Strategic Planning Analogy #513: The Business Lottery

THE STORY
Imagine a world in which business is run like a lottery. Under such a scenario, each morning every business would submit to the Business Lottery Commission (BLC) their guess of the day’s winning numbers. Then the BLC would use numbered ping pong balls to determine the day’s winning numbers.

Each company’s sales for the day would them be determined by how close their guess was to the numbers chosen by the BLC. The more numbers a company got right, the higher their sales for the day would be. If a company got none of the numbers right, their sales for the day would be zero.

That would be a strange world, because success would be random and essentially out of the control of management. Skill would be replaced by luck. Nobody would stand for a world like that, would they?

THE ANALOGY
Lately, it seems like the business world is becoming more and more like the lottery, particularly in the social media space. I was reminded of this when reading the November issue of Fast Company. In the editorial, editor Robert Safian said,

“There are so many emerging technologies and newly found companies, it is near-impossible to predict which ones will have staying power. This makes both business planning and investing not just complicated, but treacherous.”

There are two main implications in such a statement. First, it implies that success appears to be unpredictable because it is based almost entirely on luck, like playing the lottery. Second, if success is based on luck, then the importance of planning is severely diminished. Why work hard on planning for success if success is primarily a result of luck?

This idea is further reinforced when one looks at the behavior of a lot of the young entrepreneurs in the social media space. They tend to spend very little time on a particular venture. If it doesn’t get “lucky” quickly, they move on—either by pivoting the current venture into an entirely new direction (like Fab.com) or by abandoning it and starting completely over. They are like the lottery player who picks new numbers to play every day because yesterday’s number wasn’t lucky.

And when these entrepreneurs do “get lucky” they often abandon participation in the business soon thereafter in order to play the game again with another new venture. In other words, they cash in their winning lottery ticket and use the proceeds to buy more lottery tickets. They call it

serial entrepreneurship. I call it lottery fever.

And here’s the even stranger fact. The entrepreneurs are paying for most of their “lottery tickets” (i.e., latest business ventures) with someone else’s money (from Venture Capitalists).

When the venture gets “lucky” and wins, it usually wins big (like Facebook, Google, Linkedin, etc.). But most of these ventures end up with nothing. That also sounds a lot like the lottery.

So maybe the people would stand for a world like that after all.

THE PRINCIPLE
The principle here is that actions are a result of assumptions. If you assume that business success is essentially random, then you will treat business like a lottery (and planning will be minimal, at best). However, you assume that business success still has a significant element of skill to it, then you will treat it more like professional poker. Yes, poker has a high element of luck, but the good players use strategy to consistently outperform the odds of mere luck.

I believe that it is in one’s best interest to use strategy to increase the chances of success (like poker) rather than relying on betting often and hoping for the best (like the lottery).

The Problem With The Lottery Assumption

If you assume success is primarily luck, you then your actions will work against you in two ways.  First, this assumption will cause your actions to move towards quantity rather than quality. As in the lottery, the more tickets you have, the better your odds are of winning (quantity, not quality). So there is a tendency with this mindset to dabble in a lot of things somewhat superficially and for only a short period of time. If there is no instant win, then you move on, perhaps even dabbling in multiple ventures at once.

It’s sort of like the old saying that “if you want to be in the right place at the right time, you have to be everywhere all the time.” So these people try to get attached to as many ventures as possible.

Unfortunately, this is rarely the path to winning. Remember, most of the people who play the lottery lose, even when they buy a lot of tickets. Real winners are not superficially involved for a short time. They are fully devoted to the business for the long haul.

Consider Amazon. Today it looks like an obvious winner. But that was not from getting lucky early. In the early years, Amazon looked like a real loser and was written off by the “experts.” Amazon won because it was dedicated to a long-term strategy for winning in the marketplace and did what it took to make that long-term strategy a reality, even if it made the near term appear “unlucky.” Rather than cashing out, they made huge investments into the marketplace to create a winning position over a long period of time. Amazon didn’t buy into the lottery assumption.

The second problem with the lottery assumption is that it places its focus on funding the purchase of tickets (getting venture capital money) rather than winning the marketplace (getting sales from customers/advertisers). You can see this in companies with fantastic valuations among the venture capitalists which have never turned a profit. Heck, many have had sales of ZERO. “Monetization” of the business model becomes a dirty word, and those promoting monetization are seen as “not getting it.”

Call me old fashioned, but I want to see a path to profits in the marketplace. Otherwise, all we have is a pyramid scheme, where early investors expect to be bought out at a huge gain by greater fools at a later date. That’s what happens when all the focus is on who buys the equity rather than who pays for the product/service. Eventually, you may find a greater fool who pays too much (to you for your equity), gets too little (the weak business model) and suffers a huge loss to pay for your gain. But if you can’t find another buyer, then you’re the last fool and you suffer the loss.

Improving You Odds Like A Poker Pro

By contrast, poker professionals don’t rely on luck. They use skill and strategy to increase their chances of winning. Poker professionals do three things in particular to increase their odds.

First, the poker professionals study their environment. They get to know the other players at the table. They learn how the other players act and react under various scenarios. The poker pros also watch the cards to learn what has been played and what has not been played. In a similar way, the best business winners don’t merely rely on luck, but study the marketplace and their competition.

Second, poker pros use that knowledge to play an intelligent game of strategy. They understand the odds and work that to their advantage. They consider various scenarios. Then the pros make moves designed to cause the other players to act in a manner that shifts the odds even more to their advantage. The pros don’t leave winning to chance and the luck of the cards. They use strategy to improve the odds of success. Good businesses do the same.

Third, the poker pros stick around. They don’t just play one hand and walk away. The pros know that in any individual game, bad luck might be too high to overcome with their skill. They know that it is over the long run that luck evens out and their skill eventually prevails.

In addition, the poker pros know that the longer they play with a particular group, the more they will learn about them. This additional knowledge makes the pro’s strategy improve over time, thereby making the later rounds potentially more productive than the early rounds.

Similarly, good business people stick around and put in the effort to build a viable position and infrastructure. Rome wasn’t built in a day, and neither are great companies.

I am reminded of a story I heard from the founders of Netflix back when their company was barely more than a notion in their head. They told me that their goal was to win in the digital download of movies. They knew that there would only be a small window of time in which to grab that position. They also knew that the timing of that window would be five to ten years in the future. So, to optimize their odds of winning that future digital window of time, they were going to start a physical mail-order business today.

The idea was that the mail-order DVD business would do two things. First, it would help Netflix build strong ties with a large number of consumers. Second, it would help Netflix build ties with the content producers (movie makers/distributors). Those connections with customers and content from the mail-order business would increase their odds of winning when it was time to switch to digital.

This was a long, well thought-out strategy with multiple steps. And it did improve the odds of success for Netflix in the digital movie space. When that small window of time opened, there were tons of entrepreneurs trying to “buy a lottery ticket” by dabbling in the space at the moment the window opened. It was like that Fast Company editorial quote of “so many...newly found companies.”

Most of them quickly “lost the lottery” and went away. But because Netflix was playing poker instead of the lottery, they are still a major player in the space.

SUMMARY
One’s actions are based on one’s assumptions. If you assume the business world is driven primarily by luck, then you will act as if business ventures are like lottery tickets. However, if you still think skill prevails, then you will act as if you are skillfully playing poker. And in the long run, your odds for success are better when using the skill and strategy of poker rather than the “buy a lot of tickets and hope for the best” approach of the lottery.

FINAL THOUGHTS
Now you may be saying to yourself, “I don’t think of business as being like a lottery.” Well, you may not say it, or even openly admit to yourself a belief in the lottery assumption. But if you act as if business were a lottery (by doing some of the things mentioned in this blog), then you must believe it deep in your subconscious. You actions shout your true inner beliefs and assumptions, even if you aren’t consciously aware of them.

Strategic Planning Analogy #507: Hammers Are Lousy As Saws

THE STORY

Joe the carpenter wanted to be as efficient as possible, so he decided to only carry around only one tool—a hammer.

Joe had three tasks that day: hammer some nails, screw some screws and cut some boards. Joe decided to do all three tasks with his hammer. Hammering the nails went quite well with the use of the hammer.

Getting the screws into the wood with the hammer, however, was far more difficult. By the time Joe could bang the screw into the wood with the hammer, the screw was all bent, the wood was a bit shattered, and the screw was doing a lousy job of holding the wood together.

Finally, Joe discovered that if you whack at a board long enough with a hammer, you can break it into two pieces. But when compared to cutting a board with a saw, whacking it with a hammer was less accurate in getting the cut in the right place, and the edges where it was “cut” with the hammer were all distorted and ragged. This made the board less useful than if a saw had been used.

But in spite of all the problems with the results, Joe the carpenter was still proud of his work. After all, as Joe put it, “I simplified my work by having to carry only one tool.”

THE ANALOGY

Joe’s approach to his work was rather misguided. What good does it do to simplify the number of tools you carry if the end results are awful? Replacing the screwdriver and saw with a hammer lead to a rather useless outcome. Not only would the results have been better if Joe had used a different tool for each task, it would have taken less time and been easier.

Business leaders wouldn’t be as misguided at Joe, would they? In one way, I think many are. There is this tool that businesses use, called a “budget.” The budget is a good business tool, just as a hammer is a good carpentry tool. But just as a hammer cannot effectively do all the work of carpentry, a budget cannot effectively do all the work of business.

Three of the key tasks of business management are to:

1. Effectively manage the treasury function;
2. Make sure the business operating divisions are doing the right things; and
3. Provide incentives for employees to act in the best interests of the company.

Many companies rely primarily on the budget process to do all three tasks. But as we will see in this blog, that is like using a hammer to tighten screws and cut boards. The budget is an effective tool to help the treasury function, just as the hammer is effective in hammering nails. But for the other two tasks, there are better tools than budgets. By trying to use a single budgeting process to do all three, one ends up with a mess. There are better tools for monitoring the operating functions and providing employee incentives, and they should be used instead of the “hammer” of budgets.

THE PRINCIPLE

The principle here is that companies are not doing themselves any favors by using budgets as a tool where it doesn’t belong. It is great for the treasury function, but inappropriate for many of the additional places where it is used.

1. The Budget “Hammer” Works Well on the Treasury “Nail”

The key function of treasury is to ensure that the cash of the business is properly managed. It looks for efficient (and cost effective) sources of cash when internal cash flows fall short of need and looks for efficient uses of excess cash produced internally. Timing of these actions is very important, so that the proper level of funding is available to match the fluctuating cash flow needs.

The budgeting process is a rather good tool to help in this treasury function. It provides a broad overview of cash flows over time. This helps the treasury function plan in advance so that the right amount of money is in the right place at the right time at the best price. The budget is also a good tool to share with the debt and equity community, so that they will cooperate more favorably with your cash needs. It helps build trust, so that they will provide cash at a favorable rate. Treasury should be the primary goal of the budget.

2. The Budget “Hammer” is a Poor Choice for the Employee Incentive “Screw”

However, when budgets are also used as the primary tool to incentivize employees, it destroys the integrity of the budget. Employees will try to “game the budget system” in order to insure easier and higher bonuses. This creates a budget which no longer reflects best estimate of cash flows, because the numbers are padded to improve the likelihood of a bonus. As a result, it damages not only the ability of the budget to get employees to work harder but it damages the ability of the budget to accurately help the treasury plan accurate cash flow estimates.

In addition, employees understand that there is usually more than one way to hit a budget number—and not all of these ways are equally good for the long term health of the business. For example, this quarter’s budgeted profit number can be hit by doing lots of actions harmful to long term prosperity, like improperly cutting investment in the future, cutting research, cutting maintenance, cutting quality, cutting service, overcharging customers, and so on. Since both good and bad behaviors can be used to hit a budget number, the budget is not very effective as an incentive for ensuring right behavior. It is like trying to secure a screw by banging at it with a hammer.

3. The Budget “Hammer” is a Poor Choice for the Operational “Board”

Similarly, the budget is a poor choice as the primary means of determining the specific actions of the operating divisions. The main problem is that budgets are frozen well in advance, before the year begins. As we all know, the marketplace is a dynamic, rapidly changing environment. It is impossible to fully anticipate all of these potential changes. It makes no sense to tie up your operations into budgeting straightjackets, unable to adjust to the changing business environment just because the best guess estimate put into the budget nearly a year earlier has proven to be off.

Does it make sense to not exploit a great opportunity merely because that opportunity was not in the budget? That would be like a miner refusing to take advantage of a huge find of gold in the mountain because they only budgeted to take a meager amount of silver out of the mountain. And the opposite is also true…why continue a particular action merely because it is in the budget if the changing situation makes that action no longer viable?

Budgets are typically broad-based numeric documents. They are not good at understanding strategic nuances, competitive dynamics or the actions behind the numbers.  To expect that out of budgets is like expecting a hammer to effectively cut a board.

Recommendations

To get around these problems, I suggest the following:

a) Get A Screwdriver. Get a tool specifically designed for incenting employees. To insure people are incented to do the right things, specifically outline what right things those are and reward achieving behaviors instead of numbers. For example, if you want an employee to master a skill, make skill mastery the criterion for bonus. Or if you want an employee to successfully roll out a new product or enter the Brazilian market or reduce the time to convert a plant to a new production run, then spell it out IN WORDS (specific enough to be difficult to game).  In the old days, we called that Management by Objectives which then morphed into Balanced Scorecards and now Key Performance Indicators (KPI). I think the migration may be going in the wrong direction towards fewer behavior-based words and more game-able numbers, but at least it is better than bonuses based almost exclusively on budgets. In fact, I might suggest doing the “screwdriver” in the spring and the “hammer” in the fall in order to keep budgets from creeping too deeply into the incentive process.

b) Get A Saw. Get a tool specifically designed for directing operations on what is an acceptable approach to their sphere of influence. This tool would tend to set up measures using a more strategic language. It would explain the strategic role that operational unit has within the organization. It would explain what “winning” would look like for that group. It would explain what the proper trade-offs are on attributes and outcomes. It would point the direction in which the operations are to migrate to in order to reach future strategic goals. Then the company delegates the specifics, to free up the operating unit to bob and weave with the changing environment in order to exploit the moment, provided the actions remain within the strategic boundaries.

c) Improve the Hammer. Budgets can be more dynamic. Draw up some contingency budgets in advance (based on different scenarios) so that you are ready if situations drastically change. Consider rolling budgets that adjust quarterly or semi-annually (depending on your business). Note: this becomes easier to do when the budget is freed by no longer having to also work as a screwdriver and saw. Also, consider doing the screwdriver and saw work PRIOR to finalizing the budget. That way, the budget more accurately reflects what will actually be done, instead of being just a wish list. Remember, the budget shows financial outcomes which are determined by action inputs. So get the inputs figured out before declaring the outcomes.

This is not to say that budgets are totally ignored outside of treasury. The budget provides discipline for the more routine aspects of business. The budget can help to determine if the desired strategy is achievable under current cash constraints. And if the budget has no connection to actions, it ceases to accurately reflect what the future cash situation will really be. So a little bit of the strategy needs to permeate the other areas. But it shouldn’t be the primary driver.

SUMMARY

Budgets are very useful, but they should not be the master tool to drive all of your management concerns. Budgets are most effective when centered primarily on the needs of the treasury function. A second, more action-related tool would be used to incent employees and a third, more strategic tool would be used to manage operational units.

FINAL THOUGHTS

Efficiency is not the same as effectiveness. Having a single tool may appear efficient, but it may be so ineffective that it destroys your ability to properly run your business.

Strategic Planning Analogy #415: Good Vs. Better

THE STORY
There is a movie currently out in the theaters called, “I Don’t Know How She Does it,” starring Sarah Jessica Parker. The movie is about a woman, named Kate, who is trying to be a good mother, a good wife, and a good employee all the same time. The comedy in the movie comes from her difficulties (and occasional failures) in trying to simultaneously do all of these things well.

According to the movie reviews, not only does Kate have trouble doing things well, but so do the people making the movie. The reviews were so bad that I am not going to go see it.

THE ANALOGY
There are many arguments used by businesses to downgrade the importance of strategic planning. One of those arguments goes something like this.

1) Most people know the difference between good and bad.

2) Most people would prefer to do good.

3) Therefore, if businesses would just eliminate the barriers on their employees, people would naturally do good things. This would create great success all on its own. Therefore, you do not need strategic planning.

The problem with that logic can be seen in the plot to the movie “I Don’t Know How She Does It.” Kate knew what a good wife, a good mother, and a good employee looks like. She was motivated to be good at all these tasks. Yet she was not performing these tasks very well.

Kate was drowning under the pressure of trying to do so many good things at the same time. She was learning that knowing good and desiring good does not necessarily lead to achieving good in all areas. Something was missing.

The same is true in business. Releasing the barriers on employee behavior may only lead to anarchy rather than success. Thousands of employees rushing around randomly trying to do good in too many areas, with too little coordination, can actually lead to bad performance—failure instead of success. Something is missing, and that something is strategic planning.

THE PRINCIPLE
The principle here has to do with tradeoffs. Successful businesses are not usually the ones who try to be good at everything. Instead they are the ones who make good choices. They examine the tradeoffs between strategic options and choose a narrower area to focus on.

Here are three points to consider on this topic.

1. Better is Better
Successful companies realize that the goal is not to be good, but to be better. Customers aren’t usually looking for a good alternative. They want the best alternative. Your success depends on how your offering compares to alternatives. To win a customer’s business, performance must be viewed as superior relative to other options.

At a given point in time, consumer decisions tend to center around a key attribute. Perhaps lowest price is most important…or maybe quality…or maybe service. Then the choice is made based on that attribute. You’d better be better on that attribute if you want to be chosen.

Now, over a long period of time, a customer may desire many different attributes. However, decisions are made based on which attribute is important at a particular point in time.

For example, let’s look at grocery shopping. At the beginning of the month after just getting paid, one may want to stock up on the basics. Therefore, the key attribute may be assortment, so the customer chooses the large supercenter. Mid-week, this customer may need to pick up only a couple of items, like milk and bread. At that time, convenience is most important, so they go to a convenience store. When this person is having the boss over for dinner, quality may be most important, so the gourmet store is chosen. At the end of the month, money may be tight, so this person goes to a hard-discount store like Aldi, because it has the lowest absolute prices.

Yes, all the attributes are important at some point, but they are not all equally important at a particular point in time. As a result, the consumer did not do all their shopping in a single average store that was good at all the attributes (but better at none). No, the consumer chose the superior store for the attribute most relevant at that particular moment. Sometimes, it was the supercenter, sometimes the convenience store, sometimes the gourmet store, and sometimes the hard discount store. It was never the “fairly good at everything store.”

So, instead of aspiring to a lot of good, look for places where you can be better.

2. Better Options Come From Making Trade-offs
Usually, the only way to become the best in one area is to accept a lower performance in another area. For example, trying to offer the best price and the best quality and the fastest service at the same time fails, because it is nearly impossible to excel at all three at the same time.

It is expensive to offer superior quality and speed. These costs make it impossible to offer the lowest price. And if you want it cheapest and fastest, you will not get the best quality (think fast food). And if you want it cheaply with high quality, you usually will have to wait for it (think health care).

In other words, working to do better in one area (like low prices) can work against trying to do better in another (like quality). So if you have people randomly trying to do good in multiple areas, their activities will tend to cancel each other out. You end up better at nothing. And you don’t get chosen by the consumer.

The winners make trade-offs. They choose a place where they can be the best and focus their efforts in that direction. Yes, this may require backing away from other areas, but it is the only way to win in the area chosen.

Wal-Mart may have great prices and a large assortment, but to get there Wal-Mart had to back away from offering a speedy shopping process, or offering high service, or offering product customization. It was a reasonable tradeoff which has lead to success.

Apple offers a great product in a great way with great apps, but it is also one of the most expensive options. It is a reasonable tradeoff, which has lead to success.

Michael Porter talks a lot about this in his excellent article in the Harvard Business Review called “What is Strategy?” (December 1996). To quote Porter, “Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers.”

In other words, without trade-offs, all the competition starts to look the same, so there is no reason for a customer to choose you or prefer you. Businesses then have to resort to “bribes” to get business, by adding more “goodies” to the deal or by lowering the price. This leads to a downward spiral where eventually companies are making offerings they cannot afford. Failure is the ultimate outcome.

There is a reason why Southwest Airlines has been consistently profitable over the years while the other major US airlines have traditionally done poorly. Southwest Airlines chose a distinctive position (low cost point-to-point flying) and made a number of tradeoffs in order to profitably achieve superiority at that position (no seat assignment, no connections with other airlines, standardized fleet, no baggage transfers, etc.).

By contrast, the rest of the industry did not make trade-offs. They all tried to do everything reasonably well. Because they were all doing the same activities, they did not give customers a reason to prefer them (they all looked alike—nobody was distinctively better). Therefore, the rest of the industry ended up in price wars and point giveaways they could not afford. The result has not been pretty

3. Strategic Planning is Needed To Pull This Off
Therefore, in order to win, companies need to make choices. And the best choices are made if a qualified strategic planner is involved to help. Those choices are:

a) Where do I focus to win?
b) What tradeoffs do I need to make to win at this point of focus?
c) What business model optimizes these tradeoffs?
d) How do I get employees to understand the trade-offs, so that they do more in the areas related to the focus and less in the other areas?

Unless you answer these questions properly, you will be searching for good everywhere and have a comedy of errors on your hands, like the movie “I Don’t Know How She Does it.”

So don’t let people win the argument that strategists are unnecessary. The facts are in your favor.

SUMMARY
Even if your people know what “good” looks like and are motivated to achieve it, that does not mean that you will be successful. The problem is that “good” does not win. Only superiority wins. And sustainable, affordable superiority can only occur if you choose a distinctive position and make the hard choices about the trade-offs necessary to win at that point of focus. You have to say “no” to a lot of good things in order to create a few “great” things. And without the help of strategic planning, the proper choices will probably not be made.

FINAL THOUGHTS
In the article “What is Strategy?”, Porter also says, “With so many forces at work against making choices and tradeoffs in organizations, a clear intellectual framework to guide strategy is a necessary counterweight.” Are you filling that necessary role?

Strategic Planning Analogy #409: Turbulence!

THE STORY
Earlier this week I flew to Kansas City. We started to fly into some turbulence and the plane began to bounce around. The pilot’s voice came on the intercom to say that there was a major storm ahead in Kansas City. He hoped to change the flight path in order to get us into Kansas City and avoid most of the storm.

A little while later, the pilot’s voice came on the intercom again. This time he said that the plane did not have enough fuel to circle Kansas City until it would be safe to land. Therefore, the plane would be diverted to Omaha for refueling.

This was a little disconcerting to me, because I was doing a one-day trip to Kansas City (in and out in the same day without spending the night). If I missed my meeting in Kansas City, then the whole day would be a waste of time.

Fortunately, with a little bit of rescheduling, everything worked out just fine.

THE ANALOGY
Turbulence doesn’t just cause problems for the paths of airplanes. Turbulence can also cause problems for businesses traveling along strategic paths.

Whereas airplane turbulence comes primarily from storms, strategic turbulence can come from significant changes to any of Porter’s five forces—changes in the competitive mix, changes to suppliers or customers, new technology, or a change in the environment. If any of these changes are large enough, they can make your strategic journey a bumpy ride.

When the strategic turbulence appears, there may be a clamoring among your executives to immediately abandon the current strategy and start all over again with a new one. “THINGS HAVE CHANGED!” they may shout. “WE NEED TO CHANGE THE STRATEGY!”

This would be like airplanes changing their destination every time they hit a little turbulence. Anyone who has flown a lot knows that in the vast majority of cases, planes find a way to safely deal with the turbulence and still reach their intended destination. Most of the time, there is no need to change the destination.

And that’s a good thing. Do you have any idea what kind of chaos would incur if every plane kept changing its destination for every instance of turbulence? The negative ripple effects would be huge. People and planes would end up in the wrong places. Connections would be missed. Costs would skyrocket. It’s not a good approach for airline turbulence or for strategic turbulence.

Another reaction of executives to strategic turbulence might be to say, “Look! Things never go exactly as planned. Situations keep changing. Therefore, planning is worthless. We should stop doing it.”

Of course, that would be like airlines saying that because turbulence occasionally occurs, the airlines should abandon the idea of scheduled flights and stop filing flight plans. They should just leave the airports when convenient and decide on where they are going once they are in the air. Again, another bad idea for both airlines and businesses.

Yes, sometimes turbulence gets so bad that airlines need to change the destination (as they did for me this week). But that is the rare exception. And it should be the same for strategic turbulence.

THE PRINCIPLE
The point here is that there are a lot of ways to deal with strategic turbulence. Immediately changing the entire strategy or abandoning strategic planning altogether are usually among your worst options.

Don’t Rush to Abandon Strategies at the First Sign of a Storm
Just as most weather-related turbulence is not sufficiently strong enough to justify an airplane abandoning its destination, most changes to Porter’s Five Forces are not sufficient to cause one to completely abandon a strategy (provided you had a great strategy to begin with). We will illustrate this by assuming we are a company with a successful luxury strategy who has entered some strategic turbulence in the form of an economic recession.

A recession will cause some near-term rocky times for a luxury strategy. Spending will go down. Profits may take a big dip. But does that mean one should abandon the luxury strategy position? A lot of time and effort and money has gone into building that luxury position. To walk away from that position would be to abandon all that effort and start over. The old customer segment would be confused and the new segment would be suspicious. During the transition from the established position to the new position, the position in the marketplace would be weakened.

And then, when the recession is over, and you want to go back to the old luxury position, you may not be able to do so because of your repositioning during the recession. It’s hard to regain a luxury image once it is lost.

Frequent strategic upheavals and change have about the same impact as having no strategy at all. All that change confuses the marketplace as to what you stand for. As a result, you end up standing for nothing.

Unless you believe that the recession will be so long and so severe that the luxury segment will utterly disappear for many, many years and never return with any significance, then one must conclude that over the long run a luxury position is viable. And if you already are successful in that segment, it is unlikely you will find a better position which justifies all the costs involved in switching.

This is not to say that you should do nothing when turbulence comes about. Turbulence probably requires a modification of tactics. But those modifications should not be random. They need to stay within the context of the greater strategy.

Yes, the airlines make some changes to get through a storm. But those tactical changes are designed to find a better way to reach the old destination (given the new near-term situation). The same idea applies to business. Rather than immediately changing the strategic destination, look for ways to adapt your tactics so that the old destination works best while in the turbulence.

Changing Altitude
One thing planes tend to do when they confront turbulence is to change their altitude. In other words, instead of flying directly into the heart of the storm, they try to go above or below the worst of it.

A similar tactical change for business would be to basically stay the course but adjust the magnitude of activity in a given area—going either higher or lower in intensity. For example, the luxury company in the recession can change the magnitude of a number of factors to help avoid the worst of the impact of the recession.

The levels of production might be lowered. Payroll might be cut. Marketing expenses might rise to try to gain a larger share of the temporarily smaller pie. The idea is to essentially do similar things, but at a different level more appropriate for the times.

Changing Path
If changing altitude is not enough, planes will alter the path. They still are trying to reach the same destination, but taking a slightly different flight path to get there. The equivalent approach for businesses would be to make more substantial tactical changes than merely changing the magnitude.

For example, the luxury company may conclude that lower end of their customer mix (those aspiring to become wealthy) is most severely impacted by the recession. Therefore, the mix is modified to shrink the aspirational products and focus more on the upper end (where the recession has less of an impact).

Or maybe the luxury products are temporarily redesigned so that they require less expensive inputs of labor or material. Maybe the luxury clothing uses slightly fewer embellishments or emphasizes a less costly fabric (while still maintaining a luxury look and quality level). Or maybe the latest designs in luxury art-glass use a little bit less of the expensive glass. The idea is to adapt to the recession by doing different things that make it easier to get through the recession without destroying the essence of the core strategy.

Take the Bumps
Sometimes the best alternative for the plane is to just go through the storm and accept the fact that it will be very bumpy for awhile. That can also be true for businesses. If there is a multi-year aging process involved (as with some luxury liquors), there may be little you can do to production levels in the short run. If quality labor is in short supply, you may not want to alienate them through temporary layoffs. If you have important contractual arrangements with key, irreplaceable players, you may not have much flexibility to make short–term adjustments. Hence, to support the overall strategy there might not be much you can change in the short-term. You just have to ride out the storm.

SUMMARY
Turbulence should not be used as an excuse to abandon strategic planning or to hastily make random radical changes to strategic direction. Most turbulence is temporary or not sufficient enough to make a strong position obsolete. Usually the best course is to maintain the same strategic destination, but merely make tactical adjustments. This could be by changing the levels of magnitude in your current tactics, or in doing different tactics altogether. The key is ensuring that these changes reinforce one’s overall strategy rather than weaken it.

FINAL THOUGHTS
Of course, as I learned when my flight was diverted from Kansas City to Omaha, some turbulence is large enough to require a total reset of strategy. For example, if you are the leader in analog photography when the world is switching to digital imaging, there is little you can do to keep your business model relevant. The change is too great. A new destination is needed. Therefore, it is important to accurately assess the magnitude of the turbulence before making any decisions about what to do. And it is better if you start that work early, before you enter the storm.

Strategic Planning Analogy #398: Strategy Trees

THE STORY
Back in the 1960s, the Smothers Brothers had a comedy show on TV. On one episode, they were talking about the problems of a population explosion. Dick Smothers was lamenting the fact that the global population was growing too quickly and was causing all sorts of problems.

Tom Smothers said he didn’t even think there was as population explosion. When Dick asked why he believed this, Tom replied with the following logic:

I am one person. I have two parents, four grandparents, eight great-grandparents, and so on. As you go back in time, my family tree keeps expanding. So, as you can see, my family population is actually shrinking from what it used to be. Therefore, the population isn’t exploding. If anything, it is shrinking.

THE ANALOGY
Tom Smothers had faulty logic when looking at his family tree. Because he did not understand the complete picture, he came to an inaccurate conclusion.

Family trees are a lot like corporate organization charts. We need to make sure that we understand the complete picture of how the organization chart works. Otherwise, we may be like Tom Smothers and reach the wrong conclusion.

In particular, as strategists, we need to understand how strategy filters through an organization. Just as Tom Smothers mistakenly thought that population was shrinking as one moved down the family tree, we can mistakenly believe that a strategy’s relevance shrinks as we move down the organization chart.

Just keep in mind that the people further down in the organization chart are often closer to where the customers are and where the production is and where transactions take place. And if a strategy isn’t relevant where the customers are and where the production/transactions take place, then is it really relevant at all?

THE PRINCIPLE
The principle here is that strategy needs to be seen as a key role for everyone in the organization, from top to bottom. It is not just a play thing for leaders at the top.

Linked In Discussion
I was reminded of this when looking at a discussion thread on Linked In. The discussion topic was about why it is so difficult to convert strategy ideas into execution. I posted a comment which referred to an earlier blog. In this blog, I compared strategy to a basketball game.

In basketball, you win by scoring more points than the opposition. This becomes the over-arching strategy. However, if all you do as a basketball coach is yell at the players to “go get more points than the opposition” you really haven’t done much.

No, basketball games are won based on the types of plays executed by the players. Although the scoreboard may tell you whether or not you won, it is the game plan—those Xs and Os drawn on the clipboard—which create the ability to win. So, if you want great execution of your strategy, quit focusing so much on the scoreboard and spend more time focusing on the clipboard.

The response I got on the Linked In discussion surprised me. I was told that the clipboard is mere tactics. This response implied that strategists should be concerned with strategy execution, not tactical execution. Therefore my comment was useless.

At this point, the thought going through my head was this: If tactics are not relevant to strategy execution, then why are you doing those tactics? No wonder these people were having trouble executing a strategy—they are disconnecting them from tactics. Just as yelling at a scoreboard does not change the score, yelling about the overarching strategy does not tell people how to make the strategy real.

Actions Have Many Roles
In a family tree, an individual may have many roles, depending on who is looking at them. For example, an individual can be seen as a Father, a Son, a Brother, an Uncle, a Nephew, and so on, depending upon who is looking at them. The same thing can happen for business activities within an organization chart. At the top of the organization, a particular action may appear to be a tactic. However, further down in the organization, that same action appears to them to be a strategy.

I learned this lesson a long time ago. I asked people about strategy & tactics and this was the typical response: “Strategy is what I do. Tactics are what the people below me do. And I’m not always sure what the people above me do.” And it didn’t seem to matter where the individual was in the organization chart. Those near the top and those in the middle had the same comment. (And in great companies, this translates all the way to the bottom.)

I’ll illustrate this with an example. At the top of a corporation, the senior executives may voice their strategy as shifting the business portfolio from declining business sectors to growing business sectors. The tactic would be to take the cash flow from declining “Division X” and give it to growing “Division Y”.

Now if you are in charge of declining Division X, you now see your strategy as maximizing near-term cash flow (in this way, the tactic from the corporation is translated into the strategy of the division). At the Division X level, key tactics to increase cash flow might be to reduce headcount and capital investments.

The head of operations in Division X would now see his strategy as finding a way to reducing labor expenses without spending a lot of money to do so (meaning the tactic at the top of the division is now the strategy in the middle of the division). The head of division operations creates a tactic of eliminating the third shift and giving more overtime to the second shift.

Now, to the head of production scheduling, that tactic becomes his/her strategy. And so goes the process all the way down the organization. One person’s tactic becomes the next person’s strategy.

Solution
Therefore, if a strategist wants to ensure that an overarching strategy gets executed, here’s what needs to get done.

1) Make sure that the overarching strategy from the top gets broken down into 1st level tactics.

2) Make sure the second level in the organization knows their role in those 1st level tactics, so they can craft their strategy appropriately.

3) Help the 2nd level of the organization develop their tactics (the 2nd level tactics).

4) Help the third level of the organization translate the 2nd level tactics into their strategy.

And so on…

Strategy is not just for the folks at the top. Everyone should be operating under a strategy. The scope of the strategy may contract as you go down the organization chart. But for each level, they need to think strategically about that which is within their scope. And that strategy needs to be linked to the tactics one level above them.

By doing this you gain two benefits—everyone is thinking strategically about their job and all the actions are linked together towards achieving the over-arching strategy.

SUMMARY
If you want to make sure that a company’s over-arching strategy is executed properly, then you need to make sure that strategies in the lower levels of the organization are linked to the tactics of the level above them.

FINAL THOUGHTS
At first, the idea of loading up an organization chart with “good soldiers” (who are good at following orders) sounds great. You’ll get things done, because “good soldiers” obey without question. However, you might get better things done if your people take personal responsibility for developing the strategy at their level (instead of just blindly following orders). Help your people to take responsibility for the strategy at their level in a manner which supports the tactics one level up. This should make them “better soldiers.”

Strategic Planning Analogy #369: Or Vs. And

THE STORY
I recently returned from a vacation to Europe. On the plane ride across the Atlantic Ocean, I discovered that flight attendants are experts in the language of “or”. For the in-flight meal, I had the choice of meat OR pasta. For a snack, I was offered peanuts OR a cookie. For a beverage, I was offered soda Or juice Or water. For reading, I was offered either the USA Today OR the Financial Times.

Whatever became of the word “and”? Why couldn’t I have a cookie AND a peanut? Why couldn’t I have water AND a soda? Why couldn’t I read two newspapers?

It reminds me of the lunch I had yesterday. Before I could fully finish the drink in front of me, the server place before me another glass of the same drink—twice—without even asking me. At these types of restaurants, be careful what you choose for your first drink, because the servers will try to make that your only drink choice for the entire meal. The idea of variety never crosses their mind. What if I want to try one thing, AND then later want to try something else? No, those servers don’t understand the word “and”, either.

THE ANALOGY
It seams that servers (on airlines and otherwise) like treating me as being one dimensional. I’m only allowed to like one thing. That seems a bit narrow-minded to me.

Sometimes, I think many strategic planners can become equally narrow-minded. As we will discuss later, there are several different schools of thought as to how to approach strategy. Individual strategists tend to gravitate towards one of these schools of thought. This then becomes the singular way they treat all strategic problems.

Just as those servers want me to drink the same type of drink all day, these strategists want me to use the same approach to all strategic issues. When you read the writings of the popular strategic writers, the approach seems to be: “choose my school of thought, not the other.” In other words, it is a land of “or” (one school of thought or the other), not a land of “and” (accepting and using multiple schools of thought).

Just as it makes sense to me that I might want to read both the USA Today AND the Financial Times, it makes sense to me that I might want to use the strategic tools found in one school of thought AND another school of thought.

THE PRINCIPLE
The principle here is that there are a wide variety of strategic issues in business. If you want to be successful in solving this vast array of problems, it helps if you draw upon a variety of strategic resources.

For example, sometimes a company may be sub-optimizing because it is poorly positioned. Other times, a company may have a great position but cannot execute it well. Or maybe the company is executing well, but is executing the wrong thing. Since these are all distinctively different problems, they require distinctively different approaches to fix them. If you limit yourself to only one school of thought about strategy, you may be applying the wrong solution to that particular problem.

The Right to Win
I was reminded about this in a recent article in Strategy+Business, the strategy publication of Booz & Co. The article, called “The Right To Win”, categorized strategic thinking into four different schools of thought.

One is the “Position” school of thought. The idea here is that winning companies create and hold a distinctive position in the marketplace. This school of thought includes the work of Michael Porter and the thinking behind the Blue Ocean Strategy.

Another is the “Concentration” school of thought. Here, winning is supposed to come from focusing your effort on your core competencies. Key books for this school of thought are “Competing for the Future” by Hamel & Prahalad and “Profit From the Core” by Chris Zook.

A third school of thought is the “Execution” approach. The idea here is that winning companies work on aligning people and processes for operational excellence. This includes the quality movement proposed by W. Edwards Deming, the Reengineering movement of the 1990s, and the book “Execution” by Charan and Bossidy.

The fourth school of thought was called “Adaption.” The idea here is that the environment changes very quickly, so successful companies need to excel at quickly adapting to the change via creative experimentation. This is the approach recommended by Henry Mintzberg and was a key part of the book “In Search of Excellence.”

The article pointed out the pros and cons to each of these schools of thought. It showed how each approach was useful in some situations, but fairly worthless in others. And that is the key point. If you limit yourself to only one school of thought, you are only prepared to solve a subset of the strategic issues you may face. You will be fairly worthless in solving the others.

If you want to be prepared to solve all the strategic issues you may encounter, you cannot take an “or” approach. You need to take an “and” approach and embrace multiple approaches.

Otherwise, you will be like the old saying which says that, to a hammer, every problem looks like a nail (even if it isn’t really a nail). Just as a good carpenter has a variety of tools in his toolkit to handle a variety of carpentry tasks, a good strategist needs to put a variety of strategic schools of thought into the strategy toolkit. I talked about this idea in greater detail here.

The Three P’s
That is why I use an approach to strategy which I call the 3 P’s. The three P’s stand for Positioning, Pursuit, and Productivity. The idea here is that a successful company needs to do well in all of three of these areas.

With a three legged stool, the stool is only useful when all three legs are functioning well. If any one leg is missing, then the entire stool is worthless. Similarly, successful companies need to be supported by three strategic legs:

A) A strong/unique Position (a place where you can win);

B) An aggressive Pursuit of excellence in the key elements of that position (which allows you to own the position and adapt faster than anyone else); and

C) An efficient and effective business model, so that there is enough Productivity to allow for optimum profits and cash flow.

My approach is simple. First do a systematic diagnostic of the situation. From this analysis, determine which of the three legs of the strategic stool is most in need of attention (Position, Pursuit or Productivity). Then, use the tools available within that area to fix the particular problem at hand.

Although Positioning, Pursuit and Productivity do not line up exactly with the four schools of thought in that article, you should be able to see how the tools offered in those four schools of thought can be useful in different ways to each of the three legs. All have something to offer at different times, depending upon which leg of the stool is broken.

That is why I shy away from the narrow-minded view that one should lock onto only one school of thought (just as I wouldn’t want to lock into only one beverage for the rest of my life). For example, if you only lock in on the Positioning school of thought, you will only be able to fix one leg of the stool—Positioning. You will be ill-equipped to handle problems with the other two legs (Pursuit and Productivity).

If you want to learn more about the 3 P’s, check out my blogs which feature Positioning, Pursuit and Productivity in the links section.

SUMMARY
Not all strategic problems have the same root cause. Different strategic tools are needed depending upon what is the nature of the problem. Therefore, do not limit your strategic toolbox to only one strategy school of thought.

FINAL THOUGHTS
While I was in Europe, I tried one of the local beverages, called Kofola. Kofola was the communist alternative to Coke at a time when Coke was unavailable in communist Europe. It was not the drink for me (it tasted to me like motor oil). It was a good thing the server let me change my beverage choice. Just as Kofola was not appropriate for my taste needs, each strategic school of thought alone will not be appropriate for all of your needs. At certain times, you will need to change approaches (just as I changed my beverage to something other than Kofola).

Strategic Planning Analogy #330: Write a Complete Prescription

THE STORY
Suppose you were very sick and your doctor knew exactly what medicine would cure you. The doctor hands you bottle with a liquid in it and says, “The medicine in here will cure you. Well I’m busy and have to go see another patient, so good luck.”

After the doctor leaves, you look at the bottle. It has no label. There are no dosing instructions. Do I take a little? Do I take a lot? Do I swallow it or do I need a needle? How often do I take it? What about drug or food interactions? Do I take it with meals or on an empty stomach? Will it make me drowsy?

Now you become perplexed. If you take too little, it might not work and you might die. If you take too much, it might kill you as well. Other food and drug interactions could make the drug worthless or harmful. In other words, without additional information, this liquid, which has the potential to cure you, also has the potential to kill you.

THE ANALOGY
Strategies are often viewed as being like medicine—something to cure a sick company. Strategists are like the doctor who prescribes the right cure—the medicine to put the company on the path to prosperity.

Unfortunately, these strategists are often like the doctor in the story. After they prescribe the strategic medicine, they disappear. If they are consultants, they often move on quickly to their next patient at another company. If the strategist is internal, he or she moves on to the next strategic challenge. They don’t stick around long enough to get involved in the “mundane” work of execution, i.e., how to successfully implement the strategy they just handed you.

You can think of dosages (how much, how often, how ingested) as being like an execution plan (what do I do make the strategy a reality). You can think of drug interactions as being like how a strategy interacts with corporate culture (combine a strategy with the wrong culture and the strategy won’t work). Just as a drug can be worthless or dangerous when dosages and interactions are ignored, a strategy can be worthless if execution and cultural issues are ignored.

And just as you would not find it acceptable for a doctor to give you medicine without dosage and interaction information, don’t accept a strategic process which is separated from execution and cultural issues.

THE PRINCIPLE
Often times, we can fall into the “blame game” trap of trying to determine what is more important in business success—strategy, execution, or corporate culture. To me this is like arguing which is more important in a prescription—the medicine, the dosage, or the interaction information. All are important and they all need to be integrated.

All About Execution?
For those who think it is all about execution, I would say that is like someone who only focuses on dosage. Their approach is to put all the emphasis on getting the job done. Using the medical analogy, they would say, “If you just religiously take one tablet, twice a day, every day, all your problems will be over.”

Yes, getting the process down right and executing it every day is very important. If you never take your pills, you will never be cured. But what if you are taking the wrong medicine? Or what if you take pills randomly from an assortment in your medicine cabinet? Religiously taking one tablet, twice a day, every day then becomes meaningless at best, and deadly at worst.

Finding a way to run faster in the wrong direction doesn’t get you any closer to the finish line. Neither will taking a dosing instruction on the wrong drug get you closer to a cure.

I’ve worked with companies who were strategically adrift. They had no clue what medicine they should be taking. Many times, these firms were very, very busy. People were putting in long hours struggling to meet all kinds of execution expectations. In fact, these companies were so busy executing all sorts of random acts that they did not want to take time to sit back and figure out what their strategy should be. Unfortunately, because they were strategically adrift, all those actions were not helping them. Some of these very busy companies ended up going bankrupt.

As I saw in these companies, often times the problem is not about lack of dedication to execution, but in lack of focus (or the wrong focus). Given the right focus (based on a sound strategy), the activity becomes more productive.

Strategies tell you how to win in the marketplace. Without a good strategy, the only thing you can do is to try to out-hustle the other competitors who are also adrift. So perhaps, if execution is all you are relying on, it is a warning sign that you need to find a better strategy.

All About Culture?
There are others who put all of the emphasis on people and the corporate culture they work in. They would say that success is most dependent on building a healthy culture.

Yes, getting the culture right is very important. Doctors will tell you that a healthy lifestyle is very important—often more important than taking the right medicine. Almost any strategy is worthless when given to a company with a toxic culture.

But just having a healthy culture is not enough. Consider a healthy athlete who exercises well, eats the right food, and doesn’t abuse his body with tobacco or alcohol. Sounds useful, right? But what if he only sits on the bench and refuses to get into the game? That lack of execution makes the athlete not very useful. And what if the athlete doesn’t know the rules of the game or the strategy the team wants to use on the field? Lack of strategic insight will also make the athlete fairly useless.

Focusing on culture alone is not enough. It makes a great environment for success, but success won’t happen without execution or strategy.

All About Strategy?
There are others who put the emphasis on strategy. These people would say that if you position a company properly and point people in the right direction, everything else will take care of itself. But if strategy is all you are concerned with, you are no better than that doctor who handed off the medicine without any instructions. Unless I have instructions to know how to apply that cure, the cure is not very valuable.

Knowing what to do is not the same as knowing how to do it. For example, I may know that my strategic success is dependent upon being a leader in innovation, but that doesn’t mean that I know how to become an innovation leader. Strategy is only as useful as is actionable. Without the behavioral means, I will not achieve my strategic ends.

The Whole Prescription
We don’t argue about which part of the prescription is the most valuable—the medicine or the dosage or the drug interactions. We just see it all as just one thing—the prescription. If any of the parts are missing, the prescription is incomplete.

This is how we should approach our strategic process. Somewhere in the process we need to determine the strategic direction, the execution plan, and the cultural fit/health. And they all need to work together in harmony. If any part is missing, it should be seen as an incomplete process.

This is why strategists and strategy formulation should not be isolated from the rest of the process. Great strategies need to be appropriate to the context in which they will be executed. Unless strategy, execution and culture are addressed together, they will not work together.

THE SUMMARY
Success is a combination of having the right strategy, great execution, and a healthy culture. They are so intertwined that it is hard to separate them. As a result, our approach to achieving success needs to simultaneously incorporate all three.

FINAL THOUGHTS
If someone were to ask me which of these three is the most important to focus on, I’d say it depends on which one is the most broken. Since each company has different levels of brokenness, the answer would be different for each company. As they say, a chain is only as strong as its weakest link. So focus on the weak link, wherever it may be.

Strategic Planning Analogy #290: Strategy is A Location

THE STORY
What if we thought of our mental condition as being like a location on a map? Then, if someone said “I am in a state of confusion,” we could just tell them to “Get in a car and drive to a different state, like the state of Contentment.” The United Mental States of America could have all sorts of interesting states. I think we already have a lot of politicians from the state of Denial.

Just think of how much money you could make selling maps showing the best path for getting from a bad mental state (like the state of Despair) to more desirable locations (like the state of Bliss). Wait a minute! Isn’t that basically what travel agencies do? Isn’t that what all those psychological self-help books try to do? Is Dr. Phil nothing more than just a seller of maps?

Continuing with this idea, if someone said “I think I am going crazy,” you could reply “How can you be going to a place where you already live? You’ve been in the land of Crazy for years.”

THE ANALOGY
Strategic planning tends to deal with a lot of abstract concepts. This is particularly true when it comes to strategic positioning. To make these abstractions easier to understand and work with, it can be useful to follow the example in the story.

In the story, the idea was to take abstract mental conditions and treat them as physical locations on a map. In the same way, I think there are benefits to looking at the abstract concepts of strategic planning as if they were positions on a map.

THE PRINCIPLE
The principle here is that strategies may be easier to understand and create if we think of them as being a location. In fact, there are three different ways to apply this principle.

1. Strategic Success Depends Upon Locating Yourself Properly on the Consumer’s Mind Map
Consumers act based on how they think. Hence, if you desire a certain consumer behavior, one needs to first get the consumer to think in a particular way about that behavior. In other words, you need to locate your product or brand in a specific location in the consumer’s mind if you want your strategy to succeed.

Where is that ideal location in the brain? It will vary based upon your strategy, but all successful locations will address the three S’s. The first S stands for “slot.” Different parts of the brain are used, depending upon the type of problem the brain is trying to solve. One of your first strategic tasks is to decide what problem your product is trying to solve.

Perhaps you are trying to solve the problem of “what’s for dinner?” Or maybe you are trying to solve the problem of preparing the customer for retirement. Then again, the problem could be trying to lower the cost to run your client’s factory.

There are all sorts of problems to choose from. As part of your strategy, you need to choose the problem you are trying to solve. And I don’t mean an internal problem like “How can I make my company more profitable?” The problem is to be a problem held by your potential customer. This is an important decision, since if you cannot help a consumer with a problem, then you have no relevancy to that customer.

Once you have chosen the problem, you need to make sure that your brand/product is “slotted” into the location of the consumer’s brain concerned with that problem. In other words, whenever that problem turns up for that consumer, you want your name to fire up in that part of the brain. This is done by communicating in a manner which continually associates your brand with that problem.

For example, Crest has spent decades associating its toothpaste brand with the problem of cavity prevention. It is now solidly slotted in the brain, so that when the problem of cavities comes up, the brain immediately thinks of Crest.

The second S is “solution.” Your strategy needs to provide a solution to that problem. What is it about your product/brand that makes it capable of solving that problem? Again, there are often many ways to solve a problem. You have to choose one.

This solution choice includes both the process and the performance. By process, I mean the general approach to solving the problem. For example, if the problem is weight loss, the choice of process could include exercise, diet, surgery, pharmaceuticals, hypnosis, and many others. By performance, I mean the type of attribute emphasized in the process you choose, such as being fastest or cheapest or most comprehensive, etc.

The third S is for “superiority.” It is not good enough to just be located in the brain where the problem is being addressed. You need to be seen as the superior solution to the problem. In Al Reis and Jack Trout’s excellent book Positioning, they refer to this as being a rank ordering, like rungs on a ladder. You want your brand to own the top rung (the best) in the mind of the consumer. So, another role of strategy is to locate your brand on the top rung on the problem ladder. You have to have a convincing argument (both rationally and emotionally) for why you should own that location.

Whenever I work with someone on developing a strategy, I usually end up at some point asking the question “Why should a customer prefer your product over all the other options?” If you have difficulty answering that question, the consumer probably has even greater difficulty coming up with an answer. And if you are not perceived as being the best alternative, they will choose someone else.

For example, for the problem of dependable transportation, Toyota has firmly cemented itself to the top rung location. It is perceived as best at automotive dependability. Through years of effort, Toyota has created a strategy which gives them ownership of that location in the brain of most consumers. They are slotted as the superior solution.

To summarize, your strategy needs to develop a superior means of solving a relevant problem and then place that information on the top rung in the relevant problem-solving location in the consumer’s brain.

2. Strategic Success Depends Locating Yourself Properly on the Competitive Map.
A strategic position is not created in a vacuum. The position plays itself out in the competitive marketplace. You can think of this marketplace as being like a map. Each competitor has a location on that map. The viability of your strategic position depends in large part on where you are on the map relative to everyone else.

For example, let’s say that you are a retailer with a strategy is based on owning the low price solution. Your ability to own the low price position depends a lot on your location on price versus competition. Wal-Mart recently has started a number of price wars in areas such as toys, books and DVDs. As long as Wal-Mart is driven to be closer to the lowest possible price location on the map than you are, you cannot own the low price position, no matter where you set your prices.

So when creating the action plan for your strategy, do not think primarily in terms of absolutes. Instead, think in terms of relativity—where you are relative to others on the map. In other words, if you want to own quality, it is not good enough to just set a high absolute quality level. You need to have higher relative perceived quality than the competition. That can be a moving target.

Often times, it is best to locate yourself on the competitive map is a place that is relatively empty. For example, if everyone else seems to be fighting for space on the quality area of the map, you may be better off going to the price area of the map, which is more wide open. The lest contested a space, the easier it is to own in the mind of the customer.

Right now Chevrolet is trying to convince people that it has the highest quality, most fuel efficient cars available. That is a hotly contested space, already owned by Toyota and Honda. Chevy will have a hard time unseating those entrenched positions. It would have been better off trying to go after a less contested space.

Although Ford would also like to be seen as high quality and fuel efficient, its approach has been less of a direct assault on Honda and Toyota. Instead, Ford is trying to establish itself with superiority in high-tech enhancements. This space is less contested on the competitive map. Once Ford owns this space, it can use high-tech superiority as a justification for a secondary claim at superiority in quality, safety and fuel economy (caused by unique technology).

And when you are building this competitive map, make sure you include every competitor attacking the same problem. For example, if the problem is weight loss, you need to include every process aimed at that solution. You may claim to be the fastest exercise solution for losing weight, but if there is a pill you can take that works a lot faster at losing weight than any exercise, you have not really captured the “speed” space on the map.

3. Strategic Success Depends Upon Locating Yourself Properly on the Map of the Future
Strategy is often about creating a better position in the future than you have today. It is often easier to communicate where you want to take the company if you can visualize that future state on some sort of map. Then, not only can you show the desired future location, but also today’s location and the path you must take in order to get from the one to the other. The mind map or the competitive map may be good templates to show the new destination and transition path to get there.

SUMMARY
Complex concepts can often be better understood, worked with, and communicated if thought of visually—like positions on a map. In strategy, some of the more useful maps would be a consumer mind map, a competitive landscape map, and a future map.

FINAL THOUGHTS
If your strategy cannot be easily translated into a visual map, then it is highly likely that your troops will get lost in strategy execution (and you will not reach the desired destination).

Analogy #227: Trickle Up Strategy?

THE STORY
Once upon a time, the Meglamight Corporation needed to quickly build a bridge across a remote river. Big Bob, the CEO of Meglamight, gave the approval to send large wooden beams to the area as soon as possible, for use in the construction.

Big Bob waited back at corporate headquarters to hear word of progress on the bridge. Days passed with no news. Finally, he made a few calls and found out that there was still no bridge. He also found out that the big wooden beams had disappeared. Big Bob was furious!

Big Bob demanded to know what happened. The project manager explained it as follows: “I’d been reading about the benefits of empowering all the individuals in a company. I wanted to give everyone an opportunity to become entrepreneurial and innovative in building the bridge. Therefore I took those big wooden beams and had them ground into toothpicks. That way, I could give every individual a few pieces of the beam to innovate with. So now each employee has a pile of toothpicks and is individually innovating for success in bridge-building.

“You fools!,” shouted Big Bob. “The bridge was not the goal. It was just a path to get to the other side of the river. The treasure was located on the opposite bank of the river. While you were playing with the toothpicks, a competitor got to the other side first and already took the treasure.”

THE ANALOGY
These days, there are a lot of business gurus talking up the benefits of empowering the masses. This includes not only empowering all of your employees, but also your customers and suppliers. Yes, there are many benefits to be had from opening up creativity to a larger circle of people. It does, however, have its limits.

Taken to an illogical extreme, this process leads to what I call “trickle-up strategy”. The idea is that if you have a lot of people trying to do creative and innovative things, then a lot of interesting innovative and creative things will occur. And the things which pop out of the process, by default, become the strategy.

Well that’s sort of like saying that if I get in a car, close my eyes and hit the accelerator as fast as I can, wherever I end up becomes my desired destination. Unfortunately, if you did that in a car, you ultimate destination would probably be the emergency room of a hospital after you crashed the car.

In the story, the project manager made many mistakes in employing this trickle-up approach. First, the project manager had the wrong focus. He had assumed that having a bridge was the goal. Therefore, he focused on creativity and innovation in bridge building. The bridge was not the goal. The treasure on the other side was the goal. Big Bob would have been happy if they had just thrown the beam over the river and run over the top of the beam. It didn’t have to be a fancy or creative bridge—just a path to quickly get to the other side. By wasting too much time on perfecting the bridge, they missed the opportunity to get the treasure on the other side.

The second mistake was to diffuse the project and the resources into piles too small to accomplish the purpose. A thousand little toothpick bridge experiments are not going to get a team across the river to get to the treasure (and haul it back)

The third mistake was poor communication between Big Bob and the project manager. Big Bob was not clear about the goals and objectives, so the project manager came to the wrong conclusions.

THE PRINCIPLE
The idea here is that one needs to be careful when applying “trickle up” approaches to innovation. If done improperly, they can waste your resources and lead to random wastes of time.

Google has traditionally been one of the strongest advocates of this trickle up approach. Employees there are given great freedom to work on all sorts of little projects which they dream up. Up to 20% of an engineer’s time can be spent on pet projects. Google has spent a fortune on hiring people and supplying other resources to tackle all of these trickle-up ideas.

The results of this approach, however, have been disappointing. After 10 years, and countless experimentation, Google still gets about 97% of their revenue from the original business of on-line ads—mostly on the Google search pages. Most everything else has ended up being a dry well without profits.

Given today’s economic situation, a lot of these dry wells at Google are being shut down and fewer resources are being given to new trickle up ideas. You can read more about this in the December 3, 2008 edition of the Wall Street Journal.

The problem is not that innovation and experimentation are bad. The problem is that RANDOM innovation and experimentation are bad. It used to be considered crass at Google to talk about whether a project would eventually make money. Instead, people randomly worked on whatever they thought would enhance the internet user’s experience.

Those days may be gone. Experiments at Google are now being more closely linked to profit motives. Just as a million little toothpicks are not going to get you across the river, a million random dry holes are not going to create a worthwhile strategy.

So here are a few points to remember about trickle-up experimenting.

1. Strategic Intent Should Not Be Trickle Up.
The old saying was that if you put a million monkeys in a room with a million typewriters, the random typing would eventually create the great American novel. Of course, that is not true. Great documents require great forethought. Similarly, if you want a great strategy, you must used dedicated forethought to the approach.

If you don’t know where you are going, any path looks good, but most lead nowhere. A company needs goals—an explicit description of where it is trying to go. Don’t rely on randomness to create your strategy. Instead, use your strategy to provide direction to where you experiment. Strategy comes first, experimentation second.

2. Make Sure The Strategy Is Well Communicated and Well Known Within the Organization.
To prevent randomness, the experimenters need to know the boundaries of what is acceptable experimentation. In other words, if you want your experimentation to get you to your strategic goal, those experimenting first need to know what the goal is.

Don’t hide your strategic intent from your people. Shout it from the mountain tops! You are more likely to reach your destination if everyone knows what that destination is. Big Bob failed in getting the treasure because he kept his strategic goal hidden from the project manager.

To get the right trickle up experiments, one needs to trickle down strategic intent.

3. Create Critical Mass in Your Resource Allocation
Strategic success typically requires winning a leadership position within a particular space. Leadership rarely comes from halfhearted efforts. It takes a large, dedicated effort within that space to win the battle. In other words, to get across the river, one needs big beams, not piles of toothpicks.

Therefore, resources should not be spread so thin over so many areas that there is not enough there to win any particular battle. Make sure your scarce resources are bunched up enough to create the critical mass needed to win. Figure out which spaces need to be won, and load up your experimentation in that area. One of the criticisms of Microsoft’s failed approach to the internet is that they have done a little bit everywhere rather than pick a few concentrated battles where they could win.

It’s okay to start up a lot of small experiments within the space you are trying to win. However, one needs a process to quickly weed out the losers, so that more resources can be given to the potential winners.

4. Profits Are Everyone’s Business
Capitalism is about profits—getting a return on your investments that is greater than the resources you put in. This includes experimentation. Not that every experiment must turn a profit, but the overall trickle up movement must as a whole be a wise investment.

Just because Google is profitable enough to waste a lot of money and get by does not make it any less wasteful. Waste is waste.

So in addition to keeping a strategy focus in front of the experimenters, keep a profitability focus there as well. Some of the experimenter’s rewards should be linked to profits.

In the story, the experimenters were ignoring the treasure and just fiddling around with toothpicks on the wrong shore. Had they been focused on the prize, they more likely would have gotten there.

It’s hard for an army to win a war if only the Generals are concerned with winning. All of the soldiers need to be committed to winning as well. Similarly, it’s hard to make a profit if only the top executives care about making money. Everyone needs to think at least a little about it.

5. Don’t Micromanage the Experiments
If the first four points are in place, then let the experimenters go wild. Don’t micromanage them. Most of the greatest inventions have a bit of wild abandon in the process.

SUMMARY
Trickle-up experimenting is a terrible way to create a strategy. It may, however, be an effective way to implement a strategy. This requires that the strategy is well known by the experimenters and that experimentation resources are clustered at the places which will most likely create a profitable success in achieving that strategy.

FINAL THOUGHTS
Once when I was in a college chemistry class, I got bored with the lab work, so I started randomly mixing chemicals. All of the sudden, the chemicals in my beaker started bubbling. They foamed up and spilled all over the floor. Not exactly experimentation at its finest.