Strategic Planning Analogy #498: Snapshots vs. Paintings

THE STORY

I recently got back from a combination trip to see my new grandson and a vacation.

I wanted a good picture of my grandson. To get it, I took a lot of pictures of him. Some of the pictures were pretty awful, but eventually, that process lead to getting a good photo of him (see photo above).

Afterwards, I went vacationing and toured some old houses. There were old oil portraits of people on the walls.  They may have looked fancy—even a bit regal—but I’d rather have the simple snapshots of my grandchild than any of those old paintings.

THE ANALOGY

In the business world, we have the option of building two types of planning processes—either one like the process used to create fancy oil paintings (like the ones I saw in the old houses) or like the process used to create digital snapshots (like the ones I took of my grandson). 

The painting process may create something worthy to display on a wall for generations, but it is usually time consuming, costly and inflexible. Those don’t sound like good qualities for a strategic plan. 

Conversely, taking digital snapshots is quick, inexpensive, and flexible. It may produce a few duds, but eventually you get some good photos in a very efficient way. Those qualities also sound good for strategic planning.

THE PRINCIPLE

The principle here is that the goal of strategic planning is not to create perfect documents and statements to proudly display on walls and bookshelves. The goal is to figure out how to move a company forward in an efficient and timely manner. To do so, we can learn more from the process I used to get a photo of my grandson than from the artists who made those old paintings on the walls of those old houses.

The Problems With Paintings

Oil paintings can look great on the wall and last for generations. The artist of great paintings can achieve great fame. And that can sound appealing. There is a certain appeal for planners to want to create plans great enough to “hang on the wall” for generations and give the planner fame and glory. But great plans should not be the desired endpoint; instead, the desired endpoint should be great companies. The plans are just a means to that greater end.

The important thing to remember is that you don’t need “perfect oil portrait” plans in order to effectively and efficiently move a company forward.  In fact, the desire for this perfection can actually be counterproductive. 

One of the problems with oil paintings is that they take a long time to create. Time is a precious resource in our fast-moving world. Time lost in perfecting a plan can become advantage lost to faster competitors. A “good enough” plan received in a timely manner is more valuable than “perfection” which comes too late to be of any use. Is your planning process geared more towards timely completion or excessiveness and grandeur?

Another problem with oil portraits are that they are posed. The people being painted have to remain in a stiff, usually unnatural position in an artificially positive environment.  And if the posing still doesn’t look good, the artist will alter reality to make the painting more flattering than reality.  The end result may be great art, but not an accurate accounting of reality.

Bad planning can fall into the same trap. The plan may try to place the company in the best light rather than show the harsh reality of the truth of what’s happening out in the marketplace. The most positive assumptions can be used. The plan may try to please the egos of the leadership rather than tell the truth they do not want to hear. Wrong strategic decisions are made, because judgment is clouded by unnatural flattery in the “posed” strategic plan.

Sometimes the flattering distortions are the result of trying to hit unrealistically high profit numbers with the plan. The only way to fit these numbers into the plan is by surrounding them with unrealistically optimistic scenarios, since you cannot get there just by incrementally tweaking the harsh reality.

The result is that the plan becomes a failure and the numbers are never achieved, because the plan was never achievable once reality overcame the false optimism posed in the assumptions.  It would have been better to paint the real picture and show that the desired profit numbers were not achievable. Then, you would be aware that radical change was necessary and you could take steps in advance to avoid the inevitable failure of the flattery approach.

Finally, oil paintings have to problem of being hard to modify once the paint has dried. We live in a dynamic world.  Adjustments are inevitable.  Is your planning process hard to modify once the ink has dried?  If the world changes shortly after the plan is put into play, do you have to wait a year until the next planning cycle to make adjustments?

The Benefits of Snapshots

Digital snapshots avoid a lot of the problems we saw with the painting approach.  They are fast and easy to create.  They capture reality rather than an artist’s distorted vision of flattery. They provide rapid feedback of what is happening. And it is easy to keep taking snapshots so that your latest picture is accurately telling you what is happening NOW.

What does a snapshot oriented planning process look like?  First, it gets out of the portrait studio inside the corporate offices and goes out into the marketplace to capture reality where money is changing hands. And it doesn’t care what camera the snapshots come from. It gathers impressions from social media, customers, competitors and a variety of other sources, so that the information is not a one-sided bias of “corporate-think.”

Second, snapshot planning is very experimental. When I was taking snapshots of my grandson, I tried all sorts of approaches to getting his picture.  Some of these experiments did not work.  But some picture-taking experiments were great.  The planning analogy is to do a lot of small experiments. Test hypotheses to see how well they fly out in the marketplace. The results of a test can often provide far better guidance for strategic decisions than having internal executives guess about what will happen in the real world.

Try things on a small scale. The disaster at JCPenney was not that CEO Ron Johnson tried something different. The disaster was that he did a full rollout before testing it.  There was little downside risk to my taking a bad snapshot of my grandson, so I could afford to try a lot of things before finding what worked.  Set up your tests in a similar manner, so that you do not risk much and can pull the plug early if it doesn’t work. That approach would have saved JCPenney a fortune.

Being flexible and experimental does not mean that your planning becomes random. This is not a process of just clicking a camera continually in random directions until you get a good shot. No, there still must be a focus to where you point the camera.

Winning strategies need to position your company in a place where is can bring a competitive advantage. There may be very few places where you can create that kind of advantage. Random acts are not the best way to find these places. First you need to understand the marketplace, what you bring to bear on the marketplace, and what others can do. This preparatory work helps you to know the general space where you are most likely positioned to succeed. Then you get flexible and experiment within that space.

The emotional connection between me and my snapshots was the fact that I wanted a record of my grandchild. Random photos of anything, or of other babies, would not have worked.  I needed to point my camera in the general direction of my grandson in order to get a satisfactory photo. In the same way, your plan needs to know the focal point. This provides guidance for the experimentation.

SUMMARY

Plans are not the endpoint, but a means to a greater end—the long-term improvement of the business. Therefore, rather than wasting time perfecting the plan, focus your effort on building a tool which quickly and effectively points to where success is most likely, so that you can win the race to finding the fortune that such a place offers.

FINAL THOUGHTS

You rarely see oil portraits of the young and unaccomplished. Instead, most portraits are of older people after they have made their great accomplishments.  They look backward at past successes rather than towards where future success will come. Planning processes which are too focused on the successes of the past (like oil paintings) will hang on too long to obsolete strategies and miss out on winning the battle for next big thing. 

Strategic Planning Analogy #497: Managing Moments

THE STORY

When I started my first semester at the university, I was surprised how friendly all the students were. I had never seen such friendly people. I thought to myself that this was going to be a great experience. 

However, when I started my second semester as a freshmen, I noticed that the other students in my classes were a lot less friendly.  At first, I thought it was an odd coincidence that I just so happened to get friendly students in all my first semester classes, and unfriendly students in all my second semester classes.

Eventually, I figured out the real cause of the change. In my first semester, I was surrounded by other first semester freshmen.  We were all new to the university. Most of us did not have friends on campus because we didn’t know anyone there yet. Because of the strong desire to have friends, these first semester freshmen were acting aggressively friendly in order to fill that desire.

By the end of the first semester, these freshmen had made a sufficient number of friends.  The need was satisfied. Therefore, they relaxed in the second semester and were not as desperate to aggressively make new friends. Hence, they were not as “friendly” to me.

That is why, when I’m speaking to someone who is going off to the university for the first time, I tell them to be careful in choosing the classes and places where they hang out in that first semester. After all, the people you meet in that first semester are the ones most likely to become your lifelong friends long after university life is over.

THE ANALOGY

When students first go to college, there is a brief window of time when they are aggressively seeking out friends. In a matter of weeks, however, that window gets closed.  Enough friends have been made during the short window of opportunity that afterwards the aggressive behavior goes away.  They are now less likely to work abnormally hard to make more friends.

Windows of opportunity also exist in the marketplace. There are brief moments of time when an individual is more open to creating new purchasing behaviors or preferences. Then the window quickly closes and they become “less friendly” towards changing those behaviors/preferences. Habit and routine takes over; and market share hardens like concrete.

There are many triggers which can cause these windows of opportunity to open. Moving to a new location, like a university campus, is one such trigger. Not only may you need to be more open to finding friends after moving, but you now may have to find a new grocery store to prefer, a new doctor, a new hair stylist, the best place to service your car, and so on. You are much more receptive at that time to consider new alternatives. But soon, you make all of those choices and the window of opportunity closes.

Other triggers which can open us up to abnormally high openness to change in behavior include getting married, having one’s first child, getting a big promotion, buying your first home, a change in a company’s CEO, a drastic change in the economy (up or down), revolutionary new technology which makes the status quo behavior obsolete, and so on.

Most strategic plans include a desire to change marketplace behavior to the benefit of the company/brand. Since triggers can have such a strong impact on susceptibility to changes in behavior, it usually makes sense to consider triggers as part of your strategic plan.

THE PRINCIPLE

The principle here is that windows of opportunity are only open for brief moments. Therefore, finding ways to quickly identify and exploit these windows should be a priority in most strategies. If you wait until the third semester to make friends in college, you will probably end up with fewer friends than if you started in the first semester, when making new friends is easier. Similarly, if you are slow in reacting to triggers in the marketplace, you will miss out on the benefits inherent when windows of opportunity are open.

Here are three suggestions on how to better exploit triggers and windows of opportunity as part of your strategy.

1. Understand the Relationship Between Triggers and Your Business

Not all triggers are equally important to your business or your strategy.  Therefore, if you want to exploit trigger points and their windows of opportunity, you must first understand which ones are most important to your business, and why. It is only through understanding the relationships that you can properly determine which triggers to exploit, and how to exploit them.

For example, I know of a church that wanted to grow. It did research and found that the people most likely to consider seeking out a new church were those who were new to the community. That was their key trigger point.  Additional research showed them that the primary reason why people moved into their community was due to a job transfer. 

Therefore, the church built a strategy around seeking out and appealing to those with job transfers.  They took out ads in the airport (the place where many of these people first experienced the community). They formed close relationships with the companies bringing in the most new employees to the community. As a result of strategic actions such as these, many newcomers ended up choosing their church and it grew very rapidly.

So do your homework to learn which triggers to exploit as well as discover the best way to exploit the window of opportunity while it is open.

2. Prepare in Advance

Because these windows of opportunity may not be open very long, one needs to act quickly—as soon as the window opens.  Otherwise, by the time you figure out what to do, it may be too late. 

In a prior blog, I talked about how Caterpillar did a scenario analysis of what would happen in significant economic downturn. They calmly built what they believed to be the best course of action under such a scenario.  Then, when the great recession began, Caterpillar realized that the significant economic downturn trigger had occurred, so the quickly implemented the plan built for that scenario. 

The plan worked brilliantly because it was not hastily put together during a period of panic. When the trigger came, they pulled out the plan and implemented it immediately with full confidence.

Other companies, like Proctor & Gamble, were criticized for being too slow and indecisive when the great recession came.  And they suffered for it.

In another example, a friend of mine told me a story about beer in Chicago. Budweiser had been a strong competitor in Chicago, but sometime back around the 1970s or so, the Budweiser distributors suffered from a strike.  Old Style beer, a smaller player from out of town, knew a strike at Budweiser in Chicago was a potential trigger point, so they prepared for it. 

When the strike occurred, Old Style immediately flooded the market to fill the void. They positioned themselves as being the one loyal to the citizens of Chicago. They made close ties with the local sports teams.  They advertised aggressively to position themselves as Chicago’s beer. As a result, when the strike came, the former Budweiser drinkers (who now had to find a substitute) chose Old Style and many stayed with Old Style after the strike was over.  Old Style became the strong leader in the Chicago market. It took many decades before Budweiser regained the share lost due to the strike. All because Old Style was prepared in advance for the trigger.

3. Utilize Modern Technology

Thanks to the technological advances in “Big Data” crunching, and the data available due to social media, it has never been easier to find out when individuals have reached a trigger point.  One can now set up massive, yet finely targeted marketing campaigns to reach individuals precisely at the point when the trigger goes off.

I recently attended a big data conference and was amazed by how advanced the tools are becoming (and how the prices to use them are dropping). It would be foolish not to consider them as key tools in your strategic arsenal.

However, given privacy concerns and other such issues, one needs to be careful.  Back in February of 2012, Target stores got into some trouble for being too indiscriminate in the process.  Due to big data analysis, Target determined that if a customer suddenly started buying certain products (out of a list of 29 products), there was an extremely high likelihood that the person was pregnant. So once someone started buying these products, Target immediately went into action with their pregnancy and new baby promotions.

Unfortunately, one of these promotional packages ended up going to a young teenaged girl.  The girl’s father became irate and went to Target to complain.  But then, a few days later, the father apologized to Target because he learned in the interim that his daughter was indeed pregnant. Thanks to big data, Target knew before the girl’s father.

Since then, Target is more subtle in how they exploit the data.

SUMMARY

The best time to convince people to switch allegiance to your brand is when people are most prone to consider making a change. Therefore, effective strategies can be built around finding and then exploiting the triggers which cause people to be more susceptible to changes in behavior. The best way to do this is by:

1.      Understanding the relationship of your brand to various triggers.

2.      Preparing in advance a strategy to exploit that trigger, so you can act upon it immediately.

3.      Carefully using all the modern big data and social media tools which make finding and exploiting trigger points easier.

FINAL THOUGHTS

Another thing I remember from my college days was that at the beginning of each school year, one of the beer companies would sponsor a huge free concert on campus. They understood that those first semester freshmen were not only making new friend choices, but new beer brand choices. Are you the one exploiting these types of windows of opportunity, or are you letting the competition get the upper hand?

Strategic Planning Analogy #496: The 3 Keys to Success (Part 3)

THE STORY

I heard a great story long ago from a preacher. He was describing a fishing club.  Every week, the club members gathered to hear lectures about how great it is to go fishing. Everyone at the meeting agreed that fishing was great (and loved hearing stories about fishing), but none of the members had ever actually gone fishing. 

A new, younger member of the group listened to the lectures and decided he would go fishing. So he did, and he caught a big fish. The following week, he brought the fish to the weekly fishing club meeting. The audience was excited.  Most had never seen a real fish before.

After that, the fishing club insisted that the young fisherman repeatedly tell stories about his one fishing trip. Of course, this kept the young man so busy that he could no longer find time to fish anymore. So the fishing club was back to not having any members who fished.

THE ANALOGY

The preacher was using his story to compare the weekly fishing meeting to the weekly church service.  Many people at church are like the members of that fish club: They like to hear stories every week about conversions to Christianity (catching fish), but never go out to evangelize on their own. Many may not have ever even seen a new convert to Christianity. His point was that just as odd as it would be to join a fishing enthusiast’s club yet never fish, it should seem odd for a professing Christian to love conversions but never participate in seeking them.

A similar analogy could be made in the business world. A lot of business leaders profess to be enthusiastic about many great business principles, like serving the customer, making employees the most important asset, having a business strategy, and so on. They may talk about these great business principles on a regular basis. The leaders may even convince their followers to also believe in these principles.

But, if nobody in the company actually does anything to support these principles, they become just hollow slogans with no impact. The company becomes as silly as a fishing club that never goes fishing.

THE PRINCIPLE

We are currently on the final blog in a three-part series on the three characteristics which tend to determine whether a business is a great, lasting winner, or a long-term loser. In the first blog, we looked at “Passion” and saw that the winners have a passion for the business and the intricacies of the business model which makes it work in the marketplace. The losers focus their passion on the money that comes out of the business and are only tangentially concerned about the details in how it is made.

In the second blog, we looked at “Direction” and saw that losers choose a direction which follows—either the rules of the status quo or the actions of the leader in the industry. By contrast, winners choose a differentiating direction—either a new business model to better solve an old problem, or an entirely new value equation for a new industry.

In this blog, we will look at “Action.”  The principle here is that winners have a bias towards taking action regarding what they believe. The losers, by contrast, are more like that fishing club. They talk a good story, but never get around to acting upon it.

It’s All About Culture

A bias towards action tends to get to the root of a company’s corporate culture. Some cultures naturally encourage action—a bias towards “yes.” Other cultures have natural barriers which naturally discourage action—a bias towards “no.”

A culture with a bias towards action tends to have the following characteristics:

1. Curiosity
2. A Passion for Experimentation
3. A Tolerance of Small Failures
4. Willing to Take Calculated Risks
5. Allow People Out in the Field Some Independence
6. Permit “Skunk Works” (independent projects)
7. Reduce the Red Tape to Get Things Done
8. Get Tired of Just Talking and Settle Disagreements By Trying Something
9. Put Their Investment Money Where Their Passions Lie.

Of course, if a company is all action with no direction, all you have is confusion and anarchy. So what you want is action focused around a general direction, the direction of strategic intent. You want to get those things done which have the greatest impact on moving the strategy.

This is why all three characteristics of success tend to be linked together.  Without a passion for how the business works, you won’t know what actions to take to improve it. Without a strategic direction in how you want to stand out in the marketplace, you won’t know where to experiment. It all goes together.

Three Types of Actions   

Successful companies tend to focus their actions in three areas.  First are the “tinkering” actions.  This is the idea of never being content with the status quo. The culture is one of never declaring “We’ve Made It!” The thinking is that there is always room for improvement and we should try to find ways to improvement all the time.

You can never just relax and put your feet up on the desk and say we’ve perfected it and we can relax.  The problem with resting on your laurels is that the world is constantly changing. The best for yesterday is not good enough for today.  If you stop improving, a competitor will pass you by.

Therefore, successful companies are always acting to tinker with the current approach to make it better. They ask themselves questions like:

1. What Worked?
2. What Didn’t Work?
3. How Can We Do This Better/Faster/Cheaper?
4. What is the Customer Feedback?

Wal-Mart is a master of the art of tinkering. They are never content; always stretching to improve.

But it doesn’t stop there.  If all the action was on small incremental improvements, companies would never make the major strategic leaps. Therefore, these successful companies also devote a significant amount of time to bringing the future to life. I call this “Big Picture” actions.

Think of Google. Their big picture vision is to advance the consumption of knowledge in a superior manner for consumers, in a way that also offers additional opportunities to leverage their digital advertising strengths. But this is not mere talk. At Google, they do it. 

To get more ads on mobile, Google created an entirely new mobile ecosystem around the Android operating system. To get more ads related to geographic search they invented a whole new approach to geographic search, including sending cars everywhere to take street-level photographs of everything. Google Glass allows people to see the internet all the time in glasses (that will also support ads). Heck, they’ve even invented cars that drive themselves so that passengers can be freed up to spend more time online to see Google’s ads.

Google saw the big picture and made big actions over large sectors in order to pave a path for their strategy. They didn’t wait for these markets to evolve; Google created them themselves in order to control the destiny of their strategy. 

Similarly, Amazon wanted to protect its ability to continue selling books once books went digital, so they acted to create the Kindle ebook devices. They saw the big picture and did what was necessary to protect their strategy. They weren’t talking about fish—they were fishing.

Finally, the third type of action revolves around just doing the things that businesses should do. I call this “Doing What the Experts Say to Do.” Starting with Peter Drucker and moving through the decades to today, there have been a number of experts saying what good companies should do. It involves things like:

1. Finding a Position
2. Investing In Your Infrastructure
3. Investing In Your People
4. Listening to Customers
5. Communicating Well
6. Delegating Properly
7. Organizing Around Competencies

Good companies don’t just read about this stuff—they actually do it. How many companies say they care about their people, yet do nothing to show they care? The good companies make these principles come to life by focusing actions to make it happen. We don’t need a lot more books on what businesses should do. Instead, we need more business who make it a priority to do what is in the books already written.

I remember going to a business roundtable of retail strategists years ago. The mix of retailers represented covered the full spectrum—from very successful firms to very unsuccessful firms. We started the meeting by going around the table asking each strategist to say what was their biggest challenge. 

For the successful firms, there was a variety of high-level problems that were being tackled.  However, for the troubled companies, the challenge was always the same. They said their biggest challenge was in getting people to actually implement the strategy. The losers could only talk about fishing; the winners were actually doing it.

It could not be any plainer. If you can’t implement things, you are doomed to failure. If you can, then the challenge is to pick which successes to go after.

SUMMARY

One of the key differences between business winners and losers is the ability to turn ideas into actions. If your corporate culture has a bias towards actions, you are more likely to succeed. The three types of actions are:

1.      Tinkering—Always looking for ways to do things better

2.      Big Picture Actions—Building the future reality of your grand strategy

3.      Doing What the Experts Say to Do—Putting the principles of good business into action.

FINAL THOUGHTS

So success boils down to just three things—Passion for the Business (and business model), Direction Towards Meaningful Differences, and a Bias Towards Action. Where do you stand in these three areas?

Strategic Planning Analogy #495: The 3 Keys to Success (Part 2)

THE STORY

I was excited the first time I was to visit the Museum of Modern Art in New York.  The museum is full of famous works of art.  I had read about or seen pictures of this art in books, but now I was going to get a close up look at the original paintings. I imagined that it would be a very inspiring visit.

Instead, it turned out to be a very disappointing visit.  As it turned out, not only do you see the greatness of the paintings when you see them up close.  You also see all the imperfections.  In particular, I remember looking at some very famous Picasso paintings.  When you studied them up close, you could see the rough pencil sketch underneath the paint.  They looked a lot sloppier than the little photographic reproductions I had seen of them earlier in art books.  After awhile, I became so fixated on the imperfections that I couldn’t enjoy the paintings.

I kept thinking to myself that I could probably find many artists who would be able to reproduce all of these paintings and have fewer imperfections. But in later reflection, I realized that I was missing the point.  No matter how much more “perfect” these reproductions would be, they would never be more valuable than the original.

THE ANALOGY

Copying is a lot easier than creating something entirely new. Imitators may even be able to make small improvements over the original.  But in the world of art, the value belongs with the original, no matter how flawed it might be. 

A similar situation exists in the business world.  The ones who create, get known for and exploit exciting new business models first usually create more value than the later imitators.

Therefore, you’d think that there would be more business people striving to be the next Picasso—creating something new, exciting and very valuable. Yet, when I look around, it seems that the business world is more often filled with imitators and copiers. The idea seems to be that “People like that original over there, so if I make something just like it, they will like mine just as well.”

But as we all know, a “just like Picasso” is never as valuable as a real Picasso.  Why should we expect the rules to be all that different in business?

THE PRINCIPLE

We are currently on the second blog in a series on the three characteristics which tend to determine whether a business is a great, lasting winner, or a long-term loser. In the first blog, we looked at “Passion” and saw that the winners have a passion for the business and the intricacies of the business model which makes it work in the marketplace.  The losers focus their passion on the money that comes out of the business and are only tangentially concerned about the details in how it is made.

In this blog we will look at “Direction.”  Winners tend to move in new and different directions, like Picasso.  Losers direct themselves to follow what is already working (the imitators).

The Problems With Following

There are many reasons why the followers rarely become the great companies. It doesn’t matter if you are following the standard rules of convention for your industry or following the innovation of the leaders.  You are still following.  And followers rarely reap great rewards.

There are three problems with focusing on following the conventional rules for how your industry works.  First, if everybody is doing the same things in the same way, then you tend to have parity of offerings amongst the competition.  How do you win over the competition if you are all perceived as being the same?  This tends to lead to price wars (“everything is the same, but we cost less”), and we all know that price wars are not the path to creating above average prosperity.

Second, even if you can execute within the conventional rules a little bit better than everyone else, it is usually only a temporary advantage. In an earlier blog, we looked at the battle between Fuji and Kodak in conventional analog photographic film.  Sometimes Fuji would have a slight advantage; then Kodak would get a slight edge—back and forth it went with no clear winner.  The real winners were the innovators who abandoned the conventional rules of photography and brought digital imaging to the masses.

Third, there are limits to how much better one can become by playing by the same rules. The law of diminishing returns tells us that ever increasing improvements tend to lead to ever smaller perceived benefits.  For example, I could make an ever more perfect nail, but at some point, the guy hammering that nail into a board won’t be able to see how those perfections improve his hammering.  In other words, superior executions of the status quo often do not create enough of a differentiating benefit to shift habitual shopping patterns for the customers.

So what about following the innovators?  Well, you’re still a follower.  The last time I checked, followers never win races.  Just as Picasso gets superior credibility for pursuing a new path, business innovators get superior credibility over their followers.  The innovator becomes synonymous with the innovation.  The rest are seen as mere copiers. 

For example, Google means search.  Even though the follower Bing claims a slight superiority in blind tests, Google still wins the war for market share in search.  Why?  We are not brand blind.  The emotional bonds associated with the leader brand overcome the slight differences.  The same thing happened when follower Pepsi claimed superior taste in blind taste tests over Coke.  Coke still won the war.

Finally, the follower usually is one step behind the innovator.  By the time the follower catches up to where the leader was, the leader has moved on to the next innovation. That is why hockey great Wayne Gretzky attributed his success to ignoring where the puck currently is and instead going to where the puck is going to be.  Rather than following the puck, he got in front of it. 

There are only two ways to win by following.  First, you can win by having your competitors make colossal mistakes. Their failure becomes an opening for your gain.  But a strategy that depends on others to make mistakes is not much of a strategy.  In addition, if you are a follower, you will probably follow them into similar mistakes.  For example, the financial collapse which triggered the great recession was caused by colossal mistakes in the banking industry.  But because most of the big banks tended to be following each other and playing by the same flawed rules, most of them fell victim to the flaw and could not gain meaningful advantage.

The second way to win playing by conventional rules is if you are substantially larger than everyone else and can leverage your size to your advantage.  However, this begs the question of how one gets to be so much larger than the others in the first place.  Usually the bigger players got to be so much bigger because they were the innovative leaders which rewrote the old conventional rules into what became today’s conventional rules. It was their leadership which made them big, not any form of followership.

The Value of Being Different

There are two ways to be different.  First, you can create a new business model which is inherently superior to the status quo model at delivering value.  For example, Southwest Airlines has been a consistent success competing against other airlines who struggle to survive.  Why?  Southwest Airlines played by a different business model, focused on point-to-point (among other things).  It’s unique business model allowed it to provide superior value that those playing by conventional rules could not imitate.  Even the best player by conventional rules could not exceed the value offered by Southwest’s different approach to the business.

Another example would be Salesforce.com.  While others were playing by the old rules of installing and supporting software scattered everywhere, Salesforce.com eliminated the software paradigm and was a leader in putting everything up in the cloud.  That change in business model gave Salesforce.com inherent advantages that the conventional operators couldn’t match if they stayed in the old paradigm, no matter how well they executed it.

This helps reinforce the first differentiation we talked about in the prior blog—where winners focus on business models.  You won’t find the success of a Southwest Airlines of Salesforce.com unless you spend time focused on business models. 

The second way to win in difference is by creating a new value proposition which did not exist before.  Apple has been a winner by creating wholly new types of value expectations.  The iPod, iPhone, and iPad changed the whole way people thought about how to live and enjoy their lives.  They created new values in new places.

The “Fast Fashion” operators, like H&M, Zara and Forever 21, helped change the definition of what to value in fashion for a significant segment.  Instead of defining fashion by Exclusive Labels, High Prices, High Quality and Fashion Seasons, they made fashion more disposable, where frequent change/variety combined with low prices (and lower quality) was a new winning formula.

If you look across the spectrum of business, you will find that nearly every great company at some point took one of these different directions.  They either came up with a new business model which had inherent advantages over the old model in the conventional industry, or they invented whole new industries by redefining or creating new value formulas.

SUMMARY

One of the key differences between business winners and losers is the direction the leaders take the company.  The losers tend to move in a following direction—either following the conventional rules or following the innovators.  By contrast, the winners tend to move in a new direction, either by finding new ways to better satisfy old values or by creating new values through new industries.

FINAL THOUGHTS

Artists create; craftsmen copy.  Are you an artist or a craftsman?

Strategic Planning Analogy #494: The 3 Keys to Success (Part 1)

THE STORY

When I was a young boy, I owned a Piggy Bank. It had two holes. The first hole was a slot at the top, used to put money INTO the piggy bank. The second hole was on the bottom. It was used to take money OUT OF the piggy bank.

My problem was that I tried to take money out of the bottom of the piggy bank more often than I put money into the top of the piggy bank. As a result, my piggy bank was almost always empty. That made it a fairly worthless bank.

THE ANALOGY

Businesses are a lot like that piggy bank. Money comes into the business through sales.  It is like putting money into the piggy bank’s top slot. Money is taken out of the business through events like salaries, profit sharing and dividends. That is like taking money out of the bottom of the piggy bank.

If you take money out of the business faster than you put it in, the result is similar to my empty piggy bank. It becomes worthless.

Most traditional small entrepreneurs I’ve met get this principle. They put a major emphasis on cash flow, to make sure that money coming in the top slot exceeds money going out the bottom hole. They realize that if the money is not coming in the top, there will be no money for them to buy groceries to eat. 

This principle, however, seems to get lost in a lot of modern digital/social businesses and large enterprises. The connection between inflows and outflows becomes less obvious. After all, there are digital/social businesses out there valued at huge sums of money (and making their owners rich) which have little or no source of income coming into the top slot.

Without strategic concern for both holes, the business (piggy bank) eventually becomes empty and worthless.  This is why you ended up with the bubble bursting on the original dotcom boom and many stock market disappointments in the current digital/social boom. The private equity contributors to the piggy bank eventually want to get their money back out. But since more money was coming out the bottom than was going in the top, there was not enough to satisfy everyone.

THE PRINCIPLE

In this blog (and the next two), I will be talking about the keys to real success in business. I’ve spent a lifetime in the business world and have witnessed first hand (and second hand) a large number of successes and failures. 

Based on what I have seen, it appears to me that there are three key differences between the big winners and big losers. So in this and the next two blogs, I will be looking at these three characteristics which differentiate the winners from the losers. 

Passion for the Business Model

The first characteristic has to do with passion—that which captures the attention and focus of the leaders (and their followers). In the losing companies, the passion and focus tends to be on wealth.  The focus is on profits or personal wealth—making them as large and as quick as possible. By contrast, the passion of the successful firms tend to focus on the business model. The focus is on making the model ever better at serving the customer.

Does this mean that profits are bad? Is it wrong to want your business to have larger profits? Of course not. But if you are more passionate about profits than the business model, then you are like me when I kept taking money out of the bottom of my piggy bank without putting money in the top. Eventually, the model falls apart and the business becomes a worthless empty shell.

If you ignore the business model, then the only way to keep taking money out of the bottom is by “financial engineering.”  This is essentially the idea of putting other people’s money in the top so that you can keep on taking out money from the bottom. As a child, that financial engineering would be to convince my father to loan me some money beyond my allowance, so that I could keep on taking out money beyond what I earned. In the business world, this consists of taking on extra debt or equity, either private equity or public equity. 

The problem is that these types of contributions to the piggy bank come with strings attached.  These contributors also want a turn at taking more money out of the bottom of the bank than what they put in the top. And, as it turns out, it is impossible for all of you to take out more from the bottom than you put in the top if the business model is not sufficiently multiplying the money.

By contrast, if you have a passion for the business model, you will be always looking for ways to improve the way the business fulfills its position in the marketplace. This leads to efficiencies (a less expensive way to serve) and effectiveness (a more valuable service for customers). This makes the money in the piggy bank grow by getting satisfied customers to contribute to your success in ever more profitable ways.

Hence, the irony. If you want a lot of profits, don’t focus on profits; focus on the business model.  Focusing alone on profits can lead to bad behaviors, such as:

1. Underinvesting in the business model;
2. Ruining the Balance Sheet;
3. Short-term gains which ruin long-term prospects;
4. Ruining the relative value for the customers (as you give more value to yourself than to your customer)

These actions all cripple your ability take money out of the bottom of the bank over the long haul.  However, if the passion is about improving the business model, the profits will be there for years to come and the piggy bank will never be empty.

Example #1 Euro Zone

Just look at the economic challenges in Europe.  Rather than a passion for building a solid business model for a continental economy, the Euro Zone has been plagued by governments and citizens who keep taking more out of the bottom of the piggy bank than is put in.  To fund this passion of taking money out, the governments took too much of other people’s money in the form of debt. Now the piggy bank has nothing but debts that cannot be paid. And the governments seem unwilling to make the tough choices on how to fix the broken business model.

The exception is Germany.  And guess what—the Germans have focused for decades on building a solid economic business model. This business model passion means that more is going into the piggy bank than is coming out. Germany is solid

Example #2: Formica

Awhile back, I was in discussions with the top executives of Formica about doing some consulting.  They explained to me the history of the company. Decades ago, Formica had been a strong brand with great profits. They essentially owned the countertop industry. 

But then, Formica was bought by people whose passion was profits. They started taking more out of the bottom than was coming in at the top. This caused two problems. First, the countertop marketplace was changing and they underinvested to meet the challenge of the change. This hurt the status quo business model, weakening the ability of Formica to fund obligations. Second, taking too much out of the bottom required loading up the balance sheet with debt, thereby increasing obligations. Eventually, since they couldn’t make ends meet, they sold the company to others.

The “others” also had a passion for profits and continued these practices. In due time, they sold the business, too. After several iterations of this process, Formica had been so weakened, that it had become an empty shell full of IOUs that could not be paid.

Eventually, Formica ended up in the hands of Fletcher Building of New Zealand. This was a company which had a passion for the building materials business. They focused on the business models within the industry they loved. As a result of their passion for the business model, they are bringing back Formica from the dead.

Example #3: Amazon

Recently, I had discussions with some executives at Amazon. In my discussions with them, they never really talked about profits. Their talking pointed to their passion for the Amazon business model. All they wanted to do was improve that model by making it faster, easier and cheaper for customers to interact with Amazon.

As a result, the Amazon business model keeps getting better and better. This is increasing their competitive advantage in the marketplace. Yes, the near-term profits have recently suffered a bit, but that was because of extra investments in the business model, not a failure to win in the marketplace. Amazon is on strong, solid footing. It survived the dot com bust and the digital/social slump. And it has the big box stores around the world panicking as they continually lose share to Amazon. Founder Jeff Bezos was the 2012 Fortune Businessperson of the Year. This is a company built for long-term success.

SUMMARY

Long-term winners tend to have characteristics that are different from long-term losers. One of those characteristics has to do with where the passion lies. The losers tend to have a narrow passion focused around rapid personal wealth-building. This usually leads to bad behaviors which choke the prospects for long-term business success. They prematurely empty out the piggy bank.

The winners, by contrast, tend to have a passion for the business and its business model. They are more concerned with improving how the business works in the marketplace than how much they can pull out of the business for themselves. They get interested in all the little details about how to make the business better. They build piggy banks which are full for a long, long time.

FINAL THOUGHTS

Now that I am grown up, I have an electric bank which sorts coins and puts them into the appropriate paper rolls.  And when the rolls get full, I take them to the bank rather than spend it right away. That is the better path for the long term. Is your corporate culture promoting actions like what I did with my boyhood bank or my adult bank?