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Where strategy gets real

A company’s budget shows what its strategy really is.

Geoff Wilson

Imagine a world where you have full view of all budgets and resource allocations in every organization you could possibly want. You could read any company’s press releases, strategic statements, and marketing collateral—and then immediately assess whether that company is doing anything special with its resource allocations to reflect its “special-ness.” What do you think you’d find?

Let’s take a topic like share buybacks. What if a company told you its strategy was to accelerate share buybacks when prices are high, and to slow them when prices are low? Would you call that company crazy? Of course. Nobody says that. Yet FactSet publishes this:

Here’s the CliffsNotes version of this chart: S&P 500 executives and boards execute vastly more share buybacks (blue bars) when share prices are high (purple line) than when they’re low. Though there are many explanations for this seemingly nonsensical reality (most importantly the timing of capital availability in the cycle), the fact remains that corporate leaders exhibit the exact same pro-cyclical bias that any investor on the street does. It turns out that manias for tulips, dot-com stocks, real estate, and share buybacks have this in common.

Now, suppose an honest CFO were to slip up and say “We’re going to budget to buy back shares when everybody is really excited about our stock because that’s when we are excited about it, too!” Would you be impressed with the company’s strategic acumen? No. You’d just have the truth.

The practical insight

Because executives, managers, and employees would be crazy to admit their biases and lack of certainty publicly, a deft analyst or owner has to find other ways to unveil strategic intent. Here’s one to live by:

An organization’s budget is the honest expression of its strategy.

It’s Occam’s razor for discerning strategic intent. More than words. More than magnificent manifestations of PowerPoint prowess. More than organization charts and stated goals. The budget is the message. It’s the narrative applied. Follow the money.

Corporate finance practitioners are reading to this point, nodding vigorously, and probably wondering why such a concept merits a full article. Here’s why: The vast majority of stakeholders in and around an organization place a lot of weight on the words and fancy marketing messages that come with strategy. All the statements of intent to “be the best at” this and “compete the hardest on” that accompanying a typical organization’s vision get delivered liberally.

Those minor messages are extremely important to align and encourage the organization. They are the audio of the strategy. However, the video of a strategy is an organization’s resource allocation. And any stakeholder—employees, board members, executives, owners, and sometimes investors—needs to discern strategy from it as a sort of check on the words. Just like the old Russian proverb: Trust, but verify.

A side note on results

Note that I don’t confuse an organization’s budget or resource allocation with its “results.” A company’s prospective budget or resource allocation is the expression of strategy. Results, on the other hand, come from the confluence of position, potential, competitive actions, regulatory changes, customer idiosyncrasies, fluctuations in weather and commodity prices, luck, happenstance, and any number of noisy and ambiguous factors.

Results are measures of performance, but not of a healthy (or even discernible) strategy. They can be spun into a hindsight strategy, but aren’t necessarily the results of a prospective strategy. In other words, organizations with bad or nonexistent strategies can deliver good results, but not for long. The key is to find executives who recognize when they’re lucky.

Results are real and provide for the present. They are a must have. Strategy, however, aligns resources for the future. It’s a must have, too.

Unpacking the insight

On one level, a budget is simply numbers. It’s not strategy. Saying that you’re going to grow earnings or tamp down costs or grow the revenue line through a budget does exactly that. It shows those things mathematically. It doesn’t establish how you intend to use the resources.

More importantly, a budget shows what you expect to achieve, but it doesn’t show the opportunity cost of that achievement. Strategy is about choices. A budget isn’t a choice. It’s math. It’s the scoreboard, not the game, and certainly not the playbook. Math isn’t strategy. But on the other hand, the math is the simplest view of an organization’s aims. In this basic view, budget is, in fact, strategy.

Let me rephrase that: A budget, and the actions it enables, is the most honest expression of strategy. Show me a company’s three-year plan and budget, and I’ll be able to articulate the company’s strategy to an 80/20 approximation—though it may not match what’s printed on the marquee.

The really interesting part is when you put the strategy and the budget together. Your strategy says you want to grow. OK, what’s your investment in growth? The budget shows that. Your strategy says you expect to be a superior marketer. OK, what’s your allocation to marketing spend? The budget shows that.

A leader who truly expects growth but cuts productive growth spend is suffering from cognitive dissonance. He’s living two lives, but only one can survive. One side of the argument will win.

And these days, with incentive structures being what they are, what wins? It’s often the spreadsheet. It’s the budget—the accounting—that wins.

How to apply this knowledge

All of this is easy if you see the resource allocation and statements of strategic intent and can make the comparisons. If you’re on the outside looking in, it can be tougher. Here are a few practical points.

To test strategy and budget alignment, consider the following hot spots:

  • Capital allocation: How is the company allocating its capital investment? Is the company in a mature market yet overspending on growth capital? Is the company pursuing a cost-driven strategy but starving assets of even minimal maintenance capital in order to drive earnings? These things can be discerned in most cases through even the highest-level financial reviews.
  • Overhead allocation: Does the company allocate overhead to the right places within its strategy? Is overhead allocated to administrative and risk management activities more than growth and renewal of the franchise? Is that what is supposed to happen?
  • Capability building/initiative spending: Can you find strong evidence of investment in capability building or renewal toward the stated strategic intent of an organization? If the organization is pursuing cost leadership, do you see evidence of investment in cost-leadership capabilities? Ditto for growth and innovation. Do you see it? Do they walk the talk?

Often, strategic discussions focus on the words of a strategy. Financial discussions frequently center on the math—forecast amounts of spend and investment vs. types.

In order to understand strategy applied, seek out the allocation of resources in the companies you own, serve, or work for.

Executives should use this sort of check on the strategies and budgets of their organizations. Avoid fooling others with and being fooled by clever narratives overlaying misaligned operations. Shoot for integrity.

Employees can use this as a test of whether the direction their organization is taking is actually the direction stated. That’s an important inkling when deciding where to ply one’s trade. They can vote with their feet. (Side note: Candidates can use this notion effectively as well. Does the company you’re interviewing with understand its resource allocations toward its aims vis-à-vis the competition? Does the audio match the video?)

Owners, board members, and investors simply need to ask the question and look for a satisfactory answer: What are the ways and means being applied to meet the ends being stated. They can also vote with their feet or, of course, with the stage hook.

The budget is an honest interpretation of strategy. It’s not the strategy, but it’s close. It’s Occam’s razor—the most direct path to strategic intent.

Follow the money.

What do you think?

Strategic Implications of Clark Griswold’s Turkey

Clark Griswold’s turkey was an object of art on the outside, and a hollow mess on the inside. So are some strategic plans. Have the courage to call them what they are.

‘Tis the season. So, I figure…why not take advantage of it?

Remember that finely-crafted 1989 cinematic masterpiece, National Lampoon’s Christmas Vacation?

It provided us with such insightful and penetrating quotations as Clark Griswold’s “Hallelujah! Holy S#*@! Where’s the Tylenol?” It also gave us that indelible image of Randy Quaid as cousin Eddie poolside with his t-shirt tucked into a leopard print Speedo.

And, who can forget Eddie, the RV, and the storm sewer?

On a more serious note, the movie has a couple of meaningful lessons for leaders.

Yes, there’s the “Jelly of the Month Club” fiasco and the classic (and useful) quote by Clark’s boss about how things sometimes “look good on paper, but lose their luster when you see how it affects real folks.”

That’s a good one for all of us to ponder as we tweak our spreadsheets this Christmas season. But…

…I’m taking on the turkey.

Remember the turkey? It was beautiful…stunning even. Ask anyone who has labored near an oven, basting a roast turkey for hours on end, and they can tell you how difficult it is to achieve the golden brown visual perfection that is the Griswold’s turkey. See for yourself:

But then, the test.

Clark puts the knife and fork to it. And, well, click here if you don’t know the story.

It’s the letdown of letdowns–a finely tuned visual feast followed by the disgust of a dry, empty, cracked, steaming hole of a broken promise.

What are the leadership implications?

For those of us who are the cooks–the ones charged with compiling and crafting strategies, plans, visions, and ideas–the siren song of great visuals with no substance constantly beckons. We have the tools to create a symphony of perfectly prepared sights, sounds, and steam. We also have the pressure to perform and incentives to placate those we answer to, whether they are managers, executives, boards, or shareholders.

For those of us who are the carvers–those charged with reviewing such plans and possibly eating the cooking–such placating visuals can be blinding, especially if they confirm our desires.

In working with more than 30 large organizations and countless small ones as employee, consultant, investor, and executive, I have had the opportunity to witness and test countless executives’ abilities to cook up a plan, if you will.

A majority of the time, the cooking survives the knife and fork. It is grounded in facts, shaped to the reality of markets and constituencies, and staged thoughtfully. It is represented by people who know what they believe and can articulate it carefully.

But, every now and then, I’ve run across Griswold’s turkey. And, it’s not always obvious. Careful use of numbers, mindful (or at least artful) omission of realities, and tight stage management of the presentation all combine to create a golden brown shell of a vision or plan that anyone would want, supported by a scaffold of…nothing.

In those cases, two things became apparent (but, again, not always obvious..keep that in mind):

First, for the executives who knew that the plan was a, well, turkey; the immense focus of their time was on parrying the knife and fork. They delay, obfuscate, rotate the turkey five different ways, or just keep saying “it’s still in the oven.” They waste time. They aren’t all bad people, but they do tend to lack the courage to call it what it is. In some cases which one could consider unethical, they avoid examination of the underlying realities because they are playing a timing game due to misaligned incentives.

Second, for those who had to eat the cooking (that is, live with the choices of the first group)–the shareholders, boards, and true fiduciaries–the surprise of the broken promise leads to needs for hard decisions. They finally put their knife into the plan to carve it and eat it; and it turns into a dry, cracked shell. When the carvers finally do take action, people are fired and in the worst of cases investigated. Boards are turned over. Divisions or entire companies are sold or shut down. Shareholders, employees, communities, vendors and customers all lose.

I’m not necessarily talking about fraud, mind you, I’m talking about window dressing on a brick wall. For example: Griswold’s turkey could be the metaphor for the vast majority of companies founded and funded during the dot com era. They had beautiful plans with no reasonable path to profit. These were not (typically) fraudulent. They were, however, absolutely built on the back of willful blindness to reality peppered with really difficult incentive issues related to agency and timing.

What are we to do?

Step 1: Admit when you are looking at Griswold’s turkey. If the plan looks nice on the outside, but is a steaming mess of emptiness on the inside, be willing to call it out no matter where you sit. Have courage.

Step 2: Go to the knife and fork every now and then. For those of us who review strategic plans and are charged with poking around, be willing to poke with more than a finger. Ask the penetrating questions about the numbers, the dynamics, and the actions underlying the shiny shell of the plan. Learn to spot the obfuscation or honest ignorance that comes with Griswold’s turkey. Really think about the responses you get to your questions.

Step 3: Be careful as an executive or board member not to inadvertently provide incentive for others to bring you Griswold’s turkey by being soft, lazy, or simply too busy to inquire. Management claims to pursue a local market strategy but can’t name the markets, segments, or tailored approaches? Hmmmm… Maybe you’ve been too easy to fool or too comfortable with current performance.

Step 4: Be willing to slow down, start over or exit. So many instances of the Griswold’s turkey come from the need to show progress or a plan in the face of intense time pressure and expectations. It’s easier to polish up a PowerPoint and parry every question with “I’ll come back to you on that” than it is to know what you believe. If you are on the team, be willing to say when a plan isn’t ready. If you are reviewing the team, be willing to order them to go back to the clean sheet. If you are making strategic decisions, be willing to know when it’s time to stop cooking–to change leadership or exit.

These steps represent a critical aspect of leadership and a key learned skill: Calling a golden brown shell surrounding a hollow hot mess exactly what it is.

These particular turkeys are, as mentioned earlier, the letdown of letdowns. They are a visual tease. They lead to the disgust of a broken promise.

Learn to spot them, have the courage to avoid them, and role model the discipline to prevent them.

Hallelujah! Holy S#*@! Where’s the Tylenol?

Merry Christmas!

What’s Your White Whale?

The types of goals we set, and the manner in which we pursue them, have consequences for us and for the people around us.

“…to the last I grapple with thee; from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee…”

– Captain Ahab, in Moby Dick by Herman Melville

And like that, a captain lost his life, a ship, and all men aboard save one left to tell the tale.

Call him Ishmael.

Focus, intensity, and drive are all fantastic things. Identifying a goal and driving toward it can differentiate a professional in the earliest stages of their career. Such drive and focus is valuable for teams, organizations, and yes, families.

But it is in how we define our goals that we establish our course and set sail.

Sometimes…sometimes we choose goals that–when played out–are destructive to us and to those around us. They are outwardly worthy, and inwardly virulent.

The more senior we are, the more influence we have, the more damage we can do.

Ahab did this when he let a blinding, to-the-marrow hatred of a monstrous white whale cause him to lead his men to the edge of the earth and ultimately to death. He took his ship off its profitable whaling mission to pursue an obsession, a blood vendetta against a big mammal that took his leg.

Of course, you or I would never do that, right? Ahab is fiction.

Well, not really.

The way we define our goals–or help execute the goals others define for us–defines us; and the more driven we are in achieving misguided goals, the more destructive we can be. We might not kill our crew, but we could very well kill an organization, a partnership, or a marriage.

Take a moment and think: Do you harbor a goal like Ahab’s lust for killing the white whale?

Worse yet, have you, as a board member, senior executive, or manager, provided people with incentives to pursue a white whale goal?

A white whale goal is one of two things: In its first and simplest guise it’s an obsession. It is a goal that is so deeply held and so exclusively pursued that its pursuit alone is destructive to relationships, damaging to professionalism, and ultimately distracting from real performance. A foolish, simpleminded pursuit of money, power, position, prestige, image, “winning,” or–wait for it–the moral or intellectual high ground are all examples.

Yes, that last one is a doozy that we too often forget or forgive. Self-righteousness blows up as many relationships as most any other thing listed.

In its second guise, a white whale goal can be a misguided goal propagated by proxy, where boards and senior leaders provide a framework of thinking (for example “grow profits”) without guidance on and transparency in boundaries, value, or values; or with specious accounting and accountability.

This second version of the white whale can lead both to brutal decisions by middle managers “just doing their jobs” and to baffling decisions in the ranks where people struggle for clarity. All the while the board and senior managers maintain the real innocence of propagating “good” goals. Or, at least, they maintain plausible deniability.

The epitome of these two types of white whales playing out–an obsession that leads to a vicious goal by proxy–is the assassination of St. Thomas Beckett of Canterbury.

King Henry II, obsessed with the church as an interference, is reported to have said “will no one rid me of this turbulent priest?”

After which, of course, somebody did; to the ignorance of the historical significance of the act.

But, the King didn’t order the martyrdom of a future saint…Did he?

You as a senior executive didn’t really order the curtailing of investment in pursuit of current earnings…Did you?

You didn’t handicap the sales team by introducing turgid administrative tasks in the name of greater openness and transparency…Did you?

You didn’t order leaders to take unacceptable safety and fire risk by curtailing costly planned outages and maintenance…Did you?

Surely, there are honest-to-goodness unintended consequences; and then there are white whales.  Sometimes they are hard to tell apart. Foolish or obsessive pursuit and propagation is the sin qua non of the white whale.

Remember Enron?

Consider the Enron scandal. The tragedy of Enron was equal parts a criminal lack of professionalism (which has been well publicized and rises to the level of obsession for some people involved) and a broad based propagation of and adherence to financial frameworks and incentives that many people in the ranks knew made no sense–misguided goals.

This second part gets missed and dismissed, especially as the Enron case recedes into memory as a quaint blip preceding the global financial crisis of 2007-’08.

The second aspect–the misguided goal set–is actually the most important aspect of the Enron case for professionals to consider these days.

A good example of the incentive issue was where “mark to market” thinking led leaders to be paid handsomely on the modeled Net Present Value of development projects, but not on the actual fulfillment of the projects themselves. Baffling? Yes. Still, senior management–operating within a framework endorsed by auditors, consultants, and board members–defined the goals. Those goals played a big part in destroying the company.

Sure, a few Enron employees went to jail and many professionals were sullied forever; but the true “crime” that gets missed is how top down incentives drove otherwise professional people toward behaviors that they wouldn’t have even paid themselves for.  They were white whale goals acted on by proxy.

That is perhaps the best test of a white whale by proxy. Would you pay yourself to fulfill the incentive set you have?

White whale goals by proxy are usually present when you hear people lament that they are “just doing their job,” or “doing what they are told,” or “doing what they get paid to do,” or in the worst of the worst cases “protecting the company.”

Massive autocracies and ignominious genocides stand on the shoulders of white whale goals by proxy, particularly when they are proxy to an obsessed leader. Let’s not participate in or propagate them.

What do some simpler ones look like?

To keep this closer to home, here are a few modern goals that can become white whales in our professional lives, and a brief explanation of why:

1. A superlative image and “personal brand” – The phony focus on image in the mold of “fake it ’til you make it.” If pursued as an end in itself, vs. an outcome of a life of substance, then…well, it’s a deleterious focus on a goal that is ultimately not merely self interested, but selfish in a harmful sense.

2. Great pains for small wins – The dominance of the clean desk, starched shirts, pursuit of dominance on every point in the negotiation. Basically, this is idealizing stuff that doesn’t matter. In WWII U.S. Army slang, foolish adherence to critical standards on things that didn’t matter to the mission was known as chickenshit. I’m not sure what it is called now, but whatever it is it’s damaging to the mission and morale.

3. Rent-seeking – Seeking wealth without the creation of wealth. Placing defense of title, position, and income ahead of principle and value. Jerry Pournelle’s Iron Law of Bureaucracy puts in pithy words this white whale; and provides an explanation for countless managers’ sometimes oddball behaviors: They defend the bureaucracy at the expense of the mission. It’s a classic white whale. Similarly, acting purely on incentives without regard to the value they create (or destroy) can be a white whale goal as outlined in the Enron case. This is often the case when incentives are based on individual drivers (like revenue growth or headcount or output) in isolation that systemically create no value.

4. Temporal goal misalignment – Addressing the “now” without a focus on the “later” or vice versa. How often do we see short term decisions made that have a readily measurable, net negative long term impact; but that are characterized and lauded as magnificent wins. So, you closed the deal and got paid. Was it a good deal for shareholders and employees–the people who live with the longer term decisions? Interestingly, the opposite is the case as well: Many bankrupt companies lie foundered on the rocks of “long term investment.” How often do we see 5-year plans that lack a 1 or 2-year plan component?  The white whale lies in the lack of explicit balance.

5. Vengeance – I’m just going to go ahead and list it because, well, I started with Captain Ahab; and this was his issue. Pursuing personal vendettas, particularly those that drag your organization, family, or friends along with you; is the ultimate in white whale thinking. 9 times out of 10, the bitter pursuit of revenge against other people or other organizations only serves to take your eye off the ball. To be clear, this doesn’t mean simply the pursuit of crushing vengeance a la Ahab. It can also be as simple as an overweening need for one-upmanship or the constant need to be seen as ahead of the object of your bitterness. All this is wasted motion when it comes to life and performance.

So what?

Knowing whether you are pursuing a white whale is tough. Generally, the white whale looks like a worthy goal to the person obsessed with it.People who are genuinely obsessed can’t generally be reasoned with. But, they can be removed from their position…and, that’s worth pondering.

The best way to spot a white whale is to lay out the “True North” that everyone agrees to–what winning really looks like from a fiduciary, professional, and values standpoint; and then to identify how far off that azimuth your immediate goals are.

White whales pop out easily at that point as twisted and torqued visions of winning. They link to True North via paragraphs of logical backflips instead of a sentence fragment of concise clarity.

Like any other blind spot, these goals require reflection on your own part to spot. They also require willingness to tolerate a person or two in your midst who will challenge your view, your goals, your passions, and your obsessions. That person might be a trusted friend, a mentor, a pastor, or–if you are lucky–a spouse. In a really functional team, it can also be a subordinate or a peer.

In any event, you have to listen to them.

The gist of Melville’s story about Ahab and his hatred of the whale was that Ahab destroyed everything and everyone around him in pursuit of a definitively odd goal: Revenge against the single whale that took his leg.

There were many other whales in the ocean.

But, the white whale did him and his crew in. No–strike that–Ahab’s obsession with a white whale goal did it.

Don’t let a white whale–yours or somebody else’s–do you in.

What are some examples of white whales from your own professional, political, or personal lives?

Bill Gross: Debt Binge Worthy of Future Scorn

Bill Gross says future generations will view the global debt run-up of the past 6 years like we now view smoking on airplanes…misguided or just plain stupid.

Janus’ Bill Gross released an investment outlook today that is a painfully good read.

Your Link

His thesis:  That future generations are going to look at this one and say “How could they do that?” when it comes to running up debts the way we have in the past several years.

For those scoring at home, the U.S. National Debt stands above $18 Trillion as of today.  That, of course, looks trifling in the face of the U.S.’s $115 Trillion in unfunded liabilities.  Regardless of what you call them, they are promises to pay; and they are big ones.

An always interesting link is the U.S. Debt Clock.  Try it out; but keep a bucket handy.

The U.S., of course, isn’t alone; and that is what makes Gross’ read so interesting.  There may be no place left to hide soon.

In his outlook, Gross lodges multiple protests.  He states that while debt fueled recoveries from debt caused recessions are possible, they must have three preconditions to be so…

1. A non-fatal structural starting point (that is, countries can’t be insolvent at the start…)

2. Alignment of monetary and fiscal policies (especially that fiscal policy should take advantage of loose money to invest in accretive infrastructure)

3. Willing participation by private investors (they have to stay in the market even as yields are driven down and asset prices up beyond any realistic point of further appreciation).

It’s clear that all preconditions are/were not present in all countries pursuing the “borrow or monetize your way to freedom” strategy.  At the end of the day, fiscal, monetary, and investment indicators have to point toward kickstarting consumption and investment in the real economy.  It’s not clear to Gross (or me) that this has happened. If anything, Gross points to massive inconsistencies in political and market sentiments.

This is a fantastic read.  One that is well worth your time.

The implication?  Well, I posted last week about lower energy prices being a wake up call for business leaders to re-set scenarios for the future.  In this case, Gross is essentially saying that financial investors might do well to get out of markets sooner rather than later.  His quote:

Markets are reaching the point of low return and diminishing liquidity. Investors may want to begin to take some chips off the table: raise asset quality, reduce duration, and prepare for at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields, QE and the trickling down of faux wealth to the working class.

Ouch.  That’s the implication.  Bursting of high valuations by investors fleeing to quality and going short could very much signal a period of deflation; then who knows what…?

Photo credit: Lendingmemo

Here is the link.

Image from Yahoo News

A Reuters report today outlined a “cyber espionage” ring focused on stealing insider information for use in stock market trading.

Here is the link.

In an interesting and not so surprising approach to targeting, the spies sought email addresses and passwords of individuals most likely to have insider access.

Cyber security continues to be a critical element of any company’s strategy.  The question will be how to maintain a level field in the capital markets with this sort of thing going on in the background.  Like cockroaches, confidential information leaks are typically far broader than the ones you see; and the key to security is not to have a low incidence rate, but rather a zero incident rate.

How does secrecy and confidentiality affect your enterprise? 

 

Energy Shocks Put a Premium on Foresight

The current sea change in energy markets brings the need for foresight to the front stage.

 

Foresight feeds the foundation of strategy.  The ability to read and react to the likely future defines organizations and executives.

On November 25th, energy expert Daniel Yergin (writer of The Prize among many other interesting books and articles) appeared on CNBC to outline the impact of revolutionary changes in U.S. oil and gas production.  Here’s the Link. Video here.

The upshot?  The U.S. is becoming a bellwether energy producer…so much so that Russia and OPEC are losing sleep over how to handle the ocean of oil and gas that is slated to come from the U.S. in the next few years.

Subsequent to Yergen’s commentary–on Thanksgiving day–OPEC chose not to alter its production schedule.  This was a move to maintain share at the expense of price. The decision sent oil prices plummeting more than 10 percent on Friday.  Here is CNBC’s report on that.

So, what?  

These issues impact you, your organization, your city, state, and country.  Pick an affinity that you have–any affinity–and this news matters.

Imagine first a future where energy stays cheap. Imagine that the economics of the petrochemical supply chain are severely impacted by low prices.  Maybe the dynamics crush upstream commodity producers.  Maybe they enhance smart specialty producers who benefit from consumer spend and lower commodity costs.  However, lower energy prices directly impact players who depend on energy production, particularly in specific geographies. Laborers in geographies that lie on the high end of the cost curve might not enjoy this news; neither will suppliers to those work-forces–the ones that provide uniforms, tools, meals, and services like laundry and transportation. The more localized the impact, the worse it could be.

But every shock means opportunity.  So, meanwhile…

Imagine second a future where consumer and corporate disposable income is unlocked from the dungeon of costly energy.  Where an average family receives a dividend that amounts to real cash to spend, just because the world has become more efficient at extracting (and, yes, using) energy.   Imagine that the average manufacturer can also contemplate reinvestment of such gains.

Those two imaginary impacts of lower energy prices are strikingly significant to all companies, whether they play in the petrochemical space or not.   Now is the time to contemplate change (yes, 2011 was the time, but still, get on board now).

What does this mean for your end products?  How about for your capital projects? What about for your procurement targets and programs? Perhaps more importantly, what does this mean for your job?

The market-wide impact of energy costs is practically instantaneous.  In 2008, we saw a tremendous reallocation of production in the automotive industry due to sustained spikes in oil prices.  SUV and truck plants were closed, not just idled, as reality set in.  Demand for efficient vehicles spiked as well, spurred by some (perhaps spurious) legislation in that era.  Such corporate moves dwarf in relation to moves that consumers make as energy costs crowd out other spend categories.

What will this sort of change mean for your company or your career?  How do you sense and predict what different end states of the world look like, and how each one impacts your capital and expense allocation?

Think about the the future, and develop options for it.  Options are the foundation of strategy, and foresight feeds them.

What do you think? 

Concussions, Settlements, Cynicism, and Standards

The NFL’s concussion settlement might be more cynical than its decades-long deceptions on the topic.

While I have nothing to gain from the National Football League’s concussion settlement, I have been an interested observer. As I stated in an earlier commentary, I played the sport and understand its intensity. So, I take notice of big moves related to the concussion issue.

In a recent article in ESPN The Magazine, Peter Keating outlined how difficult it would be for a retired NFL player to be compensated under the NFL’s new concussion settlement the league is putting in place.

Just to put things in perspective, Keating writes the following:

First, to be eligible for compensation at any point, you must register with the settlement within 180 days of its final version’s being posted on its web site. Then, if you’re feeling symptoms, you must see a doctor approved by the settlement plan’s claims administrator. These basic hurdles, combined with athletes’ lack of awareness, will be enough to knock nearly 40 percent of potentially eligible players and families out of the deal, according to estimates by the NFL’s actuaries. That gets you from about 20,500 potentially eligible players to around 12,500, according to both sides.

Next, you will need to submit to a battery of 32 neurocognitive tests. Invented by the NFL, the players’ lawyers and their consultants, this scheme is new, untested and at points bizarre — one part is a 338-question exam about your psychological state and personality whose results won’t even be used to decide if you get compensation. Stern estimates that the whole thing will probably take you around five hours to complete, and if you give up or can’t finish — and remember, you are already feeling subpar; that’s why you’re getting yourself checked out — you are out of luck.

If you do get to the end of the assessment, you will need extraordinarily poor grades to qualify as neurocognitively impaired under the settlement. For eligibility, the deal requires players to score at least 1.7 standard deviations below expectations on multiple cognitive areas, including learning and memory and executive function. That’s worse than doctors often see in patients who already have moderate-stage dementia. “Most guys don’t realize how badly off you need to be,” says Stern. “You have to be really, really bad, basically unable to take care of yourself during the day.”

That’s not a settlement, it’s an insurance policy against payouts.

Basically, retired players are presented with a catch-22. In order to collect on the compensation offered, they have to be too impaired to complete the tests that are required in order to justify eligibility to collect.

Sometimes, cynicism is on display for all to see.

In this case, the NFL might have gone too far.

I write this because it involves a critical view of professional standards and their impact on the long term strategy of any organization. We all have to choose where we draw the line on supporting stakeholders of our brands, our organizations, and our communities. Some choices are more transparently cynical than others.

Kneecapping the retired performers its business depended on might not be the highest and healthiest long term play for the NFL.

What do you think?

 

 

Success Can Be a Problem, Too…

Sometimes, learning from your successes can be the hardest learning of all.

 

“History is written by the victors.”

– Winston Churchill

The most difficult leadership disease to overcome is one that springs from success. A victory—whether it be in business, war, or sports—is a victory. A win is a win. The disease I write on here is what I’ll call the “blind man’s bullseye” disease or BMB disease for short—the ability that leaders have during time of success to recast a win…any win… as intentional and well planned. We read a lot about how business and political leaders have learned from “adversity” or from failure. It is less common to hear how these leaders learn from their lucky breaks, particularly if they are in an environment that doesn’t respect luck.

BMB disease—this tendency to recast luck as acumen and to avoid learning from it—kills agility and learning; and it does so when the organization just might have the most to gain from being more agile and focused on learning. In its most extreme form, this disease destroys trust and implants a ticking time bomb of false confidence that will trigger when tough times hit.

Why the name? I use the analogy of a blind man’s bullseye because this leadership affliction is akin to a blind man firing an arrow from a bow and then painting the bullseye around the arrow—no matter where it hits—after the fact to match the hit. Apost hoc fitting of strategy to results vs. measuring results and adjusting strategy.

Bullseye!!!

In reality, this concept is an offshoot of well-known cognitive biases outlined by Daniel Kahneman and others. In particular, BMB is a type of survivorship bias—it’s a way of promoting success at the expense of learning from failure. It is a cousin of the “Texas Sharpshooter” logical fallacy that derives from a similar, but different, projectile analogy.

So where does the affliction come from?

A true irony of the information age is that spin has become easier than ever. The availability of data, networks, relationships, and ostensible transparency ought to result in an environment where escaping hard truths is increasingly difficult. It’s logical, right? Give me enough information about any problem, and I should know the truth.

It’s just not so.

Today, leaders of all stripes have tremendous power to form, propagate, and change messages at any given time. At its best, this power allows for obvious flexibility in moving an organization forward—influential control of a mission-based approach. At its worst, it forms the basis for the meanest sort of revisionism at both a personal and organizational level—Orwell’s memory hole writ large. “I meant to do that” becomes not only a means of self-promotion, but also of self-defense and self-delusion.

Where might we see this in the business world? Here are a few examples from my experience:

The Strategic Management BMB:

I had the opportunity to spend my early career in the venture capital space during the rise and fall of the dot com. During that era, many corporations got into the game of venture capital investing in the name of it being “strategic,” particularly while it was profitable, only to find that the game is not only difficult but also highly volatile. Many companies who accumulated large venture capital portfolios on their balance sheets ended up with a bucket full of write offs when the market turned. Incentives being what they are, we tend to define as “strategic” that which is immediately profitable versus that which is sustainably profitable.

This is going on in your office today, and it is a natural bias—In fact, you may be mining a highly profitable small account today (bullseye!) at the expense of a more difficult but potentially much larger account your strategic aims say you should be mining. We paint the bullseye on the things in our portfolio that pay off now, and downplay the risk-adjusted strategic approach that may have been our target in the first place.

The Talent Management BMB:

One of the more malicious aspects of the BMB is its tendency to drive out diversity of thought and experience. In the run-up to the sub-prime lending crisis, most anyone who had the gall to question lending standards or the lunacy of some securitizations ran the risk of being squarely ostracized. Many people who were bearish on the securitized debt market as a whole spent years and a tremendous amount of capital convincing others that it was overvalued. A few of them made a killing in the subsequent turmoil. The reality is that understanding the value of “minority reports” in an organization or market sector is a key leadership trait. If we spin our success as intentional, we will push these thoughtful perspectives to the side and drive them out of our organization.

In your own organization, there are people who think differently about your success. They should be embraced for their diversity and not ostracized because they “don’t get it.” We paint the bullseye (mark them as “successful,” that is) on the employees who are immediately productive—or, in the worst case, simply sycophants and acolytes—in the current environment vs. those whose points of view, talent, and mindsets will move the organization forward in different states of the world. In times of plenty, people who have a cost and risk discipline are valuable counterweights; just as people who are entrepreneurial, creative, and growth-oriented are in times of cost control and retrenching.

The Thought Leadership BMB:

Perhaps the most egregious use of the BMB in existence is in business literature. Every business school case study and almost every business book in existence takes what was almost certainly an ambiguous, amorphous circumstance that resulted in success and attributes it to structured planning, vision, and “good business thinking” that can be summarized in 10 bullet points or fewer. The success of an organization can be written into a tidy story suitable for consumption by a business school class or an aspiring professional; but the ambiguity of actually muddling through a difficult business environment—the many shifts, turns, decisions, and blind alleys—almost never get displayed for consumption.

Storytellers being as common as they are, the thought leadership BMB is likely right under your nose—it may even be your own work product. Internal case studies and after action reports often exhibit BMB disease because they fail to confront the lessons learned that will make the organization better the next time around. “We brought the project in on time and on budget” sounds a lot better and cleaner than “we brought the project in on time and on budget but we burned-out 5 of our best professionals and alienated our two most strategic business partners in the sector.” We paint the bulls-eye on the end state of “great” companies, businesses, or projects but rarely examine the structural, cultural, or risk-taking advantages they had—along with the real failures they endured—along the way.

So what?

These are all examples where valuable learning opportunities are papered over in the interest of the promotion of success. In some instances, such papering over implants a ticking time bomb in the organization. In the first two instances, the time bomb was the future profitability or organizational health of the company. In the third, the ticking time bomb is that we imbue young business leaders with a view of business success as somehow formulaic and simple vs. ambiguous, random, and hard won.

Overcoming this disease is hard. You and I have incentives to promote success and minimize failure. Those incentives are as basic as dollars or as ephemeral as ego. Recognizing that you, as a leader, have both the motive and, increasingly, the opportunity to spin your way to a dangerously revised view of success is prerequisite to solving this problem.

The best leaders I have had the opportunity to work with and around do a few things better than others to avoid the BMB disease. In times of success, they (1) acknowledge when their arrows have landed randomly, (2) evaluate and understand why they landed randomly and why they were successful, (3) celebrate the win and the intent—the what and the why—but own and fix the process—the how, (4) seek objective counsel, and (5) aggressively eliminate spin and the habits that propagate it in the organization.

Step 1–admitting it–is the hardest for most leaders, but without it the other steps never happen.

Enlightened leaders pursue a learning mindset, a learning team, and learning organization. The leader has the power either to succumb to BMB disease or to overcome it. But, the leader has to have the discipline to assess component failures within grand successes in order to lower the probability of grand failure in the future.

One warning: Don’t take this article as an indictment of risky or random wins. Seizing on emergent opportunities is important. A win is a win, even an ugly one. As leaders, we have to embrace and bask in the joy of what John Madden called the “no-no-go-go” where a risky, unorthodox, or simply bad decision becomes a great one. We never need to scoff at off-strategy wins; we just need to know whether they are sustainable. Blind Man’s Bullseye disease is manifest in “spinning” or moving the organization’s bullseye to the organization’s results without a sound rationale to do so—fitting the strategy to the result, vs. assessing results and adjusting strategy.

As we write the history of our victories, may we all have the humility to admit when we were lucky, and to grow from the experience.

I invite you to share examples of this affliction from your own experience if any come to mind…

Strategy is Execution…And Vice Versa

Overcoming the intellectual separation of strategy and execution by testing whether you’ve “packed for the journey” can unlock flexibility, creativity, and action.

 

At a conceptual level, the strategy to execution gap is real. I’ll leave it to the reader to search The Internet for “strategy to execution gap” and to then peruse the studies that show that execution matters…deeply.

But, with all due respect to the percentages derived from executive surveys and the implications they provide, separating strategy and execution in this way amounts to a waste of valuable time. The strategy vs. execution dichotomy is an overly convenient tool used to separate the thinkers from the doers. At its most dangerous, the strategy/execution split leads to recrimination vs. reconciliation—attack and defense vs. collaboration—when it (purposefully or accidentally) pits stakeholders against one another.

As strategic leaders, we must grasp that strategy encompasses execution. Execution is strategy. Strategy is, quite simply, knowing where to place the right kind of pressure on one’s environment to achieve a given set of objectives; but also—and this is important—how much pressure to place and how and when to trigger adjustments.

Noted military theorist Karl von Clausewitz referred to war as “merely the continuation of policy by other means.” War isn’t an end in itself, any more than our vaunted concept of “execution” is. With apologies to Clausewitz: Execution is merely the continuation of strategy.

So, when we accuse execution of derailing a good strategy, are we accusing instead our strategy as a whole? The best strategic plans hinge on a single, defining and definable question: Have we packed for the journey? Any organization’s strategy is evident in the resource and reactive decisions its leaders make on an ongoing basis. Because execution is the most honest expression of strategy (indeed, a more honest expression than any PowerPoint deck could ever be), it’s important that strategic plans encompass readiness for action and change.

As an executive who has formulated, tested, and implemented strategies across sectors and companies, I have used four practical questions to test for whether my teams and clients have “packed for the journey.” In any journey, we prepare to go the distance (enough food, fuel, water, rest, etc.) and we prepare for the unexpected (poncho, first aid kit, a bottle of pepto, etc.). Questions on resourcing and risk are fantastic acid tests for a given strategy because they move beyond a linear plan and force discussion on capability and flexibility. With that in mind, when evaluating a strategic plan, ask these questions:

1. What are the major “chunks” of activity needed to achieve the plan?

So, you want to climb Mount Everest. Okay. Got it. Where are your base camps going to be located? What is your supply chain going to look like? Where will you hide your oxygen bottles? In other words, have you defined the immediate “chunks” of resources and objectives that keep you on schedule to your strategic goals? The body of knowledge on effective intermediate term planning is immense, but shockingly untapped. Find or become an expert at hoshin kanri or its many offshoots (many organizations refer to hoshin planning, goal deployment, strategy deployment, policy deployment, or other terms for the same thing)–take a 5 year strategic plan and turn it into a one, 2, and 3 year plan. Define reality and required resourcing for the plan this way to mesh “strategy” and “execution.”

2. Do your resource allocations reflect the competitive reality of the situation?

Classical military theoreticians proposed that facing an opponent with twice your resources requires four times the quality of resources to merely achieve parity–your quality has to increase exponentially while their quantity advantage increases linearly.The so-called “Lanchester square law” applies conceptually in business, too; and it’s a scary proposition. In many business environments, quantity of customer touches can overcome quality of touch. An organizational plan that assumes twice the account penetration with half the sales personnel per customer of the next competitor needs to be tested for the personnel quality assumptions it implicitly contains. Likewise, a financial plan that reflects deployment of capital at ever increasing returns probably needs to be re-tested for the defensibility it implies.

We all (well, most of us) want extreme productivity and distinctive capabilities; and it’s easy to make that look good on paper. However, there is a tremendous difference between a lean approach to business vs. one that is merely cheap: Long term effectiveness. Test your strategy for effectiveness, not just a pretty model and the fool’s gold of unsustainable efficiency.

3. What are your pivotal assumptions?

Can you define the turning points of your strategy? For instance, do you know what your and your competitor’s strategies look like based on changes in regulations, demographics, demand, or the financing environment? Pivotal assumptions are the ones that, if flexed, cause you to take a significantly different course. Sometimes the most basic test of a strategy is whether the executive can name the 3 pivotal assumptions, in short sentences, and how changes in them cause changes in the strategy. Can you?

4. Will your strategy survive a punch in the mouth?

Former heavyweight boxing champion Mike Tyson’s contribution to the body of strategic knowledge is a great one. He famously stated “Everyone has a plan ’til they get punched in the mouth.” Is your plan built for speed and flexibility? Can it survive a shock? What are the trigger points for improvising? When will you improvise? Embracing uncertainty through scenario thinking will make you more nimble; and it will help ensure that when the “punch in the mouth” inevitably comes, you can improvise and carry on.

There you have it, 4 questions–2 on resourcing and 2 on risk–that help link the typical notion of “strategy” with the typical notion of “execution.” Remember: Execution is strategy. Artificially separating the two may feel tidy, but real strategic leadership is rarely tidy.

Now it’s your turn: How do YOU test your strategic thinking?