THE PRINCIPLE
The problem is that most business leaders are caught in a mechanic’s mind set, because the engine of their current business model keeps breaking down. The pressures of the immediate crisis force them to focus on an immediate fix. These fixes revolve around making the status quo work better. After all, production lines are breaking down, customers are yelling about late deliveries, key employees are threatening to leave, and suppliers are raising prices. Under this near-term pressure, the thinking goes like this, “If I can only get this process to work a lot better and more efficiently, then all these pressures will go away.”

As a result, the tendency is to act like a mechanic and keep one’s head under the hood, looking for ways to make all these current crises go away.

The Problem When Leaders Are Merely Mechanics
Now it is true that crises cannot be ignored. Problems in the business need to be fixed. That’s why such a large percentage of employees work in business operations. You need lots of “mechanics” on the payroll.

The problem is when your top executives still think of themselves as mechanics. In the story, Juan was running a trucking company, yet he still wanted to spend his time as a mechanic. He was ignoring what leaders need to do—lead their companies into the future.

Leaders need to become less of a mechanic and more of a designer. And this may be a tough mindset to change, since solving near-term crises by tweaking the status quo (mechanic work) is probably what got the person promoted to a leadership position in the first place.

How can you tell when a leader is too much of a mechanic? When times really get tough, a mechanic wants to double down and spend even more effort on trying to fix the status quo so that “it works again.”

Unfortunately, the reason why the engine of your business isn’t working may be because it has become the wrong engine—it has become obsolete. The best response at this point is not to spend more time trying to fix the status quo, but to move on to the next business model. And you won’t find it by staring under the hood. You will only find the next big thing if you have a leader who is leading the charge to find it.

The Necessity of Strategic Planning to Break the Mindset
Helping leaders spend more time thinking like designers is probably the biggest benefit of practicing the discipline of strategic planning. It helps leaders take time out from working under the hood to see the bigger picture. It forces them to question the status quo. It helps them think like a designer.
In particular, there are two principles that strategic planners can use to help create a designer mindset.

1. Change is Usually Not Incremental
Industries rarely evolve along a steady, gradual line. No, it is often interrupted with great upheaval as one business model is rejected and another replaces it. And no amount of tinkering with the old will get you to the new.

Kodak could never incrementally improve analog film to make it turn into digital imaging. No amount of improvements to manufacturing a gas tank will get you to battery-powered automobiles. A more efficient printing press will not save newspapers from the upheaval of digital media.

Change tends to be radical and requires a radical response. Radical responses need to be designed. You won’t find the answer by tweaking the engine under the hood.

Strategists provide a great benefit when they remind people of how industries radically shift (and why tinkering won’t help you bridge the shift). They provide even more value when they help point the way to where the shift is occurring and how to reinvent the model to stay on top.

2. Even Designers Can Fall Into the Trap of Evolving into Mere Mechanics
Usually, it is an outside firm which upsets the status quo. Because they have no vested interest in the status quo, they can boldly attack the status quo with the next big thing and win.

The problem is that, eventually, the radical new thing of today becomes the status quo of tomorrow. And then something radically different upsets the “newer” status quo. The cycle never stops.

Computers used to be the hot new thing. Now they are kind of quaint, with iPads, smartphones, and Kindles taking over. And the hot new things did not come from the leading computer manufacturers. No, they came from places like Amazon (Kindle), Google (via Android), and Apple (a minor also-ran in computing).

The problem is that the new company’s success came from pursuing the new business model. Therefore, they get overly attached to that new model. When it comes time to move on to an even newer model, there is a tendency to stay back and act like a mechanic—trying to fix the old new thing instead of designing the next new thing.

Strategists provide a great benefit when they remind people of how the cycle of business model innovation never ends (making your new design eventually become as obsolete as the old design it replaced). They provide even more value when they help point the way to when the cycle is about to turn again and how to turn to stay on top.

SUMMARY
Every company needs “mechanics” to help keep the current business running. But when senior leaders are overly focused on being mechanics, the company stagnates. They are left behind perfecting the obsolete while the rest of the world is moving forward to the next business model. That is why the strategic planning process is so vital. It helps leaders get a broader perspective, in order to:

a) Perceive in advance when it is time for radical reinvention;
b) Figure out how to reinvent the model in order to stay on top.

FINAL THOUGHTS
You can’t stop change. Therefore, take advantage of the change. After all, that’s when the biggest changes in market share occur in an industry. If you take advantage of the change, then your market share will skyrocket. If you ignore change your market share will plummet.

Strategic Planning Analogy #418: It’s the Same Distance

THE STORY
Back when I lived in urban Minneapolis, I had a commute to work by car of about 14 miles. Although it wasn’t the greatest time of my day (I was in traffic tie-ups every day), I didn’t think a whole lot about it. It was just something I had to do every day.

By contrast, when I was living in Green Bay (a much smaller market), I was considering a job in Appleton. Appleton was one county away. The commute from my house to that new job would have been about the same distance as my commute in Minneapolis (around 15 miles). In fact, because of the nature of the traffic, the time of my commute from Green Bay to Appleton would have been shorter than the commute I had in Minneapolis. Yet, my desire (if I got that job) was to relocate from Green Bay to Appleton in order to shorten the commute.

Why did 14 miles of commuting seem okay in Minneapolis, but not between Green Bay and Appleton? I think it has to do with what I saw outside my car window during the commute. In Minneapolis, the entire drive was through a dense, urban environment. The view really didn’t change during that commute. All I saw was a built-up urban view. It was as if I didn’t go anywhere, because the view didn’t change.

By contrast, to get from Green Bay to Appleton, I would have left the urban view of Green Bay and driven into rural farm country (complete with barns and grazing dairy cows). Then I would have left the rural area to enter the urban area of Appleton. This contrast in views made me feel as if I was going on a very long distance because I was leaving one environment to go through two more visual environments. That made to commute seem so much longer and more dramatic.

Visually, the Minneapolis commute felt like I was staying in the same place. By contrast, the Green Bay to Appleton commute felt like I was leaving one world to go to another. As a result, I was willing to accept the commute in Minneapolis but not the commute in Green Bay, even though the distances were about equal and the travel time in Minneapolis was actually longer.

THE ANALOGY
One of the main purposes of strategic planning is to help get a company from where it is today to a better tomorrow. That journey into the future is a lot like my commute to work.

If the view on that strategic journey stays the same (like my Minneapolis commute), then people are content to stay on that journey. They are content, because it doesn’t feel like much of an effort—everything seems the same.

However, if that strategic journey includes a dramatic change in view (like commuting from Green Bay to Appleton), then it feels like the journey is much longer and much more difficult. There is more resistance to taking the trip.

Yet the reality is that the future comes at the same pace, whether the view changes or not. The working time is the same, regardless of what work is being done. Even though a change in work may make the work seem harder and more time consuming, the reality is that it is merely another way to occupy the same length of time. And, as we shall soon see, it may actually be easier work.

Therefore, if your strategic vision requires significant change for your organization or its position, expect increased resistance due the perception that a change of view makes for a more lengthy and difficult trip. But remind people that this perception is not necessarily reality. Just because the view outside the window changes does not mean that the effort in driving the car is all that different. All you’ve done is just point that effort into a new direction—a better direction.

THE PRINCIPLE
The principle here is that change is often not much more difficult than maintaining the status quo. It only seems that way because it is different. As strategic leaders, we need to help people see that beyond the false perception to the reality of the situation.

Here are three points to consider when persuading people to accept the journey of change.

1) Trying to Maintain Status Quo When It is Out of Sync is Very Difficult
Moving forward doing the status quo sounds easy. After all, it’s what we know and it is what gave us success in the past. But if the environment changes, then the status quo may not be as easy as it used to be. The effort to make the status quo still relevant in a changing environment can become a lot harder than expected.

Consider, for example, a conventional supermarket which suddenly has a big Wal-Mart supercenter built across the street. All of that status quo work which made the conventional supermarket successful in the past now has less of an impact. Doing the same old thing leads to lower sales and lower profits, because the Wal-Mart supercenter has taken away a large chunk of their business. The conventional supermarket has to work a lot harder just to try to lose only a little bit of past glory.

The supercenter has a natural superiority in price and selection. It takes a mammoth effort to try to overcome the resulting natural inferiority at the conventional supermarket. Unless the conventional supermarket changes its strategic approach, it can triple its effort on the status quo and still come up short. So sticking with the status quo may not be as easy as it first appears.

Change in the environment is inevitable. Eventually, the actions of the past will become out of sync with the marketplace. Their effectiveness will go down. Therefore, you will have to double or triple the effort in order to get the same impact as in the past. That doesn’t sound easier to me.

2) Getting in Sync With the Future May be Easier
I was hesitant to take the commute from Green Bay to Appleton because the scenery changed. What I didn’t take into account was the fact that because the commute would take me out of the city, I would be heading away from heavy traffic. The commute is easier in the country, because fewer cars are there. This would have been a much easier commute than the congested one I had in urban Minneapolis.

The same is true in strategy. If you change your strategy and head for a brand new position, you can end up moving in a direction which is far less competitive. There are far fewer cars on the road (competing entities) trying to reach that spot. As a result, this move into new territory is actually easier.

This is the principle behind the Blue Ocean strategy. By moving to uncontested new locations, success is actually easier to obtain.

In the example above, instead of working harder at the status quo, the conventional supermarket could have repositioned itself as the premier store for healthy, fresh, organic and wellness products. Using Whole Foods as an example, this type of concept can peacefully coexist against a Wal-Mart Supercenter and even provide the opportunity to successfully raise prices and margins.

Yes, that would require a change is activity. But it might provide a greater return for the effort than trying to make the status quo still work. And it would probably be even less effort in the long run to make that change than to continue the fight with the ever less effective conventional tools.

3) Changing Early Has its Advantages
There are many advantages to being an early mover when the environment changes. You get to own a position before it is contested (the easiest way to get a position). And it is easier to keep a position already owned than to take a position away from someone who already has it.

First movers get to define the category (and define it in a way most advantageous to themselves). First movers can lock up the supply chain to their advantage. First movers get customers in the habit of choosing them (and habits are hard to break).

All companies get the same amount of time. We all get only 24 hours in a day. If you spend most of your time driving in the status quo, you will be in the wrong location when your time is up. It is the one who redirects the car towards the new view early who gets there first (and gets the advantages of being first).

Trust me, if you wait until the end to realize that you drove in the wrong direction (towards status quo) and then try to catch up to those who took an early route to the future, you have a very difficult task in front of you. You will get to the future late and at a competitive disadvantage. That sounds like an awfully lot more work than just steering your company towards the future early on.

SUMMARY
People tend to resist change because at first it appears to be harder and more time consuming. However, the reality is that early adoption of change can actually be easier and less time consuming than sticking with the status quo. The problem with the status quo is that eventually it will become out of sync with the changing environment. As a result, you have to work ever harder at it while getting ever less benefit. By contrast, early movement into uncontested areas of the future can be easier to attain and easier to defend. As a result, status quo is usually the harder and more time consuming approach.

FINAL THOUGHTS
I knew someone who moved from Chicago to Green Bay. He noticed that most of his co-workers had a home in Green Bay and a cottage further out in the country on a lake. So he did the same. Then he started thinking. He realized that the length of time it took to get from his cottage on the lake to his job in Green Bay was about the same length as the commute he used to have in Chicago. Therefore, he sold his house in Green Bay and lived full time at his cottage on the lake. This made him much happier, because the commute took him to a happier place. If you accept the idea that a changing view is okay, then you can become happier, too.

Strategic Planning Analogy #403: We’re All Number One

THE STORY
One of my first jobs after getting my MBA was to help a small retailer determine where to put its advertising dollars. All the local radio stations thought that I should be spending my advertising dollars with them. As a result, I was constantly being shown presentations by the radio stations about why I should be using them for my advertising.

What amazed me was that nearly every radio station in that market could use the ratings book to “prove” that their station was ranked number one. How could they all be #1? It was done by slicing up the market into sub-segments. As it turns out, for some time during the day for some sub-set of the demographics, each station could find a place where they were number one.

For example, one relatively weak station showed me that they were #1 with teenage girls at 2AM. I’m not sure how many teenage girls are listening to the radio at 2AM, and I’m not sure why I would want to talk to them at 2AM, but it was the rare opportunity when this one station could claim to be #1, so they bragged about it.

It didn’t take me long to figure out why the boss had given me the task of working with these radio stations. He knew from experience that these presentations were a waste of time. So to avoid them, he gave that job to me—the new guy.

THE ANALOGY
These radio stations all saw an advantage to being able to claim that they were the market leader. Therefore, they sliced up the data until they found any obscure data point that would allow them to claim some form of leadership, no matter how meaningless.

A lot of business strategies and mission statements also put a high priority on leadership. You’ll find goals to be “a market leader” or “industry leader” (or something similar) in many of them. And there is a lot of evidence showing that there are strategic benefits to being a leader.

The problem is that not all types of leadership are created equal. As we saw with the radio stations, it is possible to find leadership within minutiae that is so obscure as to be practically meaningless.

This same problem can occur with all businesses. Like the radio stations, they can find a way to claim leadership. If you look hard enough, almost all businesses can find someplace where they are a leader. But is the leadership meaningful? Is the leadership claim strategically significant, or just some trivial point of data with no power?

THE PRINCIPLE
The principle here has to do with smugness. Having a business which is a leader can be very satisfying. It can be a source of pride. It can make you feel like your strategic mission has been accomplished. It can make you feel smug…nothing left to do but put your feet up on the desk and watch the profits roll in.

In reality, however, there is no room for smugness in strategic planning. Just because you have found a way to define yourself as a leader today does not mean that you will remain a leader tomorrow. Worse yet, the type of leadership you have defined for yourself may not have any strategic power or significance.

While it may be true that all successful businesses are leaders, not all leaders are successful. You need leadership in a place worth leading.

Problem #1: Leaders Without Followers
The definition of a good leader is someone with lots of followers. Similarly, being #1 is only valuable if you are number one in a place with high demand. Being #1 in a place that everyone is abandoning is not much to brag about.

The largest threat to the power of leadership is obsolescence. It leaves the leader of the obsolete with nothing but memories, because their future is typically ruined. And pretty much everything eventually becomes obsolete. Therefore, if you smugly rest on your #1 position, refuse to abandoned your strategy, and hold on too long, you will eventually be a leader in a worthless position—abandoned by customers because it is obsolete.

This applies to leadership positions in specific products. Just think of all the analog products and business models made obsolete by the digital age. Being #1 in video tape players is worthless in a world of streaming movies off the internet.

Technology leadership is also vulnerable to obsolescence. Being the leader in the manufacturing of cathode ray TV picture tubes is worthless in a world of flat screen TVs. And as Clayton Christensen points out in his book on The Innovator’s Dilemma, data storage devices have gone through numerous technological transitions, and the leader in the former technology is rarely the leader in the next technology. Often, they cease to exist because they smugly clung too long to the obsolete technology.

Even entire industries can become obsolete. Think about the payphone industry. Being #1 in any aspect of the payphone industry is pretty worthless in a world of cell phones. Similarly, being #1 in the video rental store industry is fairly worthless, because the entire industry is obsolete. Just look at what happened to Blockbuster. Their leadership in the end could not save them.

Even leadership with a customer segment can be worthless if that segment goes away. I worked with a wholesale company whose core customer segment was small independent retailers. The small independents were disappearing due to the growth of Wal-Mart and other large chains. This wholesale company’s #1 position with independents was becoming worthless because independents (its customers) were becoming obsolete.

I know a story of a brewer who was looking at buying a beer brand. They did research and found out that although this brand had a leading regional position with a certain customer segment, that segment was starting to get old. They were starting to die off. No new customers were being added. In the not too distant future, so many members of the customer segment would be dying off that the leadership with this segment would be worthless. Dead customers are obsolete customers.

Problem #2: Leading in a Meaningless Place
Even in young, growing sectors, leadership can be worthless if the leadership is in a bad place. For example, some segments are just too small (like being #1 with teenage girls at 2AM). Even if you are the leader with 100% market share, it is not enough to provide an adequate return.

Think about satellite-based cell phones. About the only customers who desire them are people in places without access to cell phone towers. Unless you are out in the middle of the ocean (and few of us are) or in a very remote area (and by definition almost nobody can be in an area labeled “remote”), then you have virtually no reason to pay the extra expense for satellite-based phone service. Therefore, being #1 in satellite phones is fairly worthless. The returns will never justify the costs.

Another worthless place is being the leader in a broken business model. Even in young, rapidly growing businesses, if you cannot eventually find a path to profits, then that leadership is worthless. I can think of a lot of dotcom business which are leaders with a large number of followers. However, they have not discovered a way to adequately monetize that leadership. The business model is broken. In these situations, leadership will only allow you to burn through cash more quickly on your way to failure. The reason why dotcom bubbles and housing bubbles burst is because the industries are based on flawed models. Eventually, the flaw brings the market down, and even the leaders struggle to survive.

Avoiding the Problems
So how do you avoid these problems? First, don’t get smug and stop adjusting to the marketplace. Always be watching the marketplace for early signs that your position is in a place that is becoming obsolete. That will give you time to prepare to jump to the area that is making you obsolete. Better yet, consider initiating the act that will cause obsolescence. That way, you have a better shot at keeping leadership through the transition.

Second, don’t get smug and relax just because you were able to manipulate the data in such a way as to find some place where you are #1. It may be a worthless place of leadership. Do the math to make sure that all that effort to lead will end up in a place worth leading.

Third, once you have found the right place (a place where you can win and a place worth winning), work hard to be a leader there. This is when leadership really makes a difference, so work hard to get it.

SUMMARY
Doing nothing is rarely a good strategy. Marketplace conditions are too fluid. Even a market leader can lose out if their point of leadership becomes obsolete or is threatened by others with a superior business model. There is never an excuse for becoming smug and stopping the attempt to get closer to where the market is going. Rather than looking for ways to redefine the status quo as some obscure version of leadership, look for areas where leadership is really valuable and move from the status quo to get there.

FINAL THOUGHTS
As Clayton Christensen likes to point out, leaders at one point in time rarely survive the transition to the new when the old becomes obsolete. They are replaced by new companies created just for the new. And a major reason, I believe, for that inability for the leader to survive the transition is because they become too smug.

Strategic Planning Analogy #314: One Strategy

THE STORY
Early in my career, I was working on a project with another guy in the department. He seemed more motivated than normal get this project done. He also wanted me to be more highly motivated.

Trying to get me excited, he said, “I was talking to the boss, and he said that if we do a really good job on this project, I will get a big promotion.”

So I started thinking…this guy had less seniority than me and a lesser position. If he were to get a big promotion, it would mean that he would become my boss, putting an additional layer between me and the top of the organization. In essence, his reward would have the indirect effect of acting as if I we getting demoted, or at best having my career path made worse.

So, if WE work hard, HE benefits at MY expense. What’s in this for me? Would not I be better off if the project has a little less than a stellar performance? The status quo looked a lot better to me than the so-called “rewards” that would come from working harder.

I could see the look on the face of the guy I was working with. He was starting to realize what was going through my mind. Now he regretted having told me about his potential promotion.

THE ANALOGY
Business is ultimately about getting things done. One of Strategic Planning’s key roles is to help determine what should get done. However, just deciding what should get done does not necessarily ensure that it will, in fact, get done.

In the story, there was a disconnect between what the company wanted to get done and what I wanted to get done. Project success and my personal success were at odds with each other. As a result, I was not fully motivated to make the company goal a reality.

These types of situations happen in the business world all the time, often on a far larger scale than the project in my story. Businesses will make grand pronouncements of wonderful new strategic initiatives. They will explain how these new strategic plans will make everything for the company so much better.

Then, over time, you stop hearing much about that grand strategic initiative. Worse yet, there is no real evidence that the key elements of the strategy ever got accomplished. Status Quo prevails.

A year or two later, the business will make grand pronouncements about an entirely new and different set of strategic initiatives. Forget those old initiatives. Let’s embrace the new ones. Of course, the success in implementing the new initiatives turns out to be no better than the failure of the old ones.

Why? Usually in these situations, there is a disconnect between the ones declaring the initiative and the ones who are supposed to accomplish the initiative (just like what happened to me). Unless you fix the disconnect, the strategic initiative will not succeed.

THE PRINCIPLE
The principle here is that strategic planning needs to be more than just a source of great ideas or mandates. It also needs to get involved in the messy work of implementation. Otherwise, the forces of the status quo will usurp control and render the strategy powerless.

I was reminded of this principle today while reading an interview with one of the authors of a book called “One Strategy.” The book, which was published late in 2009, tells the story of the project to design and release Windows 7.

The premise of the book is as follows. Most companies have two strategies: The “explicit” or “directed” strategy (the declared strategic desire from the top) and the “implicit” or “emergent” strategy (what emerges from the everyday activities of the organization). If those two strategies are not aligned, you will fail.

The book’s prescribed solution is to seek “strategic integrity”—where both strategies are one and the same. This is done by working on all those forces which cause the “emergent” strategy to vary from the intended “directed” strategy. This includes things like policies, procedures, organization, rewards, incentives, management style, and so on. In addition, there needs to be constant communication between the keepers of the directed strategy and the keepers of the emergent strategy so that they can stay on the same page. The book uses blogs by the Windows 7 project manager to illustrate how Microsoft created strategic integrity through this process.

In my story above, my rewards and incentives were not aligned with the project, so I was less than fully motivated to make the project a success. There was the potential for me to lose strategic integrity.

What is amazing to me is that this is considered a radical enough new idea to warrant a book. Isn’t this just common sense? Let’s assume for a moment that I owned an auto repair shop and decided to turn it into a gourmet restaurant. I tell the head mechanic to make the change and then go away for a few months. When I come back, I find out that nothing had changed. When I ask the mechanic why the new strategy was not implemented, he says:

“You didn’t give me any money to make the conversion from auto repair to gourmet restaurant. I had no policies or procedures for running a restaurant. All the employees here are compensated as a % of the labor costs in automotive repairs. If they stop doing auto repairs, they stop getting paid. In addition, all the mechanics figured that they would soon be out of a job (replaced by chefs) if they cooperated. Finally, I’m more comfortable managing a repair shop than a restaurant. So we decided to keep things as they were.”

Common sense should tell us that this would be an expected response. If you truly wanted to make the conversion from auto repair shop to gourmet restaurant, you would need to get rid of all those barriers to conversion and stick around to make sure that the forces of status quo do not win.

But I guess it is not common sense, since strategic failure (lack of strategic integrity) is so common.

Part of this is the fault of the professional strategy community. We often don’t like getting our hands dirty with the messy task of implementation. We voluntarily cut ourselves out of the daily conversation where the “emergent” strategy takes place. This is a mistake. No wonder so many companies see strategy professionals as irrelevant.

Part of this is the fault of the operators who try to block strategists from “meddling” in their affairs. Strategists cannot help remove the barriers if they are forbidden from entry into the world of everyday business activity.

So how can we help fix this situation?

1) Create Incentives for Cooperation
If the natural tendency is for the two sides to not want to work together, create incentives to overcome these natural tendencies. Tell the strategists and the operators that neither is rewarded unless both do their part to build the One Strategy. Suddenly, their success is dependent upon each other, so there is more incentive to work together.

2) Blend the Teams
The operators are more likely to trust the “meddling” of the strategists if some of the members of the strategy team are current or former operators. In addition, the strategists are more inclined to get their hands dirty if members of their team are used to getting their hands dirty. So if you want one strategy, build one blended team.

Professional strategists and professional operators both have something to offer. Blend them together, so that they offer assistance to each other rather than offering two distinctively different strategies.

SUMMARY
Strategic plans are doomed if they are mere words handed off to people who are incented to keep the status quo. Strategy & Implementation need to be blended into a single, ongoing process.

FINAL THOUGHTS
I witnessed a company where about 90% of the organization believed that the “directed” strategy would have a negative impact on their career path. This was like my little story above, only multiplied by the thousands. As you may have guessed, the 90% revolted against the 10% and won. Never underestimate the potential resistance of people who feel that change threatens their personal agenda.

Analogy #197: Change the Rules

THE STORY:
I used to live in a city that was having some problems with the quality of the municipal water supply. There was too much of a certain chemical in the water.

By law, when a city was in violation of water standards they had to send a letter to every household in the community. This letter had to do three things:

1) Inform people of the problem with the water;
2) Explain the risks in using the water;
3) Provide details on how the city was planning to fix the problem.

In essence, this is a summary of what the city said in the letter.

1) The levels of a particular chemical in the water exceed the maximum allowed by the government.
2) We don’t think it’s a big deal.
3) Our primary solution is to petition the government to raise the allowable levels for this chemical, so that our current levels would be considered safe.

For some reason, I did not get a lot of comfort from that letter.

THE ANALOGY:
Every industry tends to have a certain accepted way of doing business. They become the standard operating procedure—the rules for how things get done. Most of the time, these rules aren’t written down—it is just how the industry evolved.

There are reasons why these standardizations are useful:

1) Getting the entire supply chain in an industry to work smoothly requires the cooperation of many different firms. The more procedures are standardized, the easier it is for these firms to work together.

2) There is usually a limited pool of quality employees in a given industry. It’s difficult to tap into that pool of employees if your procedures are radically different from the norm, because they are trained and experienced to excel within these norms.

However, it should also be pointed out that these accepted ways of business are somewhat arbitrary. They do not have to work that way. Other processes could have just as easily have evolved over time.

In the story, it seems rather audacious that one little community would challenge the water standards set by the Federal Government. After all, it is assumed that scientists picked the maximum levels for that chemical in the water based on solid evidence. Similarly, it may seem audacious for a business to ignore the operating standards of its industry.

However, I am reminded of a conversation I had with a doctor at Mayo Clinic who was on a team of experts to determine what was the acceptable range of health should be for one of those common measures used in medicine, like blood pressure or cholesterol. He said that it’s not as if you are healthy and that all of the sudden after reaching a certain point you suddenly become unhealthy. He said it is a gradual thing and that as measures like blood pressure and cholesterol gradually go up, you gradually become less healthy.

According to this doctor, the point at which you declare one of these ranges to go from “healthy” to “unhealthy” is somewhat arbitrary. And in fact, he disagreed with the committee he was on and thought the range for “healthy” should have been narrower.

So maybe it was not that audacious after all for that city to challenge the federal water standards. And maybe it is a good thing if your business’ strategy challenges the standards of your industry.

THE PRINCIPLE:
The principle here is that industry standards are arbitrary to some degree and that sometimes it is in your best interest to change them. There are several reasons why you might want to change industry standards.

1) The standards tend to protect the established leaders. If you are not an established leader, they may become a barrier to your success.

2) The standards may not play to your natural strengths. A different set of rules might give you more of a competitive advantage.

3) Standards tend to reinforce the status quo. True innovation may require abandonment of some of these standards. In fact, almost every major innovation creates a new set of standards for how things are done. If you are unwilling to bend the rules, you may never truly innovate.

Here are some examples of firms which changed the rules in order to get an advantage. We’ll start with the typical rules in furniture. Furniture brand firms in the US tended to be large companies who desired to made their furniture in their own factories. They spent lots of money to create a consumer demand for their brands. Labor costs were high, but they were able to pass the costs on to the smaller, and less powerful retailers.

Then along came Ashley furniture. Ashley had no desire to own manufacturing facilities. When cheap labor markets like China opened up, they aggressively went into these countries to source their products from anyone who could meet their specifications. Ashley didn’t care about establishing a strong, separate brand name for their products. They just sold them under the name of their retail brand.

By abandoning the status quo and rewriting the rules, Ashley had several advantages. First, they were able to secure products far cheaper than the status quo, who were burdened with factories and unions and other costs, which were higher and less flexible. Second, by sourcing directly, Ashley entirely avoided the branded manufacturing middlemen, saving even more costs.

These savings allowed Ashley to provide a far superior value to the customer. The customer responded, and Ashley thrived. Most of the large, established furniture retailers in the US who played by the old rules have gone bankrupt. In the mean time, Ashley has catapulted to becoming the largest furniture retailer in the US.

And, of course, everyone knows the story of Starbucks. Before Starbucks, the rules about coffee went something like this. Coffee was something you consumed at home or at work. Coffee was purchased by consumers in bulk in ingredient form. The customer manufactured their own coffee. The ingredients tended to be heavily couponed and sold in supermarkets, with the choice usually made on the basis of price.

The key manufacturers, like Folgers and Maxwell House knew the rules and played by them. The consumers knew the rules and played by them. That is, until Howard Schultz came along and changed the rules. At Starbucks, you consume the coffee at the coffee shop. You buy it one cup at a time, prepared by someone else. Quality became far more important than price.

Now, consumers are drinking a lot more coffee, but Folgers and Maxwell House are struggling, because they stuck to the old rules.

I am very excited about the prospects for Alan Mulally, the new CEO at Ford Motor Company. He is an outsider who has no personal connection to the old rules about the automobile industry. As a result, he is far more inclined to rewrite those rules. I hope he is able to do so.

SUMMARY:
Industries tend to run using generally accepted rules and procedures. However, just because everyone tends to do things in a similar manner does not mean that it is necessarily the only or even the best way of doing things. It may be a result of historical quirks or factors which are no longer as relevant in a changing society. Therefore, when developing strategy, the best tactic is not always to look for ways to outdo everyone within the current paradigm. Instead, you may be better off looking for a new paradigm which plays by another set of rules.

Even if you like the status quo, one must not get too cozy with them. It is important to keep your eyes on the horizon, looking for firms who want to destroy the rules which are helping to create your success. As we have seen, if you stick to the old rules when society is migrating to the new rules, you will lose out. As a consequence, even if you prefer the old rules, you may need to quickly shift gears in order to remain relevant.

FINAL THOUGHTS:
When I received that letter from my city water company and found out how little they were prepared to do to fix the water quality, I changed the rules about the way my family consumed water. I bought a home water filtration system.

Not all rule changes are driven by innovative businesses. Some are driven by rule-changing consumers. Keep an eye on the leading edge consumers. They may already have a new set of rules in mind. All you have to do is tap into them.