Corporate Strategist, Plan Thyself (Part 3)

THE STORY
Once upon a time, there was a man who approached a football coach and said the following:

“I am a great football player. Look at all of my awards. Look at all of my trophies. I am recognized throughout the land as a great football player, and I would like to join your team.”

“Wonderful!,” replied the coach. “We have a shortage of good linesmen. Get out there onto the practice field with the other players. Get up on the line and show me what you’ve got.”

The man did as the coach asked. As it turns out, he performed terribly on the line. He was so weak relative to the player on the opposing side that he eventually had to be taken off the field on a stretcher.

As the stretcher was being taken off the field, the coach went up to the injured player and said, “I thought you said you were a great football player. You looked awful out there.”

The injured man replied, “I am a great football punter, not a linesman.”

THE ANALOGY
Just because a person may be great at playing a particular position in football does not mean that they are great playing every position in football. Different positions require different skills and abilities. That is why football players tend to specialize at excellence in only a couple of similar areas.

As we saw in the story above, this man was well regarded as a punter and had lots of trophies for that skill. However, being a great punter does not provide the skills needed to be a great linesman. Rather than claiming to be a great football player, he should have limited his claim to being a great punter.

A similar situation often happens in the business world. A corporation has success in a particular area, and suddenly they declare themselves to be a great corporation. It may be that their success came in a narrow specialty. However, by classifying themselves as a great corporation, they may get the idea that their skills are broader than they really are.

As a result, the corporation may decide to tackle strategies where they have no right to be, much as that punter did. And, similar to the punter, the corporation may come out of the battle weak and on a stretcher.

THE PRINCIPLE
This is the third in a series on building strategic plans for the role of the corporate headquarters. As we have seen in one of the prior blogs, corporate headquarters needs a strategy as much as its divisions. If the corporation headquarters does not have a definitive strategy for adding value to its divisions, then perhaps the divisions should be spun off and the corporation folded.

In the last blog, we looked at various ways a corporation can add value based on how much it gets involved in the activities of the divisions. In this blog, we will look at ways in which a corporation can specialize its skillset to help certain types of divisions. Much like a punter specializes in punting, a specialized corporation will build a particular type of portfolio—the types of divisions that benefit most from the corporation’s specialized skill.

To illustrate this point, we will look at the various lifecycle stages which a division goes through. These life stages go from new business incubation, through rapid growth, into maturity and then fall into decline. At each stage, a division has different success requirements. If a corporation can excel at building success for one of these life stages, then they can develop a corporate strategy of adding value for firms at that stage in their lifecycle. Then the corporate portfolio would specialize in being full of divisions at that particular life stage.

Listed below are six ways a corporation could specialize, depending on life stage of the divisions.

1) Entrepreneur/Visionary
In this specialty, the corporation is skilled at envisioning what the Next Big Thing is going to be. This requires being able to examine the marketplace to see where demand is evolving to and where the holes are in currently meeting that demand. Then, once finding where that next great opportunity might be, the corporation is skilled at making the right initial investments to create or acquire what will evolve into that next big thing.

Once the company proves the inevitability of that next big thing, the corporation can cash in on the value added by selling the division at a huge multiple, or spinning it out into an IPO, or hold it for a longer term gain.

2) Venture Capitalist
This is the corporation which may not have the entrepreneurial skills to dream up the next big thing, but has the skills to recognize the next big thing when it is in its infancy. Often times, these new ventures are started by people who are skilled at visioning, but not skilled at running professional businesses. As a result, the venture capitalist type of corporation provides funding, nurturing and teaching, so that the young division can make the leap to the next level of development—becoming a stable business.

As with the entrepreneur/visionary corporation, most of the value is unlocked at the time that corporation cashes in their ownership position. The venture capitalist corporation can cash in on the value it adds by spinning out the venture into an IPO or by selling at an incredibly high multiple to a deep-pocketed firm.

3) Growth Funder
During the rapid growth phase of a division, they tend to consume a lot more capital than they provide. Eventually, the cash flow is expected to turn positive, but at this stage, the division is in need of funding. A growth funder corporation is skilled at understanding how to help divisions through this rapid growth phase. They have the resources and discipline to properly stage the funding of the growth. In addition, the corporation understands how to properly scale up the infrastructure to support the growth.

In general, the growth funder adds value to helping the division grow in a way that doesn’t overstress the young division’s capabilities. By giving it a strong operating infrastructure, the corporation enhances the likelihood that the growth will be successful and lead to profitable market leadership.

4) Operator
Once a firm reaches maturity, ultimate success shifts even more towards operating efficiency. “Operator” corporations are experts in understanding how to be a great and efficient operator. They know the tricks to squeeze out a little more in sales and a little less in costs. They mentor the firm and help it install the various procedures and investments needed to get to a higher level of performance.

Here, the value added by the corporation is relatively immediate. As the improvements to the operation improve the cash flow created, the stock multiple on that cash flow comes into play right away.

5) Turnaround Expert
Sometimes, companies fall from maturity into decline prematurely. A turnaround expert can breathe new life into the falling division and extend its useful life. Often times, large corporations who are not turnaround experts and prefer growth businesses will sell off these divisions relatively inexpensively. This is what is happening at a lot of the big consumer product companies these days, like Unilever and Proctor and Gamble. The turnaround expert can buy these established, but falling brands from companies such as these and get more life out of them, usually by unburdening them from the large infrastructure of the old corporation.

Whereas corporations who add value to early stage life cycles get most of the value out at the time they sell, for a turnaround expert, they establish a lot of the value in their ability to buy the brand inexpensively and then bring it back to former glory.

6) Bottom Feeder
This is the corporation who can find pockets of value in even the most distressed of organizations. Usually, bottom feeders get the assets at bargain basement prices. Then they redeploy the assets in a way that makes money. Maybe all they keep are the rights to some brand names that are moved to a more successful operating division. Or perhaps the only thing of value is the real estate, which is repurposed. As with the turnaround expert, much of the value added comes from buying well and then having a better idea of knowing what to do with what was bought.

SUMMARY
If a corporation specializes in developing skills which add value in a particular way, then the corporation can have a strategy of building a portfolio of businesses which would benefit most from that specialized skill set.

FINAL THOUGHTS
In many of these instances, once the corporation adds its value to the division, it may be in the corporation’s best interest to divest of the division and find new ones to fix. Hence, the corporation becomes the constant, and the divisions are like raw materials to be manufactured into something better and then sold at a profit.

Corporate Strategist, Plan Thyself (Part 2)

THE STORY
Earlier this year, McKinsey conducted a survey with a large number of business people regarding strategic planning. They not only surveyed people at the corporate headquarters, but also executives at the division level.

To me, the most interesting part of the results had to do with the idea of collaboration. The survey asked these business executives about how much collaboration there was at their company between headquarters and the divisions on strategy formulation.

The study found that the executives at corporate tended to think that there was a lot more collaboration going on than executives at the division level. Whereas corporate saw their conversations with the divisions as collaboration, it would appear that the divisions were more likely to see those same conversations as something else, like commands or meddling. I guess collaboration, like love, is in the eyes of the beholder.

THE ANALOGY
As this survey seems to point out, not everyone perceives the value of corporate in the same way. In the last blog (see “Corporate Strategist, Plan Thyself (Part 1)”), we saw that it should not be automatically assumed that a large corporation running many divisions is the ideal way to run your business. If the corporation is not adding sufficient value, it should be drastically cut back, or perhaps even eliminated/outsourced.

In this blog we will look at ways in which a corporation can add value.

THE PRINCIPLE
We will briefly describe six ways in which a corporate headquarters can add value to its divisions. We will start with the simplest and least involving forms of value and work our way up. In general, as we move up the ladder, there is greater potential for the headquarters to add value. Also, in most cases the process builds, in that each succeeding level also tends to incorporate the prior levels as well.

1) Protective Parent, Protected Child

In this version, the corporation protects and shields the divisions from having to deal with all the messy details of being a corporation, so that the divisions can focus on their particular businesses. The headquarters handles (a) communicating with shareholders and analysts, (b) managing shareholder regulatory authorities, (c) defining the corporate governance system, and (d) preparing and filing external financial reports.

By dealing with the messy issues and distractions like Sarbanes Oxley compliance and public relations, the headquarters unburdens the divisions so that they can focus more on trying to make money. Although this is adding value, it is not a whole lot of value and does not require a very large corporate infrastructure.



2) Coach, Team

In this scenario, the corporation helps the divisions become better than they would be on their own by using its expertise to coach the divisions on how to be professional business organizations. This involves tasks like (a) setting expectations (performance targets and goals), (b) challenging and setting cultural norms, values and behaviors (how to act), (c) showing how to protect corporate assets (brand names, cash), (d) defining operating rules and policies.


In other words, the coaching headquarters shows the divisions what role they are playing, what is expected, and how to do it in an efficient, professional manner. Usually, the coaching headquarters also acts like the parent in option #1. This adds more value than option #1 alone, but still not a lot. If the division were a stand-alone business, it might be able to get this same value cheaper through using consultants.


3) Banker, Borrower

In this scenario, the corporation adds value by taking the excess cash out of each of the divisions and then reallocating it based on where it can get the best return. In this manner, the corporation acts as the bank. If the division wants money, it must make a compelling case before getting it.



The corporation adds value as a banker because (a) it typically has a lower cost of capital than a stand-alone division, (b) it has more options for sources and uses of capital, thereby allowing it to make better investments than a stand-alone business whose options are more limited, (c) it can typically add more rigor to how things get financed, creating better decisions.

This level increases the value added, but as we saw in the last blog, capital is not particularly scarce and good stand-alone divisions would still have lots of options for gaining capital without a corporate headquarters.

4) Builder, Legos

In this scenario, the corporation takes a more holistic look at their portfolio. Individual businesses are not seen independently, but rather as role players in the larger portfolio. The role of the corporation is to envision the ideal portfolio for a given corporate strategy and they use their power to design and build that portfolio. In this fashion, the corporation is a strategy builder, snapping together divisions as if they were Legos.


As such, the corporation (a) determines the larger strategy and what competencies are needed in the portfolio to make it happen, (b) manages the acquisition and divestiture process to get those competencies, (c) initiates new ventures, (d) acquires/divests/organizes divisions and their structure, (e) places expectations on the divisions as to how they contribute to the larger strategy. This is starting to get more sophisticated in terms of corporate value add. It not only looks for ways to make the individual businesses better, but looks for ways they can contribute to something which goes beyond their individual business.

5) Specialist, Clients

In this version, a larger percentage of the tasks of business become centralized at the corporate level. The logic is that by centralizing these functions, the corporation can become better at delivering the services than if each division did them separately. This would be a result of economies of scale, the ability to hire more qualified individuals, and a more steady stream of work, so that expertise can become more specialized. This could involve what companies typically call “shared services.” It could include things like Legal, Finance, Human Resource benefit administration, Foreign exchange, and so on.


Although this creates even greater opportunities for corporate to create value, it can also create greater opportunities for corporate to destroy value if they do the centralization improperly (see the blog “Sometimes It’s not nice to share”). This is the double edged sword of value creation. The more corporate gets involved, the more it can help as well as the greater the likelihood it can hurt. As we move up the ladder of involvement, the rewards may be greater, but so are the risks.

6) Synergist/Alchemist, Resources


This is the highest level of corporate involvement into the divisions. At this point the divisions have very little independence. The corporation is actively working to get the most out of what it owns. People, resources, patents, and competencies are frequently moved from division to division for the greater good. All potential synergies in cross-divisional activity are looked for. Even if a decision serves to destroy some value at a particular division, it may demanded by corporate if it is for the greater good of the overall portfolio.

At this point, not only have many key functionalities been moved to corporate, but also a greater percentage of the overall business decisions. As mentioned earlier, if done well, this can add great value, but if done poorly can destroy value.

SUMMARY
There are many ways in which a corporation can position its headquarters to add value. Depending on the level of value added, one will get different sizes and structures of headquarters (as well as different levels of risk). Since there is no one-size-fits-all headquarters approach, you have to make a choice. You must determine which option is right for you. It is important to proactively plan the strategic role of the corporation in advance in order to ensure that (a) you are building the headquarter structure properly, and (b) you are truly adding the most value.

FINAL THOUGHTS
If you ask the divisions what kind of corporate structure they would like for a headquarters, they would probably not pick one of the higher levels. Of course, this is like asking young children what type of discipline they want from their parents. This is a decision that cannot be left to the children.

Corporate Planners, Plan Thyself (part 1)

THE STORY
There’s an old joke that circulates around the business world. It goes like this: What are the three biggest lies in the world? Answer:

1) I’ll respect you in the morning.
2) The check is in the mail.
3) I’m from Corporate, and I’m here to help.

I used to work for a company where the divisions hated the corporate office (which would probably describe most large companies). At the time, I was working at the corporate office and needed to fly out to the divisions to help them with their planning.

To try to break down the barriers between corporate and division, the first thing I would do when visiting a division office for the first time was to shake the hands of all of the division executives and say, “I’m from corporate, and I’m here to help.” At first I would get a lot of odd looks, because the division executives did not know where I was coming from when I said that old punch line.

Later, I would tell them that I used to be a division person and that I hated corporate as much as they did—maybe even more, because I had to deal with the corporate executives on a more frequent basis. After that, the barriers were broken and we got along just fine.

THE ANALOGY
There’s a reason why most people at the division level hate corporate. They don’t perceive any value coming out of corporate. The logic at the division usually goes something like this:

1) Corporate really doesn’t understand what is going on out here in the field. As a result, they ask us to do things which make it harder to earn a profit. They don’t help us, they hurt us.

2) Corporate sucks all of the profits out of the division to pay for their lavish lifestyle at the corporate level. They live high on the hog while we slave away out here with insufficient funding.

3) The real profits are made out in the field where the paying customers are. Yet, instead of rewarding us for doing the deals, they pat themselves on the back and keep the big bonuses for themselves. In retailing, the phrase that was often used to describe this was “there are no cash registers at the home office.” If retail profits typically have to come via a cash register, then the people closest to the cash registers should be rewarded highly.

Whether or not you agree with these reasons is immaterial. If the divisions believe it, they will act accordingly. And you have to find ways to deal with that attitude, just as I did in the story above.

Divisions typically resent corporate because they do not perceive adequate value for the cost. This raises a valid question which all corporations should consider…how much value does corporate actually bring to the organization? Are all of the stakeholders getting a good return on the investment in corporate, including shareholders, customers and division employees? If corporate significantly shrank or disappeared, would the divisions be better off or worse?

THE PRINCIPLE
This is the first in a series of blogs discussing strategic planning for the corporate function. We often talk about doing strategic planning of the business portfolio or of planning for individual divisions or departments. However, we also need to strategically position the corporate headquarters. We need to ask ourselves why the corporate function exists, how it is supposed to add value, and how to optimize that value-adding function.

In today’s blog, we will try to destroy the notion that large corporate operations running a number of divisions is an essential and inevitable way to run a business. On the contrary, large corporate functions are optional and should only be put in place if the value it provides exceeds the cost.

The logic behind this is as follows:

1) A knowledge economy is less dependent on such structure than the old manufacturing-based economy.

2) Technology and globalization make it possible to get work done without such a structure.

3) Many supposed corporate synergies actually turn out to be dis-synergies.

4) Networking can often achieve the same results without the costly infrastructure.

These points are briefly discussed below.

1) A knowledge economy is less dependent on such structure than the old manufacturing-based economy. In the old manufacturing economy, success depended on amassing a large number of resources. One needed large, expensive factories, large pools of unskilled labor, and access to lots of cash. Big companies with big corporate infrastructures were typically needed to pull this off. The corporate office used its clout to get the cash and provided the brains for the unskilled workers.

In a knowledge-based economy, the workers are highly trained experts in their fields, who know more about their expertise than corporate (corporate has less value to offer the typical employee). There is less of a need to amass huge factories and thousands of employees, so there is less of a need for a corporate function to coordinate this.

As we will see below, even if factories and money are needed, they are easier to come by. You can easily outsource manufacturing and there are many new sources of investment money which do no require your being a large publicly-traded corporation like venture capital, hedge funds, financial institutions, and so on.

2) Technology and globalization make it possible to get work done without such a structure. In the old days, one of the key functions of corporate middle management was to be an intermediary between the field and the top leaders. These middle managers would gather the data in the field and get it to corporate. Then, when the top leaders made a decision, their role was to relay the orders back to the field.

Modern technology virtually eliminates this corporate task. Data from the field is downloaded directly to headquarters via satellite or internet in real time. Cell phones, Blackberrys, Video Conferencing, emails and other such communication tools make it easy for top management to get directly in touch with the field on a very rapid basis. As a result, it is easy to flatten the corporate infrastructure and take out many layers of management which used to be necessary for relaying information back and forth.

Through the internet, it is easy to find information and sources for getting work done. Small businesses can outsource just about anything through the internet, such as product design, marketing, and manufacturing. There are even social networking sights so that you can find peers to bounce ideas off of. This allows a few people working in a garage access to the types of skill sets which in the past could only be found within a large corporate bureaucracy. For more on this topic, see the article on Minipreneurs from Trendwatching.com.

3) Many supposed corporate synergies actually turn out to be dis-synergies. In an earlier blog (see “Sometimes It’s Not Nice to Share”) I talked about how many corporate headquarters try to create cost advantage synergies through “shared services.” In other words, instead of developing expertise in certain areas at each division, centralize the function at corporate and share it amongst the divisions. Although this sounds good in theory, that prior blog showed that in many cases the corporate approach destroys value rather than adding value, because it raises total costs, reduces flexibility, increases time to get something done, and generalizes functions which work better when specialized to the division. Hence, the corporate approach may be destroying functional values rather than increasing them.

4) Networking can often achieve the same results without the costly infrastructure. In another blog I wrote recently (see “Howdy Partner”) I pointed out the fact that networking with others can often be more productive than trying to create it all in-house via a corporate infrastructure. The idea was that control is more important than ownership, and as long as your network with others allows you to maintain sufficient control, it can be far more productive than when you try to own everything. Networks allow you to connect with dedicated experts, who can better suit your needs than a generalist visiting from corporate.

SUMMARY
In today’s society, a large corporate infrastructure is no longer essential. There are often more effective ways to get many of those resources at a higher value. Therefore, the large corporate center is not a given. It should only exist if it fits into the overall strategy. It’s strategic function and purpose needs to be planned, just as much, if not more than the divisions.

FINAL THOUGHTS
Eddie Lampert’s ESL Investments, the multi-billion dollar fund that has the majority ownership of Seas Holdings, has only about 15 employees. Not a whole lot of corporate infrastructure there, but ESL Investments has made its investors very rich over the years.

Avoidance

THE STORY
When I was a boy, I was terrible at sports. I had very little muscle tone and was not well coordinated. As a result, I avoided sports in order to avoid ridicule.

The exception was high school gym class. Here I had no choice. Playing the sport was mandatory. It was my daily bout with humiliation.

The one exception to this rule was when the gym class played touch football. I was not a big fan of the game and I didn’t know the rules all that well, but still you had to play the game.

I would play as a tackle on defense. I was told that my role was to try to touch the quarterback before he got rid of the ball. I figured that the easiest way to get to the quarterback would be if I lined up in a place where there was nobody from the other side was standing. Since everyone knew how terrible I was at sports, the other team didn’t seem worried that I lined up in a place that was unguarded.

When the ball was snapped, I just ran unabated to the quarterback and touched him for a sack. Even someone as bad at sports as I was could occasionally get to a quarterback if nobody stopped him. Eventually, the other team figured this out and made sure someone tried to block me. But I figured that avoiding a tackle would still be my best tactic, so when the ball was snapped, I’d just spin to the left or the right and run in untackled towards the quarterback.

To keep me from spinning to the left or to the right, the other team started putting two guys on me—one on each side so I could not spin. Since I was in such poor athletic condition, there was no way that I could overcome that. However, by double teaming me, it left someone else uncovered who was often able to sack the quarterback. So I was still helping out my team.

THE ANALOGY
Businesses often use sports analogies to describe their strategies. They talk about “winning” or “defeating the enemy.” The strategy sometimes is described as a direct confrontation with a competitor and that we must fight hard to overcome them in glorious victory.

Although there are some benefits to describing strategy in sports-related terms, it can lead to some problems if taken too far. There are two weaknesses to a sports mindset. First, it assumes that the battle is a head to head confrontation with a single opponent. Second, it assumes that both sides are playing the same game by the same rules.

As we saw in the story above, I was not well schooled in knowledge about the game of football and only vaguely understood the rules. I only knew that I was supposed to try to touch the quarterback before he got rid of the ball. To achieve this goal, I did two things. First, I tried to avoid direct confrontation with the opposing team. Second, I didn’t pay any attention to the conventional rules which would make a tackle believe that they had to “tackle” someone (after all, it is part of the position’s name).

Because I avoided direct confrontation and didn’t play by the conventional “rules” of my position, I was able to succeed, even though I had no athletic skills.

Business strategies often work the same way. In most cases, business success does not come from directly attacking a competitor and their position, but rather by avoiding direct confrontation and moving into an uncontested space. In addition, most winning strategies tend to reinvent the rules for playing the game.

Think of how easy it would be to win a sporting event if you played in an arena where there was no opposing team, or if there was opposition, they were forced into playing by a less competitive set of rules than your team. Well, if you invent your strategy properly, you can set up that type of situation for your company.

THE PRINCIPLE
The principle here is “avoidance.” Great strategies typically either avoid direct confrontation with a competitor, or they avoid playing by the conventional rules of the marketplace.

1) Avoid Direct Confrontation
Over the years, there have been many classic head to head battles in the marketplace: Coke vs. Pepsi, McDonalds vs. Burger King, General Motors vs. Ford, and so on. One thing history tells us is that even over long periods of time, direct confrontations rarely cause a change in leadership. Coke stays on top of Pepsi, McDonalds stays on top of Burger King, General Motors stays on top of Ford, and so on. Head to head confrontations by a challenger are rarely successful.

Instead, success usually comes when a challenger avoids direct confrontation and moves into uncontested space. Pepsi may have lost the cola war, but they have a winner in Mountain Dew, which took on an uncontested space in the beverage market. Every time Coke has tried a direct attack on Mountain Dew, they have lost (remember Mello Yello?).

And then there was little Gatorade, who invented an entirely new beverage category, called sports drinks. By building strength in a brand new and uncontested space, it was difficult to overcome. The only way Pepsi could win in the new space was to acquire Gatorade.

Ford may have lost the automobile war, but they took an early lead in what was at the time the more uncontested space of pickup trucks. Ford has been able to successfully withstand direct attacks from GM on their pickup business for generations.

Finding a new, uncontested area and gaining an early strength can give a company an edge which is hard to lose. Good strategies exploit this principle. I heard a great story recently about Steve Jobs at Apple. When he came back to run Apple the second time, Jobs was taking over a company that had some difficulties. At that time, Jobs was asked what he was going to do in order to get Apple back in shape. His answer was that he was going to wait for the next big thing. As it turns out, the next big thing was digital music. Jobs quickly dove in to capture that new uncontested space with the ipod.

Jobs knew that if he tried a direct confrontation in computers, he would lose, so he looked for new uncontested space where his core competencies would be useful. With the ipod, Jobs made Apple into a strong winner again.

2) Avoid Conventional Rules
The second principle is winning by avoiding conventional rules. In this way, business is not like sports. The rules in business are not etched in stone. You can steal share away from the competition by playing by a different set of rules.

Take the retailer DSW. Its early success came by reinventing the rules about how shoes are sold. Before DSW, the traditional way of selling shoes in department stores was to hide nearly all of the inventory in a back room. Consumers were forced to give up control and sit down while a salesperson made choices for them out of the back room. DSW changed all that by putting all of the inventory on the sales floor. Customers could control their destiny and make their own choices.

Traditionally, shoes at department stores were sold through extensive promotions. The standard price was held quite high, so that huge % discounts could be claimed on frequent sales. This forced customers to wait on buying shoes until there was a sale. DSW changed the rules by having everyday prices that were similar to the sale prices of the other companies. Now customers could come in any time they wanted and be assured of paying a low price.

By changing the rules, DSW created a more appealing consumer proposition, giving them more control over the experience at a better overall value. It was difficult for department stores to change their rules to match DSW. First, their stores were not designed to display all of the shoes. It would take extensive and expensive remodeling to adopt the new rules of display. Second, the entire department store’s strategy revolved around high regular prices with deeply discounted sales. It would be difficult for department stores to price shoes in a manner differently than the rules being used for the rest of their store.

SUMMARY
Strategies tend to be more successful if they follow one or both of the following principles. First, they avoid direct confrontation with an established leader and instead try to create leadership in a new and relatively uncontested space. Second, they reinvent the rules of competition in their favor, preferably in a manner which is hard for others to easily imitate. These two rules of avoidance tend to be much more successful than direct head-to-head competition.

FINAL THOUGHTS
During the 1930s, the Green Bay Packers won nearly all of the football championships. Why? They had examined the rules of football and realized that the forward pass was legal. Nobody else in the league was using the forward pass at that time. As a result, opposing defenses were not designed for defending the forward pass. By changing the rules, they were able to win championships. You can do the same.

Hometown Bias

THE STORY
At the height of the popularity of the Dave Matthews Band, I saw a documentary about the history of the band. The documentary makers went back to where the band started in Charlottesville, Virginia. They interviewed some of the people who remembered the early beginnings of the Dave Matthews Band.

One of the people they interviewed was a guy who used to hang out at the first little local clubs where the band played. This guy blurted out, “I knew from the very beginning that eventually the Dave Matthews Band would become hugely famous” (or something like that).

My first reaction upon hearing him was, “My, this guy has a good sense about what music will sell in this country.” Then, I started to think, “I’ll bet that every little garage band that ever started playing in some local bars had some adoring fans who said, “I just know that some day this band will become hugely famous.”

Although every one of these local bands probably had fans who “knew” they would become famous, in reality over 90% go nowhere. That Dave Matthews fan in the documentary wasn’t an astute judge of success. He just happened to be lucky enough to be living in a place that had a local band that was one of the rare groups to actually become famous.

Some of us aren’t as fortunate. Back in the 1970s when I was in college, I enjoyed the music of a local Michigan band called the Whiz Kids. Pat McCaffrey, the leader of the duo, was a highly talented musician. He would simultaneously play the bass using the bass pedals on an organ, while playing keyboards with his left hand and playing a saxophone with his right hand. It was a sight to behold. I “just knew” that the Whiz Kids would eventually become famous.

Well, it didn’t turn out that way. The Whiz Kids never broke into the big-time like Dave Matthews. I went on the internet recently to see if I could find out whatever happened to the Whiz Kids. I found out that on October 9th of 2007, Pat McCaffrey and the Whiz Kids will be performing the after dinner music at the 38th Annual Conference of the “Excess/Surplus Lines Claims Association.” It will be at the Hyatt Grand Champions Resort near Palm Springs. It was nice to see that Pat was still earning a living in music some 30 years later, but I don’t think the “Excess/Surplus Lines Claims Association” conference is the same as the types of gigs the Dave Matthew Band gets.

THE ANALOGY
Strategies are used in businesses in order to help them determine where to place their “bets” on the future. Businesses have limited money, people & time, and they want to invest these limited resources where they believe they will get the best return.

As a result, the strategic process is often used to help find where the next big success will be. They are looking for strategies that will be “winners” for the company. Trying to pick the next winning strategy is similar to trying to predict who the next great band will be.

Just as over 90% of all those local bands never make it to the big time, around 90% of new business ventures never live up to expectations and destroy shareholder value. Every company believes they are betting on the next “Dave Matthews” type of business venture, when in reality, it is more like a “Whiz Kids” outcome (or worse).

In spite of the terrible odds, companies continue to try to pick winners. Take Kraft, for example. In recent years, they have spent a fortune on a huge number of new products and innovations, most of which were duds. The real money comes from things invented long ago, like Oreo cookies (which have been around since 1912) and Miracle Whip (a recipe they bought during the depression of the 1930s for about $300).

THE PRINCIPLE
The principle here is “the hometown bias.” We tend to have a sense of pride around our home-grown ideas and strategies, just as the locals have a sense of pride for their home-grown bands. Just as it is easy to imagine how our local band could become famous, we can imagine how our home-grown ideas can hit the big-time.

This bias can blind us to reality. I spent some time as a radio DJ. It gave me the opportunity to listen to a great deal of music. I tried to analyze the situation to try to see if there were any common factors which caused some of those bands to become a big hit and why some went nowhere. I discovered that sometimes highly talented musicians made it big, and sometimes they didn’t. Similarly, sometimes marginally talented bands made it and sometimes they didn’t. I couldn’t find much of any correlation for factors which created success.

I think the Australian band Skyhooks (one of the bands I heard as a DJ and didn’t make it) put it well in one of their songs. They said that the successful bands find a “million dollar riff” (a lucky twist of music that tickles the ear).

Now I’m not implying that business success is all luck. But it is true that sometimes just as there are only small nuances between a dud riff and a million dollar riff, there are small nuances between a huge strategic success and a dud.

Here are some tips to help avoid some of the duds of strategy:

1) Be aware of the hometown bias.
Realize that there are more Whiz Kids than Dave Matthew Bands and that local pride can blind us to giving too much credit to our homegrown ideas. Stand back and look at it with a more critical eye. If your bias does not let you look at it critically, then use unbiased research to help you see how the concept will be seen in the real world.

2) Realize that pride and egos can distort our judgment.
Examine your options with a dispassionate eye. Although it may hurt our egos for a time, it is okay to stop a pet project if it is starting to look like a dud. Pulling the plug early can often be a very smart thing. It’s not an admission of failure, but rather an avoidance of a bigger failure later.

3) Sweat the Details.
Because the difference between huge success and huge failure in music can hinge on the nuance of a riff, it is really important to sweat the details. Great ideas are important, but great execution can often be even more important. Designing and selling digital music players was a great idea. A lot of companies dove into the business. Yet most of these companies have failed to catch on, in spite of it being a great idea. Ipods did catch on, however. One of the reasons they succeeded with that same idea when others didn’t was because Apple did a better job of sweating the details. They spent more time mastering the nuances of the business.

4) Spread your Bets.
In the music industry, even though the music labels had experts with the “golden ear” who had a good sense about what music would sell well, they were still often wrong. As a result, the music label would hedge their bets by investing in a large number of bands. The logic was that even if nine out of the ten guesses were wrong, the tenth would be so profitable that it would more than make up for the losses on the other nine. Similarly, businesses need to use tactics to reduce the risk, like:

a) Don’t put all your hopes into a single idea. Have multiple experiments going on all the time. That way, you stand a better chance of hitting the idea that makes you a winner.

b) Stage your investments. Don’t bet the whole thing at once. Invest in the idea in stages. If a stage fails, then you can back out before you’ve invested everything. If a stage succeeds, you can ramp up.

5) Understand that your idea will not be executed in a vacuum.
Eventually, your idea will need to be executed out in the marketplace, where competition will try to minimize your success (for more on this, see the blog, “Bombs Start Wars”). To avoid future disasters out in the marketplace, ask yourself these questions:

a) Does my idea provide a superior enough solution in the marketplace for a consumer problem to cause people to switch from their current solution alternative to mine?

b) If the big, powerful competitors also decide to enter this space, do I have what it takes to beat them in head-to-head competition?

SUMMARY
Most new ideas fail. Don’t let egos or homegrown pride cause to you to back a bad idea. Be willing to do what is necessary up-front to reduce the bias and what is necessary later to pull the plug early if the idea does not pan out.

FINAL THOUGHTS
Good decision making requires looking at an issue both rationally and emotionally. Although we need to eliminate emotional biases that blind us to reality, we do not want to eliminate emotions entirely from our thinking. After all, our customers use emotions to make their purchases.