Smart is Dumb, and..

...dumb is smart.

I was reminded of the importance of what I read about years ago in the best-selling negotiating guide, Getting to Yes, watching TURN, AMC's new drama about America's first spy ring in the American Revolution. In episode two, a Captain in the Continental army charged with creating the spy ring, serves dinner to a captured British Captain in a gesture of apparent civility between officers. At the end of the meal, the British Captain, wishing to reciprocate, gives away the exact information the the Continentals needed. The dialog:

British Captain: "Now then, to business. What is it you wish to know?"

American Captain: "Oh nothing, sir. We already know all we need to know."

BC: "Truly? You know where we mean to strike after retaking New York?"

AC: "We know you have four thousand men stationed at Throgs Neck in Brooklyn, New York, as part of your occupation force."

BC: (incredulously) "Four thousand??? (derisive snort) Try six!"

Good information is critical to success, whatever your decision-making endeavor - military, negotiations, strategy, marketing, sales... And, it requires careful planning to obtain, and validate.

Just don't let your ego get in the way.

23 Reasons Not to Talk to Strangers? Or...

...Little Red Riding Hood?

My friend and former colleague Eric Pelletier blogs in a wonderful post, Croissants and fairy tales. How storytelling makes strategy happen that

...when people in a similar context, are exposed to the same facts, they tend to arrive at the same conclusions. And so, when they're in the same organization then, they're also likely to arrive at the same conclusion about the right strategy to take the organization forward.

While he focuses on the power of getting people on board via storytelling to implement strategies, I have little doubt he'd agree about the power of creating shared conclusions on formulating a winning strategy in the first place.

In The Biggest Problem in Strategy? Mindset, I noted how the railroads in post war America missed out on growth opportunities because they saw themselves in the railroad business, not the transportation business, and how Blockbuster missed out on digital distribution, ignoring intelligence on the looming threat. While railroad efficiency made enormous strides post deregulation in 1980, it basically kept the surviving companies in the game. Rail's share of freight traffic in the US (measured in ton-miles) declined from about 75% in 1930 (A Short History of US Freight Railroads, pp3) to 28% in 2000 (Freight-Rail Bottom Line Report, pp 14). Worse, its share of freight revenues dropped to a mere 6%. Blockbuster went bankrupt in 2011, shuttering the last of its outlets in 2013. Other examples of failed strategies aren't hard to find: cell phone manufacturers Nokia and Motorola; bookstores Borders and Barnes and Noble; computer manufacturer Sun; the plethora of desktop application software firms - remember VisiCalc, Lotus 1-2-3 and Freelance Graphics and WordPerfect, all of which dominated at one time?

Storytelling works because of the evolution of the prefrontal cortex of the human brain, which helps us recognize and act on patterns. It also works, as Eric notes, because it creates a shared context, or "experience" (even if vicarious) in the tribe. 

But this pattern-recognizing ability is both a help and a hindrance, for individuals and groups. It helps tremendously when the situation is reasonably stable, but often fails us in times of significant environmental change, when we are unable to recognize new patterns. And the worst failures occur when the "tribe," and especially the decision-making leadership, is unable to jettison outdated mindsets.

The most powerful stories are the ones collectively arrived at, through shared experiences. And the most powerful of these are crises. IBM (where I worked for the better part of a decade), was able to reinvent itself in the early 1990s because the tribe members (the employees) knew there was no other choice, enabling Lou Gerstner to drive a change in the collective mindset. But it was painful, to the tune of 200,000 layoffs.

So I return to a theme readers of my blog will recognize: why not create simulated "crises" to enable decision-makers to "experience" the consequences of potential actions. Militaries, governments and airline pilots (see Chance Only Favors Prepared Minds) do this regularly. And some companies regularly incorporate scenario planning or business wargaming (among other experiential planning techniques), designed and facilitated by experts for maximum effectiveness, into strategy development.

Companies that invest in these now, incorporating the latest available intelligence on potential opportunities or threats, reap huge future returns and often avoid debilitating disasters.

The Biggest Problem in Strategy? Mindset

A question in a LinkedIn forum asks what the biggest problem people haven't yet solved in strategy?

My answer: decision-maker mindset.

In one of the most famous business articles ever, Theodore Levitt wrote about the mindset of US railroad industry in “Marketing Myopia” (Harvard Business Review, July / August 1960):

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented.

Take a more recent example, Blockbuster, which went bankrupt in 2011, closing its last stores in 2013. It didn't fail from a lack of intelligence. “The fascinating issue for me,” wrote Forbes blogger George Anderson wrote in Blockbuster Beyond the Grave “is that Wayne Huizenga and his executive team were well aware of the risks from digital distribution of media and discussed it at times.”

Given the lack of action, the Blockbuster executive mindset was clearly that not only would the near-term future be like the present, but also that they would have enough time to respond to a "real” threat, before a crisis hit. But by the time it did, it was too late.

Mindset is of course, useful. It helps us interpret the barrage of new information that bombards us daily. And it works, so long as underlying conditions remain essentially the same. But it often fails us in times of radical change (brought on by external factors such as changing market or economic conditions or new technologies, or internal decisions, such as launching new products or entering new markets). Unfortunately, senior executive decision makers, because of their long years of experience – they "know" the business, the customers, the competitors, the technology and the industry – are resistant to changing their mindsets.

So, to the question, the real challenge for strategy professionals becomes how to change decision maker mindsets. Unfortunately, most traditional “strategy” processes fail in this critical regard (we could have another whole discussion on whether most companies really practice strategy, or whether they practice planning and budgeting…). Given human nature, changing long- and deeply-held mindsets requires a crisis. As English author Samuel Johnson said, "nothing so focuses the mind as the possibility of being hanged in a fortnight."

But rather than awaiting a real crisis, forward-looking organizations find ways to create structured "crisis" experiences, where decision-makers collectively evaluate intelligence, develop new insight and assess the strategic and operational risks of changing customer needs, new forms of competition, changing technologies, new discoveries and emerging government policies.

This also means strategy professionals must change their own mindsets, from “producing” strategy documents and presentations and overseeing planning processes, to creating experiences that enable decision makers to create their own insights. Once they, and not the strategy professionals, “own” the insight, they will change their mindsets. And once their mindsets change, developing winning strategies becomes, if not easy, at least straightforward.  

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Creating Winning Strategies by Changing the Dialogue

In far too many companies, "strategy" has become a euphemism for planning or budgeting. The underlying - and unstated - assumption is that marketplace conditions are largely static: the future will be largely an extension of the past and, thus, all we need to do is optimize our current operations.

This assumption, unfortunately, has proved fatal in industry after industry. Just a few years ago, Motorola and Nokia were major cell phone players, Sun was a significant server manufacturer, Blockbuster was the source for many of us for at-home movie viewing, and Borders and Barnes and Noble were where we shopped for books...

To drive serious strategic discussions, you first need to accurately assess your source of competitive advantage. Here's a framework we've found useful:

Source of Competitive Advantage (worst to first):

1. Commodity with cost disadvantage

2. Commodity with cost parity

3. Commodity with 10% to 20% cost advantage

4. One-year offering development lead

5. Two-year offering development lead

6. Brand, patent, copyright

7. Owning the customer relationship

8. A string of dominant positions (for example, cost advantage + development lead + patent protection

9. Managing the value net or ecosystem

10. Owning the industry standard

Importance of Marketplace Insight

The first two, of course, confer no competitive advantage; unfortunately, a realistic assessment of their true competitive position would surprise many companies... Hence the importance of helping decision makers develop relevant marketplace insight. Answers to these critical questions will help:

• What are customers really buying? How are their preferences changing?
• What new initiatives are current competitors undertaking: operations, innovation, marketing, sales, customer service?
• What economic or regulatory trends will impact the industry?
• Which emerging competitors have the potential to change the nature of competitive dynamics?

Assessing the Consequences

Once the decision makers have grappled with these issues, they'll need to assess the impact on the organization, including:

• Systems and processes: Do we need to change our offerings development or production processes? Which need to be re-engineered? Which can we outsource? What support do we need from IT?
• People and skills: Do we need to retrain our existing workforce? Change our hiring requirements? Restructure the organization?
• Culture: Do we need to change the behaviors? If so, where? Only in specific functions? Or everywhere in the organization?
• Incentives: Do we have the right incentives in place? And how will we align these across the organization?
• Profits: How will we make money in the future? How can we protect our profit streams?

Creating Winning Strategies

With all of the above in hand, decision makers can proceed to the important work of re-allocating resources to create:

• Differentiated value propositions
• Innovation, operational and go-to market initiatives
• Organizational alignment

Challenging work, all this, since it means the nature of the strategic discussion must change, from planning / budgeting to strategy, from past to future and from business-as-usual to new business models. Importantly, it means changing mental models - how decision makers interpret information about the marketplace. And this, in turn, means creating opportunities for dialogue and debate, v. reading reports.

But it could mean the difference between organizational life and death.

Will Your Assumptions Cost You $24 Billion?

As I passed a shuttered Blockbuster store, one of the last to remain open, I wondered what assumptions its executives used to guide their decisions.

Blockbuster filed for bankruptcy in 2011, closing its last stores in 2013, in the face of competition from Netflix, Vudu, Hulu, Amazon.com and the cable / satellite providers. Dish Network bought Blockbuster's streaming service from the bankruptcy court for $321 million. In contrast, Netflix' market cap is worth over $24 billion today - and Blockbuster could have bought it in 2000 for a mere $50 million.

The Blockbuster executives didn't fail from a lack of market intelligence. NetFlix was founded in 1997 and began video streaming in 1999, followed by Vudu in 2004 and Hulu in 2007. And Blockbuster didn't even enter the DVD-by-mail business until 2004, long after Netflix had proven its success. Forbes blogger George Anderson wrote in Blockbuster Beyond the Grave:

“The fascinating issue for me is that Wayne Huizenga and his executive team were well aware of the risks from digital distribution of media and discussed it at times,” wrote loyalty marketing expert Bill Hanifin in a recent RetailWire online discussion.

Given their lack of action, they clearly operated under two critical - fatal - assumptions: not only would the near-term future be like the present, but also that they would have enough time to respond to a "real" competitive threat, before a crisis hit. But by the time it did, it was too late.

We all have assumptions, of course. They help us interpret the barrage of new information we are bombarded with daily. And they work, so long as underlying conditions remain the same. But all assumptions are susceptible to cognitive bias, particularly anchoring, where humans rely too heavily on the first piece of information they receive, using that as the basis for subsequent decisions.

But assumptions often fail us in times of radical change, when they need to be tested to ensure continued validity. Unfortunately, senior executive decision makers are the most resistant to challenging their assumptions. Because of their long years of experience, they "know" the business, the customers, the competitors, the technology and the industry. In turn, this leads them to lend more credence to facts or information that reinforce their world view (confirmation bias).

Given human nature, changing long- and deeply-held assumptions requires a crisis. As English author Samuel Johnson said, "nothing so focuses the mind as the possibility of being hanged in a fortnight."

But rather than awaiting a real crisis, forward-looking organizations create "crisis" experiences, where decision-makers collectively evaluate intelligence, develop new insight and assess the strategic and operational risks of changing customer needs, new forms of competition, changing technologies, new discoveries and emerging government policies, in structured situations.

They can then decide to weigh anchor - or even break the chains - and navigate to a new destination, before the storm hits.

How Good Are Your Marketplace Insight Capabilities?

Since posting Insight is Where the Game is Won and Lost, many have asked "how can we assess our insights capabilities to identify where to focus?" Building on both internal work I did in the early 2000s, and an article published independently by Herring and Leavitt in 2011,* here is a framework you can use to quickly evaluate your organization's insights capabilities. There are five dimensions to rate your organization on (directions at the bottom):

• Insights culture
• Sources used to generate the information base to help create insights
• Marketplace focus
• Personnel
• Early warning of emerging threats and opportunities

The organization's culture sets the tone for insights creation, which can address markets, customers, technology or competition. Initially reactive (Level 1), executives ask for data and task available personnel to gather information for a presentation or meeting, invariably sourced from easy-to-access published data, such as annual reports, existing market research or industry analyses. The initial focus is on traditional markets, customers, technology and competitors.

Soon, a frustrated executive or ambitious analyst determines that standardized profiles, newsletters and databases will improve organization awareness. Dedicated, often part-time individuals (becoming full-time as demand increases) standardize outputs, create delivery schedules and expand the fact base to include subscriptions to specialized industry publications, and start to focus on partnerships and alliances which impact growth and the ability to compete (Level 2).

Success begets more challenging questions, such as what does this data mean? how will the trends play out? and what emerging customers, technologies and competitors should we be concerned about? Improving capability requires teams of skilled analysts under a functional manager (Level 3). Since the answers are rarely contained in published data, analysts must incorporate validated opinion and observations from individuals who don't have the time to write it all down - customers, channel partners, R&D and sales personnel, their own executives, and industry observers and experts.

The expanding organizational knowledge base generates new requirements: what are the implications of these projections? what options do we have? what should we do about them? how might customers or competitors react? how feasible is a new technology? Mature organizations assign or recruit a senior leader to answer these, using increasingly sophisticated research and analysis techniques and a well-nurtured source network. And the organization expands its focus to better understand the interactions within the industry value chain and how these will play out (Level 4).

Finally, a radical shift occurs, from an emphasis on producing reports to facilitating dialog: the organization structures insights-driven strategic decision-making sessions (Level 5). Key executives interact directly with well-prepared internal and external experts, to determine how to best position the enterprise for future success. Topics might include identifying and evaluating the strategic risks of potential new initiatives, untapped sources of customer value, the next generation of customers, emerging competitive threats (frequently through business wargames) and new growth opportunities.

The importance of early warning. 

The organization's ability to avoid surprises - a major executive concern - increases with the sophistication of its insights capabilities. Fledgling operations frequently start by looking at any of a variety of "megatrends" (example here), "boiling the ocean" to try to find a something the organization can act on. They progress to tracking studies, targeted assessments of specific marketplace issues and systematic monitoring of the periphery (emerging customers, competitors and technologies). But real breakthroughs occur when organizations form heavyweight teams, consisting of both internal and external experts, to address critical emerging issues through innovation and new business models.

How good is your organization's insight capability? Identify where it is in each category, sum the associated levels, and divide by five. If it is:

• below 2.0, it is drowning, with little chance of a lifeline in the next round of budget cuts
• between 2.0 - 3.0, it is treading water, with increasing odds of getting a lifeline
• between 3.0 - 4.0, the shore is in sight, but beware of undercurrents
• above 4.0, the beachhead is secured and the insights function is capable of making a real difference

Now ask what will it take to improve? And, importantly, what will be the impact on the business?

* Herring, Jan and Judith Leavitt, "The Roadmap to a World-Class Intelligence Program," Competitive Intelligence, January - March, 2011 

Growth is Hard

Columbia Business School professor Rita Gunther McGrath writes that only 8% of the 5,000 companies with over $1 billion in revenues grew sales by 5% annually over a 5 year period, and only 4% grew net income by at least 5% annually.* Compounding the challenge are the prevailing conditions found in many markets:

• The new product failure rate is repugnantly high: estimates range from a minimum of 40% to as high as 95%; 

• Few completely new categories have emerged in recent years;

• Risk aversion results in few real disruptive market strategies;

• Rivalry is intense and along many dimensions;

• The role of channels is becoming ever more pervasive and powerful; and

• Cost pressures continue to escalate, absorbing significant company resources to address.

Companies can beat the odds through a structured approach (chart):

• Marketplace insight – What is the customer need or problem a new growth initiative will resolve? How have recent competitive and supplier initiatives and technological developments impacted customer needs? What is going on in competitors’ minds, what are they planning, and how will they respond to our initiatives?

• Opportunity assessment and selection – How can we extend current capabilities to address new opportunities or change the nature of competition? How do we develop and test new growth opportunities beyond our current strategy? Which customer segments will we choose to serve? Which will we not serve?

• Strategy – How do we resolve a market problem / need in a valuable and differentiated manner? What is the value proposition? How will we capture value, what scope of activities will we perform and how will we protect our profit? 

• Organization alignment – What processes, systems, structures, and incentives need to be changed? What will inhibit successful execution of the growth strategy: culture, mindsets, resources, incentives?

• Execution – What specific actions will deliver the product / offering and profitably capture value? How will we measure success? How will we monitor results?

*McGrath, Rita Gunther, “How the Growth Outliers Did It,” Harvard Business Review, January – February 2012