Strategic Planning Analogy #491: Seeking Choices

THE STORY

When my children were little, they often weren't pleased by what was served at home for dinner. They would complain and ask if they could have something different to eat.

I would explain to them that we weren't running a restaurant. I did not have an extensive menu of options for them to choose from. Each dinner had only one meal on the menu. The only choice they had was to either eat it or go hungry.

It did not make my children happy when I eliminated their eating options.

THE ANALOGY

It’s not much fun looking over a dinner menu if there is only one item on the menu. The lack of options and choices makes the task seem a bit futile. Since you’re going to get the one item on the menu anyway, you may as well skip looking at the menu.

A similar situation can occur with strategic planning. A lot of business people resist going through the planning process, saying they do not enjoy it. In many cases, I think the reason for resisting a strategic planning process is similar to the reason for resisting a menu with only one option on it—a perceived lack of choices.

If you think you are going to be basically doing the same things after the planning process as you were doing before the process (because of a perception of no other alternatives), then why do the process? You can skip it and go back to doing the one thing you knew you were going to do anyway. Under these assumptions, the strategic planning process can be seen as a waste of time, keeping you from getting your one task done (just as looking at a one-item menu wastes time and keeps you from getting to eat the one meal you know you are going to have).

This really hit home with me as I looked at the way business people from different countries treated the concept of strategic planning on social media sites like Linkedin. In fully developed mature economies, pure strategic planning jobs were disappearing and the discipline was not held in high esteem. By contrast, in emerging economies people actually seemed excited about strategic planning and there appeared to be a greater abundance of professional strategic planning positions being created.

Then I started to make the connection that much of the excitement around strategic planning in developing economies was due to a perception that businesses had many more options. As a result, it was important to spend time in these countries doing strategic planning in order to choose which options to focus on. It was as if they saw strategic planning as the way to choose the best items on a lengthy menu of tasty options.

By contrast, those in mature economies or industries seemed to see fewer options available to them.  It was as if the rules had already been written and hardened in concrete.  You couldn’t change anything—choices had already been made.  Your only option was to work harder at the same old thing.  Therefore strategic planning was a waste of time—a one-item menu that could be skipped.

Of course, a skilled strategic planner can see the value of strategic planning in virtually any environment—even mature ones.  But if their audience does not perceive the value, the planning process will be resisted (or even eliminated).  Therefore, strategic planners need to address this issue of perceived choices.

THE PRINCIPLE

The principle here is that great strategic planning processes deal with determining which strategic choices to make.  Choice is the essence of what strategy should focus on.  In his famous Harvard Business Review article “What is Strategy?” (from November-December 1996), Michael Porter said “Competitive strategy is about being different.  It means deliberately choosing a different set of activities to deliver a unique mix of values.”

In the 2011 book Good Strategy/Bad Strategy, Richard Rumelt says that the main difference between good strategies and bad strategies is that good strategies are based on making tough choices and bad strategies refuse to make choices.  Or, in Rumelt’s words “Strategy involves focus and, therefore, choice. And choice means setting aside some goal in favor of others.  When this hard work is not done, weak amorphous strategy is the result.”

In a prior blog, I also talked about how the lack of making choices can lead to disaster.

The problem is that many modern strategic planning processes are missing this key point.  They are focusing on something other than making the hard choices and trade-offs necessary for creating a winning position with a complementary winning business model.

It’s gotten so bad that even many of those in the strategic planning field no longer see their primary task as one of helping companies make tough choices and coordinated trade-offs.  Without someone advocating the need to make tough choices in a strategic manner, the tough choices won’t be made.  Worse yet, business leaders are increasingly buying into the idea that there is no need to make tough strategic choices.  And once they start believing in that, it isn’t much of a leap for these executives to questioning why strategic planning should be done at all.  After all, what is the benefit of staring at a one-item menu?

Common Substitutes for Choice-Making

There are many processes out there which call themselves strategic planning, but really are not, because they do not focus on making choices.  Here is a brief description of some of them:

1. Elaborate Budgeting:  Here, the end outcome is not a set of coordinated choices and trade-offs, but a set of numerical spreadsheets.  In essence, it is just a budget with perhaps a couple more years of length to it and a few more words attached to it.  The tough choices needed to make the budget a reality tend to be missing.  It’s just a bunch of numbers one “hopes” to achieve. This often occurs when the planning process is housed in the finance department and run by the same people who create the budgets or do financial analyses.  In the past, I have used the basketball analogy and said this insufficient process is like focusing on yelling at the scoreboard rather than focusing on the hard choices of what play to draw up on the clipboard.  Yes, the highest score wins, but you don’t get the highest score by just staring at the scoreboard (the numbers).  I've spoken more about this here, here, here, and here.

2. Platitudes and Lofty Aspirations:  In this version, the focus is on lofty goals and aspirations which end up sounding like hollow platitudes. The end outcome is not a set of choices, but a nice phrase that can be put on a banner and hung in the lobby. They say things like “we aim to be a world class this or that” or “delight customers” or “create superior shareholder value” or something similar.  These are nice things to achieve, but unless you make hard choices about how to be different, or how your business model’s trade-offs achieve these things profitably, they are only wishes.  Wishes won’t come true just because you want them to.  They are the outcomes of tough choices. I’ve spoken more about this here and here.

3. More Better:  Here, the goal is to just do the same old thing as before, only more of it and better than before.  The end outcome is list of things to do which improve upon the status quo.  The problem is that this assumes the status quo is the right set of choices. It often isn't  because environments change, making the status quo obsolete. Second, when you try to improve everything, you often improve nothing, because you did not make any trade-offs needed to truly excel in any area.  Instead, the efforts cancel each other out.  The third problem is that this process tends to try to outrun the competition with a similar position, rather than trying to find a point of differentiation.  In other words, this version rushes directly to what to “do” without first stopping to decide (choose) what you need to “be.”  I've spoken more about this here, here and here.

How Do We Overcome This?

So how do we overcome all of these poor excuses for planning and get back to solid strategic planning which focuses on making the right choices?  There are two areas to work on. 

First, we need to offer strategic planning processes where choices are the focal point.  This needs to replace lesser processes which are often little more than budgets, platitudes or attempts to be more better.  We need processes focused on questions like:

1. Where are we going to win? (Customers, Markets, Solutions, Points of Differentiation)
2. Why are we going to win? (What bundle of trade-offs will give us the competitive edge in owning the winning position? What business model will beat out the alternatives?)
3. What do we need to focus on to pull this off (capabilities, capacities, competencies)?
4. What should we NOT focus on? (because it will keep us from winning)
5. How do we tweak the business model so that we not only win, but make money?

Second, we need to get management excited about the importance of making these types of choices.  There are many reasons why management may not see the importance of making choices.  First, they may not believe they have many choices.  This is usually a false notion.  Restructurings, repositionings and new business models come about all the time.  Just look at how businesses and industries are continually being replaced by something new.  Why not become the next new thing which replaces the status quo?

Or perhaps management feels that the status quo is just fine, so there is no need to change it (no additional choices needed). But we all know that the environment changes and that all strategies eventually become obsolete. Isn't it better to be the agent of change and grab all the market share which comes with being the next big thing rather than to be the victim of someone else’s change and become obsolete?  Making better choices will create a stronger, more prosperous company and who wouldn't want that?

In other words, first we need to build processes which create robust lists of options and a way to choose the best option (like the Maitre D who helps restaurant patrons make a great choice from a great menu). Second, we need to get management to want to make the tough choices (desire to go to the restaurant and choose something new to eat off that menu).

SUMMARY

The key function of strategy is to help companies make the tough choices and trade-offs which will place them in differentiated positions where they can win.  Unfortunately, lesser processes which focus only on budgets, platitudes or tactical improvements have crept in to replace the key function of choice. To get companies back on track, strategists need to do two things: 1) Bring back processes which focus on choice; and 2) get management interested in making those tough choices.

FINAL THOUGHTS

To get patrons to try new choices on the menu, some restaurants offer free samples. Perhaps you need to get your management interested in making choices by giving them samples of what particular choices could mean for the company. 

Strategic Planning Analogy #490: The Indirect Route

THE STORY

One time, I was in Chicago on a business trip with some of my co-workers. It was a nice day and we had some time on our hands, so we decided to walk to the convention center, which was only a couple of miles away.

We looked at a map and found a simple, direct street to walk down. It looked easy. What the map didn’t show was the types of neighborhoods we’d be walking through. As it turns out, that direct route took us through a pretty dangerous section of Chicago. As we kept walking, the neighborhood kept getting worse.

My co-workers were starting to fear for their lives. Having grown up in the Detroit area, I was used to bad neighborhoods, but eventually even I was getting fearful.

We saw a taxi drive by and quickly got it to stop for us. Little did we know that we had almost completed our journey by then and the taxi only took us a few blocks to get to our destination.

THE ANALOGY

Had we been more aware of our environment, we would not have chosen that route to walk. Yes, it may have been the most direct, the most efficient, and the fastest route. But it was not the safest route. We needlessly put our lives in danger. It would have been better off choosing a slower, more indirect path that was far safer.

Strategic planning is also about choosing a path—a path into the future. On first glance, it may appear that the best strategic path is the direct route. After all, the shortest distance between two points is a straight line, so the strategic path is drawn as a straight line between where we are now and where we want to be. That type of thinking sounds practical, efficient, and speedy.

Unfortunately, it can also be wrong. The most direct route is not always the safest route. It may lead you into a mine field of difficulties.  The danger could be so great that it destroys the ability for the strategy to succeed.  It does no good to be faster and more efficient if you end up dying before reaching the destination.

No, sometimes the best path is longer and less direct. These paths can be safer and increase the likelihood of ultimate success. 

THE PRINCIPLE

Although we live in an era which emphasizes speed, we need to remember that speed is not the ultimate goal.  The real goal is success. And sometimes the fastest path is not the best path for ensuring success. Therefore, when choosing a strategic path, do not automatically choose the fastest, most direct approach.

The Disadvantage of Bold Moves

There are several reasons why the direct approach can be less effective. First, it tends to loudly notify to the world (and to your competitors) what your intentions are. That can cause those opposing your strategy to wake up and fight you hard to prevent that path. Remember, almost every winning strategy causes someone else to lose. If those who are about to lose find out your intentions, they will try to keep you from winning. 

However, if you act more slowly and less directly, the opposition may not detect the threat as being as imminent or as devastating as it is. Therefore, they may put up less of a fuss in trying to stop you. By the time they figure it out, it may be too late for them to stop you.

Take, for example, Wal-Mart’s desire to be a significant player in banking. Wal-Mart first tried a very direct and fast approach to this strategic intent. Back in 1999, they applied for the right to buy a bank in Oklahoma.

This bold action quickly awakened the status quo banking industry to the threat posed by Wal-Mart. The banking industry immediately did everything in its power to influence the government to stop Wal-Mart from getting that bank. Congress was inundated by whatever forces the banking industry could bring to bear to stop Wal-Mart from ever buying a bank. And it worked. Wal-Mart could not buy a bank.

A few years later, in 2002, Wal-Mart tried again by attempting to buy an ILC (Industrial Loan Company), which is a step lower than a full-fledged bank. That also failed.

At this point, Wal-Mart tried a different tactic—the indirect route. Slowly, Wal-Mart started forming alliances with companies performing banking services. Since Wal-Mart did not own these businesses and since the partners were already allowed to be in these businesses, they would be difficult to stop. Also, because Wal-Mart added these pieces slowly in small chunks, no single act was large enough to get the industry in an uproar.

For example, Wal-Mart did deals with Moneygram and Sun Trust Bank for services like wire transfers, money orders and check cashing. It did a deal with Green Dot to create the Walmart Money Card, a reloadable prepaid card. And most recently, Wal-Mart worked with American Express to develop the Bluebird Card, a more aggressive move into the prepaid card business. 

Slowly, Wal-Mart is putting together a powerful financial offering, branded together in the store as Walmart Financial Services. It is to the point now where Walmart’s website has claimed them to be “a trusted name in financial services.” The slower, indirect path is working far better for Walmart than their earlier, more direct approach.

   

The Disadvantage of Out-Pacing Your Stakeholders

Another problem with moving too quickly is that you can move faster than your stakeholders are willing to go. No strategy works in isolation. Success depends on getting alignment with all sorts of other stakeholders, like your customers, your regulators, your suppliers, etc. If you get to far ahead of your partners, the strategy can fail.

For example, when McDonald’s wants to enter a new geographic area with restaurants, it does not just get some real estate and put up restaurants. That could be too fast for its suppliers. McDonald’s wants to guarantee that the burgers worldwide come from similar beef and the french fries come from similar potatoes. Therefore, it takes the slower, more indirect route of first working with farmers and distributors to make sure the right kinds of cows and potatoes in the right quantity are in the pipeline so that the stores have the right stuff to sell.

And in the Walmart example above, if Walmart had advanced directly from nothing into full-service banking in one step, it might have been too much for customers to accept. By moving slowly, Walmart has been able to move consumer perceptions along to allow them to accept getting financial services from a discount store.

One of the more interesting examples, however, is in the online poker business. Online poker sites can be extremely profitable for the companies who run them. However, the US government was banning the sites because on-line gambling is illegal in the US. The on-line sites could have directly tried to fight this, but they knew they would fail. So they took an indirect route.

A few years back, I remember all of the sudden seeing poker championship games being broadcast all over the place on cable TV in the US. Why the sudden surge in broadcasting Poker Tournaments, I wondered.

Well, here’s the story. The online poker people wanted to change the perception of poker from being a form of gambling to being a game of skill. That is because on-line gambling is defined as being a game of luck, which is illegal in the US. But games of skill are not considered gambling. 

What better way to convince people that Poker is a game of skill than to broadcast it like a sporting event on sports cable networks? The shows created poker winners who were becoming famous like athletes for their skilled plays. They had announcers on the show talking about the skilled plays being used by these skilled players.  

Slowly, but surely, perceptions were being changed. Poker was no longer just viewed as distasteful gambling hidden away in dark places. Now it was a skilled sporting event out in the wide open lights. Over time, this approach should be far more successful than the direct approach for the on-line poker companies.

SUMMARY

A key part of strategic planning is developing the proper path to get from where a company is today to where it wants to be. Due to the desire to move quickly, many firms try to build direct paths to the desired future. However, direct paths can be fraught with dangers large enough to prevent success. As a result, it is often the slower, less direct approach which has the greater likelihood of success.

FINAL THOUGHTS

If you go online to choose a path to drive your car to your destination, the software often asks you which type of path you want: the most direct, the fastest, the one using the most highway, the one using the least highway, etc.  In other words, the software recognizes that the fastest path is not always the path you desire. If software can recognize that, then so should strategists. Check out other options which may lead increasing your chance of success.

Strategic Planning Analogy #489: Feeling the Weather

THE STORY

Weathermen on TV don’t seem to think it is enough to merely give us the outdoor temperature.  They don’t seem to think that ordinary temperatures accurately reflect how we FEEL. So on particularly hot days, they weathercasters talk about the “Heat Index.” The heat index temperature is usually higher than the actual temperature, because it takes into account things like the humidity, which can make it FEEL even hotter.

In a similar fashion, when it gets especially cold, the weathercasters use something call the “Wind Chill Factor” to restate the temperature as colder than the actual temperature. This is because high winds can make cold temperatures FEEL even colder.

Well, my experience is that when it gets especially hot or cold, most people seek shelter indoors where it is more comfortable. People naturally flock to the warmth of indoor heat when it is cold outside or indoor air conditioning when it is hot outside.

So, if the weathercasters are REALLY interested in giving us the temperature we FEEL on these extreme days, they should give us the room temperature…because that is where most people will be found and that will be the temperature most people will be feeling.

THE ANALOGY

Weathermen are correct in noticing that the temperature reported on a thermometer does not always reflect how people feel. But I think they miss the even bigger difference in temperatures between being inside versus outside. That’s where the real difference in feelings occurs.

A similar situation takes place in the business world. Businesses have all kinds of reports and dashboards to report all kind of numbers. These reports and dashboards are like thermometers. They report the “temperature” of what is happening outside in the marketplace where business is taking place.

The problem is too many executives spend too much time indoors, inside the comfort and security of the headquarters building. These executives do not FEEL the realities of what is going on out there “in the real world.” They are protected from the intense competitive climate on the outside.  Things feel a lot better inside the headquarters where bad news is often softened and “Yes Men” make the executives feel like everything is grand.

Yes, the reports and dashboards may reflect real temperatures. But unless one can penetrate the false feelings of headquarters comfort and get the executives to really FEEL how things are going on in the real world, they will not make the right strategic decisions.

THE PRINCIPLE

The principle here is that merely seeing the numbers of business is usually not enough.  You have to get executives to actually “feel” the numbers.

Feelings are Important

Why? First of all, business is very complex. There are so many moving parts that any single number doesn’t tell the full story. And if you have a whole stack of numbers, you are often no further ahead because it can be hard to see how all the individual numbers fit together.  It’s like having all the individual pieces of a jigsaw puzzle, but no idea of what the picture looks like when all the pieces go together. At that point, the puzzle pieces may as well all be colored black for all the insight they provide.

Our modern technology can pump out thousands upon thousands of data points every hour. But that doesn’t mean we are necessarily any smarter about what’s going on. Drowning in “big data” doesn’t make us more intelligent. True knowledge requires more than just piles of numbers. It requires context and insight.

Context and insight help us to see the big picture—to actually feel what is going on, to know what is truly important, and to see into the future—beyond the reach of measurement tools.  Unless you can feel the big picture, you cannot create the big picture strategy or make the right strategy decisions.

The second reason while feelings are important is because people are emotional beings. They make decisions based on both reason and emotion.  Our customers are emotional beings, our employees are emotional beings, our partners are emotional beings, and our competitors are emotional beings. All of their emotional feelings impact what happens outside in the marketplace.  If our leaders do not have a proper feeling for how all those emotions are playing out in the marketplace, they will make the wrong decision.

Our leaders are also emotional beings.  Their feelings affect their decisions.  If their feelings are wrongly biased by spending too much time insulated inside headquarters, their feelings will steer them in the wrong direction.

What Should We Do to Move From Numbers to Feelings

So how do we make sure that our leaders are feeling the big picture in the proper context?  I have five suggestions.

1. Elevate the Art of Interpetation.  The gathering of “big data” numbers is only relevant when those numbers can be interpreted and put into context.  We need to be able to put a heat index or wind chill factor on the numbers to get them to reflect how things really feel. 

Just having a warehouse full of paint will not get you a great painting.  You need to add the artist who can create the picture out of the paint.  Similarly, just having a data warehouse full of numbers will not let you see the big picture of what is going on in the marketplace.  You need to add the analytical “artist” who can convert the data into the beautiful picture of what is going on.

Therefore, we need to elevate the importance of interpretation of data to the same level (if not more) than that of the gathering of the data.  Ask yourself…how much time and money has gone into building you data-gathering activities?  And then compare that to how much time and money is going into the interpretation and conversion of that data into a picture that allows executives to feel the big picture of what is going on.  Is it in balance?  Are you warehousing paint or are you creating paintings?

2. Get the Executives to Go Outside.  If the weathercasters really want us to know what it feels like outside, they should just tell us to go outside and feel it.  There is often no substitute for actual first-hand experience in the elements. If you really want to know how things feel, go feel it yourself.

Have top executives go on sales calls.  Have them go to the store or website and actually have to try to buy your product.  Make them have to actually use your product in real life situations.  Then have them buy and use the competition.  Watch how real customers interact with your product or service out in real-world situations at their homes or place of business.  Eat lunch with regular employees in the regular cafeteria.  I talk more about getting out in the field here.

3. Listen to the Outside Voices.  If all your executives listen to is each other, then they will only feel the temperature inside the corporation. To feel the outside temperature, you have to listen to the people who are living outside in the real world. That includes the employees in the field, customers and other key partners.

Modern technology makes it easy to hear the voice of the field and the voice of the customer.  But how much of these voices are being heard by the top executives?  Just telling an executive sales are down is one thing.  Having them hear the rantings of the dissatisfied customers who stopped purchasing is quite another.  It provides a context for how to fix the situation.

Have executives listen in on the complaint line.  Have them read the comments spoken in twitter and other digital sources.  Have them see survey comments.

4. Tear Down the Insulation.  If you want the temperature inside the headquarters to feel more like the outside temperature, then you need to tear down the insulation which keeps the outside “truth” from reaching executives. Employees need to feel that comfortable in speaking the truth when talking to top executives.  It needs to be okay to speak up when the conventional wisdom inside the headquarters appears to be out of sync with what is happening outside.

5. Make Strategic Planning More About Painting Pictures.  Finally, I am getting more and more concerned about the fact that modern strategic planning departments are turning into data organizers rather than picture painters.  They manage budgets and deviations from plans, but are not providing the types of insights which change how an executive feels about what needs to get done. I see more job specifications in strategic planning asking for CPAs than I see requests for great storytellers.  If your strategists cannot paint pictures with compelling stories, then you are back to merely having piles of data (and wondering why budgets are not being met).

SUMMARY

If executives are insulated from the harsh realities of the marketplace, they will have the wrong impressions of what is going on (and make the wrong decisions). Just giving them piles of data from the outside is not enough.  Strategists need to make sure context is placed around the data so that executives can actually feel what is happening in the real world. It needs to strike a chord deep within their emotions.  To help in this process, combine the context-making with plans to force executives to spend more time interacting with the real word and the people in it.

FINAL THOUGHTS

Maybe the best way to keep executives from hiding in headquarters offices is to eliminate headquarters offices.  There are many companies which do this.

Strategic Planning Analogy #488: Two Stories on Change Management

THE PRINCIPLE

Turning a strategy into reality often requires significant change from the status quo. Unfortunately, whenever change is asked for, resistance will occur. If this resistance is not dealt with, the strategy implementation can fail.

In most cases, you should be able to come up with compelling arguments as to why the change is right and necessary. After all, if you cannot come up with compelling arguments, perhaps your change strategy isn’t as good as you thought it was.

But even when the argument is compelling, sometimes the resistance can be strong, particularly if particular groups feel especially threatened by the change. Just think about how strongly the unions in the US have reacted in recent year when state and local governments tried to come up with new solutions to fix the underfunded pensions for government employees. A change is clearly needed, but any change is being aggressively resisted. 

So the question becomes, what does one do when logic and reason will not sway the resisters.  The following are two options.

OPTION #1: EVOLUTION

Option #1 Story

I’m sure most of you have heard the story of the frog in the pot of water. When scientists put a frog into a pot of boiling water, the frog will immediately sense danger and jump out of the pot.  However, when scientists put the frog into a pot of room temperature water, the the frog will stay in the water. And if you head the water slowly enough, the frog will not sense the danger and will remain in the water even as it approaches boiling. The frogs end up dying in that boiling water without jumping, because the change was too gradual for them to notice.

Option #1 Analogy

Like the frog who jumps when thrust into boiling water, people resist when they sense a large imminent threat. The way to keep the frog from resisting was to slow down the change to a pace that was imperceptible. That pace of change was so gradual that the frog did not realize it was eventually being boiled to death. So it did not resist.

In a similar fashion, if you make the timing of your changes gradual enough, you may be able to implement the entire change program over time without resistance. The idea is to package each change initiative in a bundle which is too small to trigger massive resistance. The change is slow and evolutionary. And if you have the luxury of time, this can be an effective tool.

As an example, look at the packaged food industry.  There are many reasons why it could be in the interest of these companies to convert their food products to a more nutritious formulation (less salt and fat). After all, there is the threat of governments creating “fat taxes” to punish non-nutritious foods. Or the governments could ban certain food formulations. Or public interest groups could file massive class-action lawsuits against companies deemed as harming the public through “unhealthy” formulations. The past experience of the tobacco industry in the US could eventually hit the food industry, if they do not change.

Unfortunately, if these companies make massive changes to their formulations, they can turn off their customer base who preferred the old formula. Radical formulation changes like “New Coke” almost ruined the brand.

One alternative is to make a series of small formulation changes over time, making them too small to notice or create an uproar. Then, over time enough salt and fat can be removed from the formula to remove some of the long-term threats mentioned earlier.  And because the taste changed so gradually, the customers were able to adapt without much resistance.  This is the strategy used by many food companies.

Another example of this evolutionary approach is to create change via attrition.  Treat current employees different from new employees.  Over time, the new employees (and their employment relationship) will replace the old in a peaceful manner.  Or gradually fire those executives who resist change and replace them with executives who embrace the change.

OPTION #2: REVOLUTION

Option #2 Story

In 1519, when Spanish Conquistador Hernando Cortez landed in Mexico, one of the first orders he gave to his men was to burn the ships. Cortez was committed to his mission of capturing the treasure in the hands of the Aztecs. Cortez did not want to allow himself or his men the option of quickly giving up and going back to Spain. By burning the ships, he removed this option, and his men were forced to focus on how they could make the mission to capture the wealth of the New World successful.

Option #2 Analogy

If you don’t want your people to resist change by retreating to the status quo, you can stop that by eliminating that option. When Cortez burned the ships, he took away the ability to retreat. So the only option was to move forward.  You can do the same.

For example, if you sell or shut down the status quo business, then you cannot go back.  GE has a long history of selling off the businesses in industries no longer important to its strategy.  Once the business is sold, it’s very difficult to go back. 

Other companies set up the new strategy under a new legal structure.  The people transferred to the new strategy are now employees in the new legal structure and it becomes extremely difficult to get “rehired” back into the old legal structure. In essence, that pathway has been burned. You have to make the new strategy work or you are unemployed.

This second, more revolutionary approach is ideal when you do not have the luxury of time and when the transformation in front of you is rather daunting. The arguments for resisting go away, because even if the resisters could win the argument, it is a moot point. There is nothing to go back to. The option is burned. 

WARNING

These two options seem rather extreme. This may create a desire to try something half-way in-between.  The in-between approach, however, may be the worst option.  If you speed up the transformation into larger, more painful chunks AND provide a path back to the status quo, you have the worst of all worlds:

1.      Irritated Resisters; and

2.      A way for the Irritated Resisters to regain control and take the company back.

No, the extremes are better.

SUMMARY

When the normal process of change management does not appear to be an option, there are two other, more extreme alternatives.  The evolutionary approach is to slow down the change and make it evolve at a pace where each step of change is below the level that would create significant resistance.  The revolutionary approach is to abruptly eliminate the option to stay in place, so that the only option is to move forward. The worst alternative is to take a middle position, as it gives resisters both the motivation to resist and a pathway back to the status quo.

FINAL THOUGHTS

These extreme options may not be ideal, but they may need to be considered when normal approaches appear to be unworkable.

Strategic Planning Analogy #487: Tying-Out Fantasies

THE STORY

Years ago, I worked for a CFO who liked to tell this story. He said that in a lifetime of being in finance he had seen hundreds, if not thousands of financial pro formas. He said that almost without exception, every one of those pro formas projected a financial outcome high enough to exceed whatever financial hurdle was necessary to get a project approved.

Yet, once the best of those projects were approved and put into action, a significant proportion of those projects would be dismal failures. And one could assume that if a high percentage of the better projects failed, an even higher percentage of the ones not approved would have also failed.

So how is it that so many projects with favorable financial pro formas at the beginning turned out to be dismal failures in the end? It was enough to get this CFO to lose confidence in the value of most pro formas. Yet, as CFO, a large percentage of his job was in dealing with pro formas. It got him very discouraged.

THE ANALOGY

Strategic planning deals with the future.  Even though the future is not known, we try to make projections about how we think the future could occur under various scenarios. Then we choose the strategic plan which appears to have the best future outcome.

These strategic plans tend to be like a more sophisticated version of a financial pro forma, which also tries to quantify the future.  In the story, we saw that there was not a strong correlation between a great pro forma projection and a great future outcome. Similarly, strategic outcomes rarely look like our initial projections. Hardly anyone would willingly promote a strategic path that they knew would fail, yet many strategies do, in fact, fail. Even when the planning process is thorough and dives deep into the details, the targeted numbers in the plan are often woefully missed.

It’s enough to get one very discouraged.

THE PRINCIPLE

The principle here has to do with the concept of “accuracy.” In both the world of finance and the world of strategy, we would like to have accurate projections. Yet, as we have seen, even a strong desire for accuracy does not guarantee that financial pro formas and strategic plans will do a very good job of capturing reality.

Part of the problem is that a person can take two approaches to accuracy.  We’ll call them “Internal Linkage” accuracy and “External Linkage” accuracy.  One of these approaches is far better at eliminating unpleasant surprise outcomes than the other.  And far too often, companies focus on the wrong one.

Internal Linkage Accuracy

Internal linkage accuracy is concerned with making sure the mechanics of the modeling mesh together properly. Areas where the eye to accuracy is focused on in this approach include:

1.      Making sure the balance sheet, income statement and cash flow statement all tie out precisely (without rounding).

2.      Making sure all the sub-accounts are filled and add up to the total.

3.      Making sure the precise cost of capital is used.

4.      Making sure all the boxes are filled in on the forms and scorecards.

5.      Making sure there are measurable KPI’s (Key Performance Indicators) for every initiative.

6.      Making sure you have all the proper sign-offs by the required people.

7.      Making sure all of the data is accurately represented, and fully tied to the stated strategic goals and annual budgets.

The idea here is to make sure everything in the process ties together. The assumption is that if there is a high degree of accuracy in getting all the parts of the process to agree, then you have a good, solid plan. The comfort comes from having lots of numbers carried out to several decimal points.

External Linkage Accuracy

External Linkage Accuracy, on the other hand, is concerned with making sure the internal strategy meshes together with the anticipated external marketplace where the strategy will be executed. Areas where the eye to accuracy is focused in this approach include:

1.      Making sure the strategy is superior to all the external alternatives in solving a problem important to your consumer segment. These can be similar or dis-similar alternatives.

2.      Making sure competitive reaction is factored into the analysis.

3.      Making sure evolving technologies and social issues are taken into account.

4.      Making sure the company and its employees are willing and capable of delivering on the promises inherent in the strategy.

5.      Making sure to factor in changes over time in external factors such as raw material pricing, final product pricing, consumer adoption rates, etc.

The idea here is that the more accurately your strategy accounts for the external dynamics, the more likely the strategy will succeed in that environment. The comfort comes not so much from numbers, but from relative superiority and strategic fit.

Why a Focus on External Linkage is Better

If you want your strategy to succeed in the future, the focus on external linkage is more important than the focus on internal linkage. After all, making sure your financial statements tie out is worthless if all the financial statements are based on horribly inaccurate assumptions about the external environment. Getting bad numbers to tie out doesn’t instantly convert them into good numbers. They’re still bad numbers.

Think about Iridium. This was a company formed back in the early days of cell phones. Their strategy was to ignore the conventional land-based broadcast tower approach to cell phone transmissions. Instead, they would transmit all signals via a network of satellites in space. This strategy was extremely capital intensive.  Putting up a network of satellites costs a fortune. Therefore, I would assume that all of their internal calculations had to tie together pretty well in order to get the strategy approved.  And I’m also confident that those internally accurate calculations showed a positive return on investment. Otherwise, they would not have proceeded with the project.

Unfortunately, Iridium proved to be one of the largest value-destroying strategies of the late 20th century. It was a dismal failure. The reason Iridium failed was because the external links were terrible. Iridium’s success was based on the following assumptions:

1. Cell phone adoption rates would stay relatively low (a niche product). This would make it impractical to fully build out a land-based transmission system. There would be too many holes in the land-based network to make it practical.

2. Land-based cell phone service charges would remain at or near current high levels. As a result, it would be possible to spend a fortune on satellites and still sell the service at lower rates than the land-based companies. 

3. Phones would remain large, so that the larger mechanics needed to transmit to satellites would fit in them.

These assumptions turned out to be totally inaccurate.  Prices dropped dramatically and adoption rates soared. Land-based networks filled nearly all of the holes.  Smaller phone sizes could not accommodate the needs for satellite transmissions. As a result, Iridium could not effectively compete, because its cost structure made it impossible for them to match the new pricing environment. That left Iridium viable with only a small sector of the industry—spies, the military, and ships at sea—not enough to generate a profit.

Has Iridium spent less time on internal accuracy and more time on external accuracy, they probably would not have made the mistake of moving forward.

A professor once told me about a research project which compared pro forma performance to actual performance. The results looked something like the nearby chart. The study found that most pro formas projected results which tightly clustered near the hurdle point for success.  However, most projects ended up at the extremes—either very good or very bad. Very few were near the hurdle point.

As a result, internal precision seems out of touch with reality. If most projects tend towards the extremes, then fine-tuning internal models near the hurdle rate is not the best use of one’s time.  Instead, one needs to spend more time on the softer issues to determine if the external fit is high or low.

So Why Do Companies Focus Internally?

If external accuracy is so much more important, why do so many companies focus internally?  Here are a few suggestions:

1. A lot of strategic planning takes place in finance departments, where there is more comfort in the CPA mindset of putting a priority on making sure all the numbers tie.
2. Internal issues are more controllable, so there is more comfort focusing there.
3. People are personally motivated to make big bonuses, so they focus on the goals and the budgets, because they help determine bonuses.
4. It is easier (and less controversial) to find a mistake in math than a mistake in assumptions.
5. The people managing the process are evaluated based on their ability to manage the process, so they focus on getting the process right rather than getting the assumptions right.

We need to overcome some of these biases towards an internal focus and create more incentives around a focus on external accuracy.

SUMMARY

When seeking accuracy, one can take two approaches. One can focus on making sure there are good internal linkages within the numerical process.  Or one can focus on making sure there is a strong fit between the strategy and the evolving external environment.  The latter approach is more likely to lead to success.

FINAL THOUGHTS

This is not to say that sloppy internal processes should be tolerated.  Instead, one can perhaps step away from the costly and time consuming effort to drill down too deep internally and use some of that effort to fine tune the assumptions related to the external.