Category Archives: Strategic Planning

DARKNESS AND DECISION MAKING MODELS

future-focusThe famous psychologist Carl Jung once said that, “enlightenment is not imagining figures of light but making the darkness conscious”. So how can business people do that? Every business decision is based on a model of projected facts and circumstances and then ultimately a strategy to resolve the matter. But to create a great strategy requires a great decision-making model. Simply stated, decision models are designed to create a structure of thinking and dialogue so that you are better prepared to create a sustainable competitive strategy. Have you ever heard of the expression “that’s a solution in search of a problem” or “we’re climbing the right ladder but up the wrong wall”? These expressions come about because too often the decision-making model is not known, much less ever discussed. So a critical decision model is replaced sometimes with such a superficial approach such as the “traditional” model of “that is the way we have always done it” to the “different” model of “its new and improved” – and every construct in between. Yet, looking back, it’s the decision-making model itself that sets the course for the ensuing disastrous results [i.e. think Titanic].

So what are some of these key decision models. Some of my preferred decision-models are the following:

1. Johari- window
2. Flow
3. Long Tail
4. Black Swan
5. In-On Model
6. Avoiding Practical Drift
7. Mechanism Design Model
8. Balcony – Dance Floor [or System 1 & 2]
9. Deciding How to Decide
10. De Bono 6 Hat Model

It is important to know is that these are key tools to help you make decisions beyond what you are perhaps unconsciously using now. So if you don’t know, don’t use, or don’t KNOW HOW to use, these various models, then you are perhaps accepting more risk by not taking advantage of some key tools that will allow you to make better decisions. ”So what” you may say? Have you ever said to yourself “What happened”? The more tools you have at your disposal, the less often you will need to ask the question.

Carl Jung would concur that decision-making requires one to shine the light on the darkness of the way you think.

WHAT KINSHASA ENTREPRENEURS CAN TEACH US.

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In his most recent National Geographic magazine article [September edition] entitled “Kinshasa, Urban Pulse of the Congo“, the author and photographer, Robert Draper, wrote that Kinshasa, the capital city of the Democratic Republic of the Congo, is a “marvel of dysfunction”.  A local author Lye Yoka that he interviewed quipped that “Kinshasa is a city where students do not study, workers do not work, and ministers do not administrate”.  Bribery and extortion are the key government funding mechanisms of choice.  In summation, Kinshasa governance is basically controlled chaos for a population of ten million residents.

So what does work in this mind-boggling dysfunctional system?  Mr. Draper concludes that the “miracle’ of Kinshasa is that it is full of “compulsive entrepreneurs” who make it work despite little government or authority to govern.  How do they do it? According to those he interviewed, the underlying strengths of Kinshasa entrepreneurs are their “creativity, improvisation, and passion”.  He concludes that “this is a city of frenzied entrepreneurship, where everyone is a salesman of whatever merchandise comes along, an uncertified specialist – self employed, self styled – a creator amid chaos, an artist in a shed”.

So is this true entrepreneurship in Kinshasa – or rather desperate people doing desperate things, in a desperate place, and what can we learn from it?  In the book  “The Illusions of Entrepreneurship”, the author – Professor Scott Shane – provides significant entrepreneurship research in America that debunks many commonly held myths that are important to correct first. Some highlights, generally speaking, are as follows:

1.            The typical entrepreneur in America is not young and special.  He is middle-aged person just trying to make a living.

2.             Psychological factors are not significantly different from an entrepreneur and a salaried employee other than that they didn’t want to work for someone else.

3.            Starting a new business is based more on what you know rather than who you know. The highest ranked centers for entrepreneurs is not places like Cambridge Massachusetts or Silicon Valley, CA but instead its Vermont.

4.            The majority of entrepreneurs are wrong about how to run a business so it is better not to follow a new business. But they often get better.  Starting a company is not linear but rather evolves over time.

5.            Over half of new businesses are a one-person operation that offer the same product or service that is already in existence so there is no competitive advantage.  Many entrepreneurs do fail – but many become successful as well.

Many entrepreneurs in America tend to lament that “if I just had more funding, I could be successful”.  But taking a page out of the Kinshasa entrepreneurs book, they may be better served by starting with their own “creativity, improvisation, and passion” skills to drive their business growth.  Why?  Creativity, improvisation, and passion are start-up resources that you don’t need to reach for outside, you simply need to reach inside yourself.  How?  As the old adage goes, “if you change the way you look at things, the things you look at change”.

BAD NEWS PIVOT

BAD NEWS In his seminal book the author Mark Nepo quotes a well-known African saying “If you don’t know where you’re going, turn around and make sure you know where you’re coming from.” So where is your business coming from the last 6 months?  Here is a simple “look back” test that I call the “bad news test”.  Take some recent bad news at your company and carefully analyze how it was addressed at all levels. From the minute the bad news was learned ask the following questions: How did you get the bad news in the first place [e.g. customer, an employee, a report]? How did your organization handle the bad news initially?  After more information was uncovered, what bottom up system was enabled to address it specifically?  Was there also a top-down, high-level strategy to address this particular bad news in relation to other bad news throughout the year? Who was invited to those strategy sessions?  What was the follow-up to see if the specific fix was accomplished?  Finally, what overall new organizational system [“lesson learned”] was instituted to avoid a similar pattern.  Bad news is possibly the single most important front-line means to improve your company.  Why? You really can’t do quality strategic planning without looking back at your bad news data.

Fourth of July holiday is an important holiday for many reasons.  Time to celebrate and recalibrate.  As Ron Heifetz and Marty Linsky say in their book “Leadership on the Line”, make time to get off the dance floor, and instead get on the balcony. Put another way, having just spent half a year working IN your company, you need to spend some time working ON your company.  A serious mid-year review provides the opportunity to look at your operational, organizational, financial, asset protection/estate and strategic/risk management plan.  How are doing so far this year?

So celebrate your successes, and search for objectives that have not tracked your mid-year goals. The good news is that there is still half a year left to make the corrections you need to achieve your annual goals. The bad news is that you realistically can’t delay any longer.  So really declare your independence by taking stock of where you are – and compare that data to where you want to be by year-end.  Ask “What are your mid-year top three [3] challenges”?  Then really make them a top priority by meeting with your team of trusted advisors.  Why? Your greatest risk is simply what you don’t know.  So start by simply asking strategic questions to your strategic teammates.

Are You a Strategist for a Different Tomorrow?

Flowchart on a chalk boardThe question that Cynthia Montgomery poses at the beginning of her Harvard University Entrepreneur, Owner, & President Program [“EOP”] for business owners and senior executives is simply “Are you a strategist”? Why? Her mission is to take her class of executives and show them, through the many case studies she has written about in her book “The Strategist – Be the Leader Your Business Needs”, how to create a sustainable strategy for you company.  So what is a strategist and why become one?

A strategist is not a “super manager” as the author calls it.   A super manager is an “action-oriented problem solver for whom difficulties are daunting but solvable challenges”. The biggest risk of believing in the myth of the “super manager” is that super managers “tend to focus on what they can control and ignore what they cannot control”.  Put another way, the Nobel Laureate Daniel Kahneman, in his book “Thinking Fast and Slow” may have called this the “inside view” – the tendency to ignore outside data to engage in independent decision-making.  Super managers choose to ignore fierce competitive outside forces as not as important as their management inside capabilities to overcome them.

So how do you “become” a strategist?  The author believes that you must first begin with creating a company’s “purpose . . . why it exists, the unique value it brings to the world, what sets it apart from other companies, and why and to whom it matters”?  At its core it’s your sustainable competitive advantage.  One way to determine if you have a core purpose is to ask yourself “if your company disappeared today, would the world be different tomorrow”?  Once you ascertain your core purpose you then must plug in each component of your company and ask yourself, in a binary fashion, does the specific business activity advance your purpose or does it detract from your purpose of creating a real system of value creation.  If it detracts from your purpose, stop doing it.

So how do you “own” your strategy? The author calls it the “strategy wheel”. It consists of your Products and Target Markets, Marketing and Service, Sales and Distribution, Manufacturing, Procurement, Human Resources, Information Systems, R&Ds, and Finance.  Each “system” needs to be impacted by the center of the wheel – your core purpose. To digress, your “purpose” answers the question of why you exist.  Your “strategy wheel” is HOW you are unique in each component.  Without a core purpose tied to each component of your strategy wheel activities, you will be ineffective.

To be a strategist you must be a leader.  At least once a year a company’s board of directors or LLC managers/members meet to look back at what happened over the past year, and then look forward to how it wants to operate the company next year.  Too often it is a mechanical exercise that involves reviewing the financial statements and tax considerations but not much else beyond asking how you can save money.  A good way to avoid this mechanical approach is to first ask yourself “are you the company strategist”?  If so, then ask what is your company strategy for a different tomorrow?

Why Green Hair is your Company’s best strategy?

SPRINGGREENThe famous writer, business consultant, and anthropologist Angeles Arrien was quoted by Mark Nepo as saying that her grandparents told her to “never hide your green hair, they can see it anyway”.  So when a company starts a new plan for the year, a new project, or a new product, the question they need to ask is how does this improve the overall unique strategy of the company – the “green hair” so to speak – that makes each company different.

The problem is many companies ask the wrong question, and therein lies the biggest mistake they will ever make every time they do so.  What is it?  In the book “Understanding Michael Porter” by Joan Magretta [2011 – HBR Press]  Magretta interviews the famous Harvard University Professor and who responds that the “granddaddy of all mistakes” is confusing marketing plans or operational effectiveness [“OE”] plans with overall corporate strategy.  Why? Simply because trying to “be the best” by definition presumes you are providing goods or services the same as your competitors which ultimately results in what he considers a “race to the bottom”.  Strategy links your demand side with your supply side to create a sustainable competitive advantage.  “Strategy is about the whole enterprise, not the individual pieces” as Porter explains.  Put another way, “better” in strategy parlance means different or unique – your “green hair” so to speak.  There is no one path to success, just many interrelated activities that make your company unique.  The author cites many examples such as IKEA, Starbucks, Apple, etc.  All these companies practice the concept of overall company strategy, not just marketing strategy, not just OE strategy. Porter calls it a framework, not as linear as an economic model and not as specific as a case study.  Once you decide what your unique value proposition is, then you need to communicate and ultimately achieve alignment with your organization, both your inside team and your outside team.

So how do you do it?  Porter states that every 12 to 24 months all companies need to have a formal strategic planning process, with quarterly reviews. But don’t confuse your business model with your business strategy.  Your business model should ask the question how you will generate income and control your expenses, basically your P & L Statement that you review with your accountant [when you do your tax returns].  Your business model looks back and analyses your financial data.  Conversely, your corporate strategy looks forward.  It asks the question – what is your sustainable competitive advantage?  How do your relative prices and relative costs compare to your competitors? What value proposition and value chain can you tailor to make you different.  In a nutshell, Porter states that your business model is a basic “analyzing” step, but your strategy is the next level “forecasting” step that will make you viable.

So when do you do it? Each year the management of a company gets together to have an annual meeting to decide the strategy for that year. Each year has its own challenges and opportunities.  If all that these meetings produce is budgeting and growth rate projections than Porter says all you have achieved is a business model, but you have done no debate and decision-making on your competitive strategy.  Your competitive advantage  is already known by your customers –  that is why they picked you or not.  Your failure to leverage it will ultimately result in your competitors using it against you.  It’s that simple.  So sit down with your trusted advisors who can facilitate a dialogue to help you create a framework for your company strategy – you know – the one that starts with “Our company’s green hair is  . . . “

If you don’t, it’s the biggest mistake you will ever make, because your competitors are doing it – and they know what your green hair is.

Corporate Governance vs. Management – Who is Keeping Score?

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Annual board of directors meeting season is just beginning for companies on a calendar year basis.  Some companies took the opportunity to look at how they do business.  Many small companies have what is referred to as their OPERATIONAL PLANS.  As it definition states, this is how they “operate” their daily business working IN their company as a W-2 employee. Congratulations, that is a good start but it is not a good finish unless you just wanted to create a job for yourself and others? If not then you need to work ON your company.  In fact, working ON your business is just as important because you want more than income, you also want profit and equity [“ROE”] which are the results of ownership work – not just employee work.

The biggest mistake you will make this year is equating working IN your company with working ON your company, according to the well-known author Michael Gerber of the book The E-Myth Revisited.  He states that P&Ls and tax data are static because they look backwards – not forward. Ownership work gets beyond Income only and into Profit and Equity [ROE] strategy. And isn’t that why you went into business in the first place – to go beyond income?  You simply can’t be effective long-term until you integrate what you do IN with what you do ON your company. So stepping back and doing some critical decision-making is the key. But that raises the question of who does it and how to do it?

So let’s answer the first question of who is responsible for governance?  In a corporation the board of directors sole job is to “govern” the company.  So HOW does a board “govern”?  The answer lies first in defining the difference between management and governance.  Most people have a good idea of what management is so I will restrict my remarks to governance issues.  Some top 10 good governance director practices are the following:

1.            Strategic Planning addressing sustainability, competitive advantage, etc.

2.            Corporate performance and valuation planning

3.            Risk and Crisis Oversight [e.g. data security]

4.            Oversight of company core principles, ethics and culture

5.            Oversight of human resources [e.g. management] and recruitment of directors

6.            Financial Oversight [e.g. review of P&L, Balance Sheet and Budgets]

7.            Oversight of sustainability matters and stakeholder relations

8.            Create/approve company-wide policies and procedures.

9.            Manage Board of Directors education, meeting processes, committees, etc.

10.             Oversight of corporate social responsibility

I recommend that these key governance issues be addressed by your directors.  (See also NACD Directorship Board Intelligence, survey report dtd 1/2011, p. 40).  Managers manage the company.  Directors govern [direct] managers. They are both important but very different.  The Massachusetts Business Corporation Act [“MBCA”], Section 8.30(a) defines the standard a director must comply with.  It states, in pertinent part, that a director must, generally speaking, act (i) in good faith, (ii) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and (iii) in a manner the director reasonably believes to be in the best interest of the corporation.

So how does a director comply with this legal standard?  The comment section to Section 8.3 provides advice by stating: “The process by which a director informs himself will vary but the duty of care requires every director to take steps to become informed about the background facts and circumstances before taking action on the matter at hand.   [However], a director may rely on information, opinions, reports, and statements prepared or presented by others as set forth in Section 8.30(b).”

So who are these “others” referred to?  Section 8.30(b) lists the individuals and groups (the “others”) that a director may rely on.  Generally speaking, they are as follows: (i) corporate officers or employees whom the director reasonably believes to be reliable and competent with respect to the information, opinions, reports or statements presented, (ii) professional advisors as to matters within their professional competence, and (iii) a committee of the board, where the director is not a member, if the director reasonably believes the committee merits confidence.

But there are two major caveats.  The first is that “a director so relying must be without knowledge concerning the matter in question that would cause his reliance to be unwarranted”.  The second is that “. . . in order to rely on a report, statement, opinion, or other matter, the director must have read the report or statement in question, or have taken other steps to become familiar with its contents.”

In summation, directors must become actively engaged in the governance of the company or else they should resign.  So take a look at the recommendations above and ask yourself “is your board living up to the legal standards of the laws in your state”?  If not, your company is at increased risk.  Haven’t started yet to address the governance issues of your company? I suggest you do so before a third-party discovers you are running a high risk business – and that high risk is your decision-making – or lack thereof!

The 2011 Metaphor: Sputnik or Confucius?

The Unites States and China have always rallied their respective countries with a good metaphor.  In the late 50’s, when the Soviet Union launched their first satellite in orbit the United States responded to the challenge by calling it a “sputnik moment”. Today, China’s attempt to reconcile its controversial past and promote a global image of cooperation, just erected a statue of Confucius on Tiananmen Square. One metaphor focuses on energizing, the other on harmonizing. Both are important in following strategy at a global level. Why? Take for example the Executive Order signed by President Obama on January 18th.  It states as its premise that, to reform government regulations to ensure maximum benefit, each agency “may consider [and discuss qualitatively] values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts”.  Regulatory integration and innovation are not a zero sum game.  The key competitive advantage of great companies is their ability to synthesize historical core values with groundbreaking products and services. So in 2011 lets energize AND harmonize and use the combined metaphor to SHOW the world HOW to make positive change.

The Great Debate: Data versus Decisions

The Economist Magazine recent article addressed the seminal problem of what risk will hurt you the most – either what you don’t know or what you know but don’t interpret properly and implement remedial action.  The article focus was on the shadow banking system [non-bank financial systems] and the recent recession. But the lesson learned [or not] was that the key economic risks were not buried in data but rather in “plain view” – inflated housing prices and some banks low capital level. But “plain view” facts are not literally in plain view if you do not see them.  Some refer to this as black swan risk management. Whatever you refer to it as, the circumstances of these past few years is a reminder that if you change the way you look at things, the things you look at change. If so, how are you changing the way you look at 2011?

Values and Traditions

Values and traditions are two words that come to mind when we think of the upcoming holidays in December. But these are also the two words that the Economist magazine [October 30th] cited as the most important “intangible things” for good corporate governance [versus “ideal constitutions”]. Why?  Because recent studies show that corporate culture trumps corporate checklists when it comes to predicting the success of a company. Unlike check the box rules, a good corporate culture fosters good habits.  So what values and traditions do you want to carry forward into 2011- and which ones do you want to leave behind in 2010? December is a good time to “mull it over”.

A Scary Question!

How do you know that the answer to your current problem may just be very simple but, because you assumed it was too complex or expensive to resolve, you were afraid to ask for help?  Conversely, how do you know that an issue you have that seems simple may, in fact, be a whole lot more complicated – so you can’t afford not to solve it or it will get even worse?  How do you know unless you ask?  Here is one example. The saying goes that great companies are bought – not sold.  If so, ask yourself why anyone would want to buy your company? If so, why? If not, why not? How do you know unless you ask?