Would you prefer sales growth or profit growth?

Often, before I work with a company on strategic planning, I ask the owner or CEO what success would look like for him or her.  This simple question has been the source of some great soul-searching over the years.  One of my earliest clients answered – very quickly – that he wanted sales growth.  We created a plan that delivered that, and then some.  The company nearly doubled in size in a short period of time, but the next time we did strategic planning, the owner told me he wanted more profit – even if it meant slowing down growth.  This is not unusual – and many people try to pretend that there isn’t a trade-off.  While it is true that both profit AND sales growth are possible simultaneously, it is much, much more likely that you will experience one or the other.

Here is why most companies experience either sales growth or profit growth:  customers aren’t particularly interested in either of these things for you.  Customers want the best deal on the best products and the best services with the most features and the most convenience.  Try to do all those things at once, and you are going to lose money – unless you have a magic recipe somewhere (and granted, it’s possible, but much more rare than most gurus would have you think).  So…we can sell MORE to customers if we give up a little – or we can sell LESS and make more money.  Your competitors have the same deal going on – some may have special know-how that enables them to wiggle about a bit in this equation, but every company runs into this wall, sooner or later. 

A few years back, I analyzed the results of dozens of companies that I’ve worked with, and this tendency became very clear:  the top performers in sales volume growth were in the bottom quartile in profit growth, and vice-versa.  I find this result a little surprising:  most of us assume that overhead absorbtion creates an economy of scale as you get larger.  The problem with this assumption is that size attracts – you guessed it – competition, and so there is a higher need for investment and the overhead that comes along with it as you get bigger.  In other words, for most companies, there is no magic size you can reach where you are not going to be beset by competition.  If you don’t believe me, take a look at companies like Apple and Exxon-Mobil.  They make great money, and they are huge, but they have to invest heavily to maintain their position because a big company is essentially a HUGE target for competition.

So here is a question for you – would you like to see super high growth in sales or profits – or would you be happy with mid-range numbers in both?  If you can make a clear, focused choice, you will be far ahead of your competitors.

Upstream and Downstream

One of the overlooked ways to improve your strategic planning is by thinking about how your organization fits into the bigger picture.  An excellent exercise in strategic thinking is to take a minute and think about why you are important both upstream and downstream in the value chain.  In other words, what makes you important to your suppliers, and what makes you important to your customers.
I like to closely examine any ideas this may spark about win-win activities that might involve the upstream or downstream players.  A good example would be a social networking site which encourages you to invite friends - you are helping them by growing their network, and helping yourself by expanding the network you can draw upon within that site.  This particular win-win activity goes a long way to explain the rapid growth of social networks as both a business and recreational tool.
Question to ask in your strategic planning:  What activities might you encourage that create a similar win-win situation for your upstream and downstream stakeholders?

Strategic Vision at Apple: Will it change under Tim Cook?

As Steve Jobs' health becomes a greater concern at Apple, attention has been focused on Apple's number two exec, Tim Cook. This transition raises some questions that are interesting strategic planning issues, and will be a fascinating case study in business strategy over the next three or four years.

First, many credit Jobs' vision for the success of Apple. In some ways, this is not far off the mark - Jobs, especially after his return to Apple in 1998, pushed Apple in some weird directions that clearly distinguished the tech company from its competitors. Probably the best part of this strategy was an emphasis on design and a willingness to take a shot at unusual new products before it was clear consumers wanted to buy them.

The first item - emphasis on design - could arguably be Apple's strategic competency. Every successful Apple product has had a design that notably distinguishes it from competitors, and in most cases, the Apple product has re-defined its market.

The second item - a willingness to take risks on new products - lies at the heart of entrepreneurial success in any industry, and is only notable at Apple because size tends to extinguish this vital recklessness. The Fortune 500 is littered with companies that used to have this gambling mentality - but no longer do. Apple still has it, and one could argue this is because of Jobs.

Enter Tim Cook - a perennial number two, according to some, Cook has been seen as an operations guy - and a brilliant one with a keen mind. Operations, unlike design and marketing, does not often reward entrepreneurial recklessness, though - so will Cook bring a vision that can sustain Apple's weird status in the future? On the one hand, people who know Cook say he is a great strategic thinker. On the other hand, operational responsibilities can infect your mind with a gray practicality that deadens the innovative spirit of an organization. It's truly too soon to tell, but don't bet on Apple going dead in the water immediately. Cook knows he has a lot of very keen people around him who have been part of Apple's success over the past ten years - and he is smart enough to know how to work with them. Let's hope he doesn't try to "re-make" Apple in his image just to satisfy his ego - any sign of that would be the kiss of death, as it has been for countless other successful companies in transition.

Why Wal-Mart is not invincible

After a couple of years of news stories trumpeting the success of Wal-Mart (again), sales at Wal-Mart stores showed a decline last year. Why? There are two very different reasons. The first is economic, the second is competitive. The economic reason is that all shoppers shift spending downward when they see themselves affected by an economic downturn. This means people who shop at higher-end stores when times are good may stay pinching pennies by making the same purchases at a commodity store like Wal-Mart when things get tight. The competitive reason is that some of Wal-Mart's closest competitors - notably the dollar stores like Family Dollar and Dollar Tree - have started to close the gap on some of the weaknesses that caused customers to shift away from them and towards Wal-Mart. The first shift isn't really big news - commodity players always fare better when the economy is doing badly, and worse when things brighten up. But the second shift should be worrying to the folks at Wal-Mart. The commodity game, unlike a specialty strategy, allows only one winner. Any change that reduces volume for the lead player makes it that much more likely that an upstart will be able to remove the commodity crown from the top dog. Wal-Mart has undertaken some big expenses in the past few years that their smaller competitors have not - notably advertising and opening/closing stores. These are both strategic moves, and properly done may lead to higher profit at Wal-Mart - BUT improperly done, these moves may just be another chink in Wal-Mart's armor.
While I'm not a big fan of commodity strategies in general, so much has been made of Wal-Mart's management approach that I will find future developments in this market space very interesting to watch.
Here is a question for you in your strategic planning: Are YOU staying on top of your game? Are you considering pursuit of strategic moves that may create chinks in your armor? And how are you preparing yourself for a better 2011 and beyond?

Making things matter

A quick strategic planning observation: so many great profitable strategies work off of this one simple idea, I thought I'd share it with you. We live in a world where many of the frustrations we have come from people treating things as if they don't matter. If you can find something that matters to your customers that your competitors treat this way, you have a potential gold mine on your hands. In your strategic planning, make sure you ask yourself if you understand what matters to everyone in your profit system - your customers, your employees and your suppliers, most of all. If your business matters to those people, it's bound to succeed.

Help! I can't get my team thinking strategically!

This is a cry for help I get a few times a year. Fortunately, I'm good at fixing this problem. Of course, you are wondering how.
Here are four simple tips for getting a team to think more strategically:

1. Force thinking to the future. The more distant future brings up questions about the survival of the industry, not just your company.

2. Ask why we exist. Not how are we going to exist, but why.

3. Use strategic imagery. Don't talk about swimming faster - talk about swimming in the right direction.

4. Challenge the team to make their own luck. Get them thinking about how to get your company doing the right thing, in the right place, at the right time.

5. Every time someone suggests a tactical solution, respond negatively: "That's only going to make us a little more successful next year. I want something bigger".

If these don't work - or if they do, for that matter - you should seriously consider bringing in a professional who focuses on challenging teams to think more strategically. Drop me a line and I'll tell you how to get me to come do it in person.

Strategic Planning: Why Wal-Mart is a bad place to buy books

A recent article on Yahoo Finance got me thinking about a fascinating strategic planning question: why is Wal-Mart is a great place to buy some things (such as video game consoles) and a terrible place to buy books?

Wal-Mart wants to turn over its merchandise quickly, and prices hot items (like the Nintendo Wii) to sell quickly. When it comes to books, there is a serious problem in this. Wal-Mart has been having a price war with Amazon over best-selling titles. Fortunately for Amazon, Wal-Mart has to do this, because Wal-Mart would never win a value war with Amazon. Amazon has invested huge amounts in having millions of titles available - arguably, a better selection of books than any other source on the planet. Wal-Mart - true to their commodity strategy - only wants to sell huge quantities of the best-selling books. This means that Wal-Mart, at best, might carry one thousand titles, compared to Amazon's millions. This brings us to the classic reason to buy - or not buy - from Wal-Mart. Want a cheap price on a New York Times bestseller? Wal-Mart will probably have it, and they will try to price it less than Amazon. This is still a challenge, since Wal-Mart is still largely a bricks-and-mortar operation, but their advanced distribution and purchasing power enables them to give Amazon a run for it's money.

But let's look at the flip side: Want any one of a million titles - say, a book about fossil hunting in Florida? Wal-Mart will never carry such a title, because the turnover rate would be too poor. In fact, there are thousands of books in a typical Borders or Barnes and Noble that Wal-Mart wouldn't want to carry because they don't have the volume demand that, say, the latest Twilight book would have. This approach might make little difference to readers who only buy a book or two to take to the beach in the summer - which is a valid, addressable market that Wal-Mart already caters to - but it makes buying books at Wal-Mart about the same as buying clothing at a convenience store. Sure, you might find what you are looking for, but you'll waste a lot less time going to a specialty retailer whose strategy is centered on giving you the selection you want. This is true whether you are talking about online sales or bricks-and-mortar sales: selection is both a cost and a consumer preference in the book market (and arguably, the fashion market and many others).

Wal-Mart can succeed by sacrificing the preference for selection because price is also a strong preference. For retailers like Amazon, however, the strategy of leaning into Wal-Mart's weakness (product selection) will always garner a sizeable chunk of market share. The challenge for even more specialty-oriented stores (small, independent booksellers, for example) is to provide other values that Amazon (or Waldenbooks) won't, such as personal service, focused selection, ambiance, and browsing configurations.

I'd go a step beyond this and say that people who buy books at Wal-Mart are also doing society a disservice, because civilization suffers when economic resources are diverted only to cultural production that sells in mass quantities, but that's a somewhat elitist viewpoint. Still, a culture that only supports best-sellers isn't just bland, it is systematically likely to sink to the lowest common denominator in literature. Call me a snob, but I'd prefer not to build a civilization on Harlequin romances.

How about your business? Are you like a Wal-Mart, an Amazon, or a small independent bookstore? How do you create value for your customers? Does your strategic planning give you the ability to out-serve your biggest competitors in a huge portion of your market?

The State of the Art

Despite what people might tell you, strategic planning is an art. As with other arts, you can do better with good training and tools, but at the end of the day, there is no replacement for skill and experience.

In times of economic turmoil - or even just turmoil in a specific industry - many companies turn away from their strategic planning to focus on short-term issues. In many cases this is warranted - your course may not be as important if the ship is sinking - but in far more cases, this departure can lead to bad strategy and failure.

One of the best (and to me, the most painful) examples of this departure from the path of good strategy occurred at Disney from 2001 to 2008. In the years before this - from 1991 to 2001 - Disney operated an excellent park at Disney World called Pleasure Island. This park filled in an important gap for both families and convention attendees in the area - the absence of nightlife for adults. While this fell outside the Disney strategic competency of family entertainment (viewed on its own), it was well within that competency when seen as a part of the bigger picture, answering the question "How can we keep the whole family happy during a week at Disney World?". Unlike any other place in the world, Pleasure Island offered (during its peak years) family oriented nightlife - a place where I wouldn't mind taking my young children to go dancing or take in a comedy show.

In 2001, the aftermath of 9/11 devastated the travel industry, and hit Disney hard. To overcome this, Pleasure Island management started targeting the local nightclub crowd, making changes to the operation that made it more appealing to young local people. This change may have decreased losses in 2001-2002, but it also decreased the family appeal of the attraction, and Pleasure Island started to fade as a part of the Disney destination as it became more of a local hang-out spot. As you might expect, the very non-family oriented problems of nightclubs - drugs, violence, gangs - also seemed to be increasing during this time. Attendance -especially by families and Disney vacation-goers- declined steadily as the Pleasure Island operation became less of a distinct entity and more of an imitation of Citywalk at Universal Studios nearby.

In 2008, the entire operation was shut down, to make room for more shops in the Downtown Disney area. Thus, a unique part of the strategic competency of Disney World suffered a strategic loss due to changes that were made for tactical reasons seven years before.

While the decisions involved in the decline of Pleasure Island may well have been made in strategic planning, there was a clear departure from strategic competency-based thinking for more tactical considerations of short-term revenue enhancement in 2001-2002. Small changes, like the cessation of fireworks and live shows, and big changes, like the removal of admission gates from the island entrance, led very directly to the decline and, ultimately, the failure of the operation.

Has your company departed from its strategy in the past year? Do you need to return to strategic competency-based planning to renew the true distinction that your company can have in the marketplace? Now would be a good time to consider returning to a discipline of formal strategic planning to assure success not just next year, but for years to come.

When Should You Get on the Bandwagon?

You have no doubt seen many of the indicators that the recession may soon be over (if it isn't already, a view held by some very smart economists). This doesn't mean everything will return to the rosy days of, say, 2006, but it does mean the economy will begin growing again. With this knowledge, you are probably thinking about when you should consider revving up the profit engine in your company. The timing of this can be a critical question in many industries.

As a general rule, you don't want to rev up too early, because you will increase your expenses to do so, and profitability will suffer as you spend on capacity that you do not need. On the other hand, you also don't want to rev up too late, because this could easily lead to a loss of market share as your inability to fill orders in the short term pulls you up short. A more difficult and probable effect of undercapacity is that parts of your distribution channel - and even individual customers - are likely to switch to competitors when you cannot meet their needs.

These two factors push against each other - the risk of increasing expenses too early tempers your desire to reduce the risk of losing market share in a recovery. Obviously, excellent forecasting - or at least close attention to real economic data - can be very valuable to you here. Beyond timing your return to expansion precisely, you should also assess the real risks of both scenarios. If you are pursuing commodity strategies, the cost of increasing costs too soon may be unbearable with your super-lean cost structure. On the other hand, a specialty strategy may lead you to see the cost issue as small compared to the risk of losing market share, especially when some market share loss may be permanent.

How should you handle this in your strategic planning? An objective look at your current financial model and market position should be a part of at least some of your monthly strategy implementation review meetings. Until we have passed the current economic inflection point, you will be well-served to look at the upside AND downside of both increasing costs and losing market share.

Strategic Planning - Better Business Models, part 2

Business models work because they work for customers – and coincidentally, for your company. Self-deception here can lead companies to optimistically adopt a business model that fails because it was designed for the supplying company rather than for the customer. Time and again, I see business models that are broken not because the starting point for their design is what the supplier wants – rather than what the customer wants. One of the key reasons that specialty and commodity strategies are more often successful when they are distinct from each other is that the concept of specialty and commodity limits suppliers to ONE facet of their own desires – and then subjects the business model to a wide range of the customer’s desires.

The quintessential example of failure on this point is one of the oldest ways to create a scam – sell someone on the idea that they can get lots of money, quickly, without special skills or hard work. Sometimes these scams are simple (the Nigerian 401 scam), while sometimes they are grand and complex (Bernie Madoff and Enron come to mind). The fundamental nature of free market capitalism – that it is an engine of creative destruction – means that ANY business model that requires little work, skill, risk or time will be destroyed as quickly as competitors figure it out. Incidentally, if you think through the implications of each of these advantages (little work, little skill, little risk and little time), it becomes quite clear that business models built on top of genuine strategic competency are the only ones that have a long-term chance of success.

Strategic Planning for Acquisitions - Team Composition

When you are evaluating an acquisition, who should be on your team? As a general rule, you should attempt to include anyone who has primary responsibility for an area affected by the acquisition. For example, if operations will be affected (and they almost always are), you will want to include the VP of Operations. Obviously, there are a few other areas that are always - or almost always - affected by an acquisition, which means that most (if not all) companies will also want the CEO, the CFO and the VP of Sales involved. If you have a VP of marketing with a strategic level of responsibility, he or she would also be a good addition to the team. In many companies, you will also want to consider including the heads of IT, Human Resources, and Technology/Engineering - depending on your industry, and the ability of the person in question to think strategically about the acquisition.

I'd be curious to hear if there are people you have included in acquisition teams in the past that aren't listed here. Do you have any experiences (good or bad) that might suggest ways you should consider team composition? Let me know!

Strategic Planning: How to RE-think Your Business Model

This year, a LOT of people seem to be wanting to re-think their business models. This is a pretty good idea, because some things are changing in the world economy at a very fundamental level.

I do have to question the wisdom of tackling this for the first time in a recession, though - and here's why: tuning up a business model requires good information from the market.
The information from the market right now suggests (for example) that US consumers only want to buy 6 million vehicles a year. This is obviously poppycock, as anyone in the auto industry could tell you - but behaviors change during a recession.

When you are re-designing your business model, you are trying to create a structure that will work for you ALL the time - in both good times and bad. In many cases, the best business models simply don't work that well during a recession - so you have to structure your business to weather the storm.

All this being said, some markets may be changing so fundamentally that it would be suicidal NOT to re-examine your business model. So what is the best process for doing this?
In strategic planning, the business model is often one of the core strategic issues, so I often find myself tinkering with it.

In the past 20 years, I've found myself making excellent changes - and sometimes not so excellent ones. Here are a few things I've learned from the hundreds of times I've tackled this:

1. Build your model on DATA, not emotion
2. Understand ALL FLOWS in your model - not just the easy ones
3. Start with an understanding of your STRATEGIC COMPETENCY
4. Looking at your current model, ask WHY and WHY NOT about every area where customer value is not optimized
5. Pay close attention to the things EVERYONE IS DOING - and figure out how to avoid them
6. When you have a new model you like, SHOOT HOLES IN IT - and then fix them
7. Make sure you have a good EXECUTION PLAN for making sure the model changes - you will meet resistance!

My next few posts will be about each of these points, and some of the things I do to assure the output is a sturdy, viable business model.

Strategic Planning - What's Working Now

I've been paying close attention to the things my clients are doing that seem to be working right now. Remember, the economy is still functioning around at least 90% of where it was a year ago, so there is plenty of money to be had out there. Here are the strategies that seem to be working:

1. Target emerging customer desires

Emerging customer desires can be general (such as an increased desire for green products) or very specific (such as the new niche for iPhone apps). This strategy requires a bit of forethought about what's going to be cool next year, but the payoff can be huge.

2. Emphasize needs based purchases

When people tighten their belts, they still buy what they need. An emphasis on basics can pay off, but don't overlook the "downshift" appeal of less expensive luxuries, where people subsitute, say, a domestic vacation for an international one, or beer for wine.

3. Use the breather to tune up your operation

You have extra capacity and manpower right now? Prepare yourself...you may not have enough in a few months. Even if you don't expect this, it's wise use a period of low capacity utilization to increase the efficiency of your operation from the ground up - and NOT just by cutting costs! This would be a perfect time to undertake a lean initiative, for example.

4. Acquire competitors who haven't planned for a recession

Some of your competitors undoubtedly didn't prepare as well as you did for a recession. Why not take advantage of this fact and sniff around to see if any of them would be willing sellers?

New Strategic Planning Process - Drinks at the Pool

I have recently reviewed strategic planning results from a number of clients, and am developing a completely new design based on results over the past 10 years.

This new process, which I am calling "Drinks at the Pool" or DatP for short, reflects learning from some of the most successful organizations I've worked with over the past twenty years. It involves a structured process of drinking whiskey next to a swimming pool in a warm climate.

If you are interested in this streamlined and effective form of strategic planning, I have some dates available in April in Orlando, and would enjoy talking with you about how we can relax and imbibe our way to greater success for your company!

Strategic Planning - What You Should Do Differently!

Obviously, this year puts most of us in a strategic environment that is quite different from anything in the past five or ten years. Are there any things you should do differently in strategic planning this year? Absolutely! Here are a few suggestions:

1. Do make sure you are investing as much as you can in capital and acquisitions - because they are really cheap right now!

2. Do invest in your brand - again, really cheap, and the marketing noise level is low in many markets!

3. Do hire good people away from competitors that are cutting staff - good people are gold, and some of the best people may become available this year!

Here are a few other things you should NOT do:

1. Do NOT save money/time by skipping strategic planning! Now, more than ever, you need to steer your business carefully.

2. Do NOT cut key people if you can help it - they are very hard to replace.

3. Do NOT assume that current trends will continue - one thing we know is that even bad recessions don't last THAT long, so plan to position yourself well in the recovery.

If you'd like to discuss how to apply these suggestions at your business - no matter what size - please get in touch! We've helped clients improve their profits in good years AND bad since 1981 - and the Simplified Strategic Planning model can be scaled to fit any timescale and budget.

Strategic Planning: "Cancelled Meetings are Actually Costing the Economy Millions!"

In response to congressional scrutiny of lavish travel perks for top executives, many in the travel industry are pointing out that meetings and incentive travel are an important part of the economy.

Yes - and no. Yes, meetings are still the most effective way for people to network, communicate and learn, because face-to-face meeting will always have higher bandwidth than any other form of meeting (or at least for the forseeable future). Yes, incentive travel is a very efficient way to motivate employees who are performing well.

No, because, at the most outrageous level, some incentive travel is going to people who need very little in the way of incentives. I'd be happy to be in the executive suite of one of the nation's top banks - and AT THAT LEVEL I wouldn't expect any incentives unless the bank was doing well. At the C-level, incentives should go up and down with the company's stock - and a company getting massive government bailout money shouldn't hand out incentives at the C-level until that money is paid back in full. An executive in a troubled company who accepts this kind of perk - with a cost that exceeds the income of some employees - should be completely prepared to have a PR nightmare on his or her hands.

This is DEFINITELY NOT THE CASE when you go to lower levels of any organization. A manager who is delivering top performance in a business unit, and increasing bottom-line performance for his or her company, should obviously be well-rewarded for that effort - especially now. So I'm particularly concerned to see Wells Fargo adopt an across-the-board elimination of incentive travel, since that is obviously a case of throwing the baby out with the bath water. What is the likely effect of this kind of misguided reaction? Loss of Wells Fargo's best performers to competing banks who will (appropriately) continue to reward their employees who are performing well. Let's put this another way: a hard-working mortgage producer who meets measurable goals this year and makes the bank a million dollars more absolutely deserves a trip to Hawaii - and I would applaud this move, as a shareholder.

Obviously, Wells Fargo and similar organizations don't face this issue at the top level where the most egregious over-incenting was taking place. No one will cry if the executives responsible for the bank's current position jump ship - and it's unlikely another bank would want them right now. Perhaps the most difficult part of being responsible for incentive travel is looking employees - even executive level employees - in the eye, and telling them why it doesn't make economic sense for them to go to meetings, when others are going. A true test of a great manager is his or her courage to do exactly this - and I hope the folks at Wells Fargo will show that kind of courage instead of the one-size-fits-all easy way out they have taken.

Meetings and incentive travel are, in fact, a critical part of the economy. Shutting them down will have a long-term negative effect on productivity growth. Let's not hamper economic recovery just because the ROI is too difficult to measure.


http://meetingsnet.com/corporatemeetingsincentives/news/mpi_meetdifferent_0209/

Strategic Planning - Great Strategic Thinking

One of the secrets of the greatest companies is their ability to communicate the essence of their strategy to every level of the organization. Not only does this result in better co-ordination and input from every employee, but it yields behaviors at the front line of the organization that reinforce the core strategy.

Obviously, a good strategic plan that is well-communicated will go a long way to making this a reality. But there is also an element of strategic thinking that exists at the top of most organizations - and is often missing at other levels.

I'm curious...does your company communicate the strategic plan to its employees? What does your company do to instill strategic thinking below the top management level? What do you think could be done to improve this at your company?

Strategic Planning - Why your balanced scorecard isn't yielding the results you expect 4

This is the last in a series of blog articles on why your balanced scorecard isn't getting the results you expect.

The fourth main reason why you may be disappointed in your balanced scorecard program is fundamental to the limitations of the scorecard itself.

-The change your business needs involves a more fundamental shift in strategy

Simply put, you can't measure your way out of some strategic issues. To use an analogy, let's say you are part of a team of jungle explorers, and you are measuring your efficiency. You might look at "miles traveled per day". Under many circumstances, this might get you where you want to go. But there is no measurement around this that addresses the more fundamental strategic questions - such as "Are we in the right jungle?" and "Should we be in a jungle in the first place?". No matter how well you perform on your measurements, being in the wrong jungle will prevent you from succeeding - and you won't even ask the right questions if you stay completely focused on any set of metrics.

So, to sum it up - a balanced scorecard is a very useful tool, one that is quite similar to the "Measures of Performance" we have been teaching since 1981. Even more importantly, measurement can drive strategically useful behavior, so a balanced scorecard program can yield excellent results. But - as with any other management process - you need to be aware that no one approach can solve all of your business problems, and there is no substitute for a robust, formal strategic planning process.