Archive for August, 2011

Bad Strategy – How To Spot It

Tuesday, August 30th, 2011

Many business owners are in the middle of their business planning or budgeting process for 2012.

So, for those pressed for time, I’ll summarize a timely article by Richard Rumelt, adapted from his new book “Good Strategy/Bad Strategy: The Difference and Why It Matters”, and published in the McKinsey Quarterly.

Here are Rumelt’s 4 hallmarks of bad strategy.

1.    Failure To Face The Problem

A strategy, according to Rumelt, is a response to a challenge. But if the challenge isn’t defined, it’s impossible to assess the quality of the strategy. And if you can’t do that you can’t reject it as bad or improve on it.

For example in 1979 International Harvester produced a Strategic Plan which was thorough and rich in detail. The overall direction was to increase share in each of their served markets while reducing costs.

Unfortunately the Plan didn’t address Harvester’s main problem – its inefficient work organization. This stemmed from grossly inefficient production facilities and the worst labour relations in US industry.

This problem could not be fixed by driving people to increase market share or by investing in new equipment. Harvester survived for a couple of years but began to collapse after a disastrous 6 month strike. The rest, as they say, is history.

2.    Mistaking Goals For Strategy

Rumelt describes a CEO who had a plan to grow revenues 20% a year with profit margins of 20% or more.When asked how this aggressive plan would be achieved, the CEO replied “With the drive to succeed – by picking stretch goals and pushing until we get there”.

The CEO then quoted Jack Welch who said “We have found that by reaching for what appears to be the impossible, we often actually do the impossible.” But he had forgotten that Welch also said “If you don’t have a competitive advantage, don’t compete.”

Rumelt argues that a company needs a unique internal strength or an opportunity created by a change in the industry for this type of growth. Stretch goals and motivation alone are not enough.

He illustrates the inadequacy of this “push until we get there” type of thinking, by referring to the great pushes in the 1914-18 war. The troops who were slaughtered didn’t suffer from a lack of motivation – they suffered from a lack of competent, strategic leadership.

3.    Bad Strategic Objectives

This can take the form of a long list of things to do – often labeled strategies or objectives. These lists result from planning sessions in which the focus is on doing a wide variety of things, not a few, key things.

Rumelt refers to the planning committee for a small city whose strategic plan contained 47 strategies and 178 action items. Action item number 122 was “create a strategic plan.”

Another type of weak strategic objective is one that is “blue sky”. It’s typically a restatement of the desired state of affairs or the challenge- and skips over the fact that no one knows how to get there.

Good strategy works by focusing energy and resources on a very few, pivotal objectives and builds a bridge between the critical challenge and action. Thus, the objectives a good strategy sets stand a good chance of being accomplished.

4.    Fluff

The final hallmark of bad strategy is a restatement of the obvious, combined with a generous sprinkling of buzzwords. Rumelt’s example is a retail bank which said “Our fundamental strategy is one of customer-centric intermediation.”

An intermediate is a company that accepts deposits and then lends the money – in other words, a bank. The buzz phrase “customer centric” could mean that they compete by offering better terms and service. But their policies didn’t reveal any distinction between it and other banks.

So “customer-centric intermediation” is pure fluff. Eliminate it and the bank’s fundamental strategy is being a bank.

5.    My final words

In my next post I’ll finish summarizing the article and talk about why there is so much bad strategy.

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Are Your Core Competencies Coming – Or Going?

Monday, August 8th, 2011

A phrase that we often hear being bounced around the offices we visit at this time of year is “core competencies”. This is because we’re getting into annual business planning or budgeting (or anything else you call it) time.

And, as any good book on business strategy will tell you, “core competencies are a potential foundation for a new or revised strategy.”¹ Why, because they are what the company is uniquely good at.

But there are 2 important caveats. To confer advantage they must be valued by the company’s customers and they must make the company better at what they do than its competitors.

1. Beauty and the eye of the beholder

If customers stop valuing what a company is good at the owner will know quickly enough because sales will fall. While a sudden drop grabs attention, a slow decline is easier to overlook – and, therefore, more dangerous.

But how does a company know if its core competencies are more highly valued than those of its competitors? The answer, at the risk of sounding glib, is to ask.

Let me back up a step, however. Owners and their management teams have been known to identify the company’s core competencies based solely on their own opinions. But beauty, as they say, lies in the eye of the beholder.

I’m not saying they can’t do it. What I am saying is that they have to get some external, objective, third party input to confirm that they actually have hit on the core competencies. That input can be in the form of customer surveys done either by the company or by consultants on their behalf.

2. Relative performance but………

The next step is to list the core competencies, come up with a rating scale and the names of 2 or 3 key competitors. Now the business owner can get a reading on the company’s relative strength in these key areas that confer advantage.

The best assessment of where the company is strong or weak compared to its competitors will use a blend of input from employees, customers and people who know the industry. This type of assessment is comprehensive, thorough and, hopefully, objective. And it may be adequate.

However it has one important shortcoming. It represents a snapshot in time. And so it may disguise areas for concern.

It can, for example, show that the company is rated more highly than its competitors in one or more key competencies. But the competitors may be gaining ground.

3. Now you have it

So the assessment should be strengthened by the addition of a question about the trend in each company’s performance. Are the competitors getting stronger – or weaker in key areas?

Then the business owner knows not only what the company is good at, but how good they are and if they’re getting better or worse. Invaluable input to the annual business planning or budgeting (or anything else you call it) process.

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¹ I happened to choose “Strategy: Create and Implement the Best Strategy for Your Business”, Harvard Business School Press, 2005

Strategy And Magic

Tuesday, August 2nd, 2011

One of my mantras is “strategic planning is based on assumptions”. It has to be because it’s about predicting what will happen in the future – and no one has been able to do that accurately yet.

To make assumptions you have to collect data and then think about it. This type of thinking is different from solving day-to-day problems. So we use various techniques to help participants in strategy sessions “think differently”.

But the other day a friend of mine made me realize that magic can also teach us some lessons about how we think and the biases that affect us all.

1. Differences in interpretation.

Different people interpret the same data in different ways. And who’s to say which way is “wrong”.

For example my magician friend, Dan Trommater (who is doing exciting things using magic for leadership training) does a trick in which a member of the audience signs their name on a $20 bill which he then makes disappear.

Later, they open a box that has been in full view the entire time and inside the box is a lime. When Dan cuts the lime open, the signed dollar bill is inside it. When Dan asks the audience for their theories about how he could have done it, he gets several different answers.

Everyone saw the same thing (or received the same data visually) – a signed $20 bill disappeared and then reappeared in the centre of a piece of fruit. But different people interpret the “data” in different ways – and arrive at different conclusions.

Again who’s to say which conclusion is right and which is wrong? (Dan says he’s used at least 10 different ways to get the bill into the lime.)

2. Differences in perception.

We also see data through the lens of our own perspective.

In another part of his act, Dan illustrates the power of perspective by bringing a volunteer on stage. He or she sees Dan cut pieces from a length of rope and then restore it “by magic”.

Meanwhile, out of the volunteer’s sight, Dan shows the rest of the audience how the “trick” works by showing concealed bits of rope which are cut in place of the long piece.

So the audience sees the “trick” while the volunteer experiences the “magic”. And they have different perceptions of reality because of what they see.

3. How do you deal with these differences?

These are examples of only 2 of the many factors that allow 2 people to take the same piece of information or data and perceive it or interpret it in different ways.

We have to accept that they exist and that their effects can’t be prevented.

So, when business owners ask teams of their people to think about important matters – e.g. when they’re involved in strategic planning or annual business planning – here are a couple of “must do’s”.
• Get the very best data available with which to fuel their thinking.
• Suspend judgement when someone says something that seems “out in left field”.
• Take the time to understand how they came to their conclusion.
• Challenge your own interpretations, perceptions and other biases.

By the way, if you have the opportunity to see Dan perform, watch the rope trick carefully because there’s a sting in the tail.

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