Aug 15, 2022 | Leadership, Strategy
Strategy is an exercise of informed fortune telling.
What will happen if we do this? Is that better than if we do that? How will others react, do the ducks really all align the way they seem to?
A thousand questions we set out to answer to allocate our resources to best leverage the outcomes we plan/hope will emerge.
It is a messy business, full of uncertainty, mistakes, dead ends, and outright failures, most of which we hear little about. Instead, we hear a lot about the few successful exercises in strategy, the few that work as hoped, or as is usually the case, not as planned, but great outcomes.
We read about the success because people can analyse them with the benefit of hindsight, which delivers to those developing the strategy, some level of prescient certainty that they almost never deserve. Fact is, your strategy will never be spot on, the magic is in the ability to adjust on the run, while achieving the outcome for which you planned.
The strategic process benefits from being subjected to informed and critical thinking being applied to the inputs, both quantitative and qualitative. The greater the level of critical thought and diverse thinking that can be brought to bear on a strategic challenge the better.
The context of strategy implementation is always different to the context in which you do the planning, simply because it is the future, and things evolve in unpredictable ways.
I expect that in about 12 months there will be a rush of erudite papers and articles reporting on successful Corona instigated transformations. These will make the protagonists look like they had great foresight others lacked, when in fact, while they ended up with the lollies, they were as confused and muddled as the rest of us during the lolly fight.
They had the benefit of hindsight to clean up their bedrooms before anyone came along for a look.
Strategy is messy because it lacks hindsight
Aug 10, 2022 | Innovation, Leadership, Strategy
When are the funds for an innovation initiative generally available?
At the beginning of a project.
When are the funds for an innovation project generally needed?
Increasingly towards the commercialisation, or completion of a project.
To me, this usual pattern of financial resource availability is arse about.
At the initiation of a project, the resource needs are peoples time, lab space, and the commitment from senior management., The need for financial resources is usually limited. However, it is this time that projects need to gather momentum, which means financial resources and forecast outcomes are included in budgets, and formal planning processes. The best way to ensure a project is supported is to ‘boost’ the promised returns and shorten the lead times.
Unfortunately, this locks in expectations that have impacts on the way projects proceed.
A project that promises 25% IRR in 18 months will almost always win the resources race over a project that forecasts 30% IRR in 5 years. This sort of financial analysis is how choices are usually made, ignoring the strategic implications of the differing projects. This is because we have not found a way yet to reliably tell the future, and immediacy is a powerful motivator.
On top of that you have the favouring of evolutionary ‘innovation’ over ‘revolutionary’ innovation.
Most successful businesses become successful by incrementally improving products and processes over time, and are prepared to spend money to keep the evolution going. The challenge of this is that it crowds out the revolutionary innovation, the ones that have the potential to change markets, rather than just do more of the same but just a bit better.
The examples of these abound.
When I was working for Cerebos in the early 80’s, we marketed a muesli under the brand ‘Cerola’. It was in the days when there were only a few breakfast cereals on the market, unlike today. Similarly, confectionary was less fragmented. We came up with the notion of a muesli bar, a ‘healthier’ snack than anything then available, with the convenience and taste of confectionary for kids lunch boxes. We did extensive product development, several pilot plant trials, and a little market research. In the early stages I had done a forecast profit and loss, timeline, and we had established the capital costs necessary for the changes to the existing muesli line. These were included in the Cerebos budgets as project ‘M’. The numbers were modest, but at the time, pushed as far as I felt comfortable. When it came to the final go/no go decision, the project was binned, as the forecast IRR based on my modest sales forecasts did not meet the hurdle. A year later, Uncle Toby’s came out with pretty much the same product and positioning, and did my annual sales forecast in the first month. Opportunity missed, and lesson learnt.
Kodak, that well known exemplar of the missed opportunity, not only invented the digital camera in 1975, they brought out the first viable digital SLR, the Kodak DCS-100 in 1991. While it was bulky, and expensive, it was the first. In 1994 Kodak supplied Apple with the ‘Apple QuickTake’ manufactured in China to a Kodak design. Also in 1994, Kodak brought out the NC2000 designed for photo-journalists.
So, Kodak did not miss the digital camera revolution, they led it, but simply failed to see beyond the boundaries of the photography business model as it had evolved over the previous century. They saw innovation as an evolutionary process, not revolutionary, as that carried the risk that their existing hugely profitable model would become redundant. None of the senior management over that time wanted to fund the risk of shooting the cash cow upon which they all depended.
Cerebos by contrast were shackled by a short-term focus on an unrealistic financial expectation that ignored the strategic value of the opportunity to generate sales, and also to open a new market that carried and solidified the Cerola brand.
In both cases, a huge opportunity that emerged from the fringes of their markets were subjected to a muddle headed and front-loaded financial calculation, ignoring the strategic implications of the opportunity.
Header source: The extensive StrategyAudit ‘slide bank’ built up over 30 years.
Aug 3, 2022 | Governance, Leadership, Management
We are in a climate of uncertainty. The next twist in the Corona pandemic, war in Europe, confrontation with China, and the daily scrambling at all levels of government, stacked onto the usual challenges of making decisions in a business, all make the current situation especially difficult.
The instinct is to wait a bit and see how it evolves.
However, having a bias to action, being prepared to do the groundwork, consider options that take a calculated risk, being prepared to back away with the learning of being wrong and having another go, is a key leadership characteristic in uncertainty.
Essential to leadership is taking decisions with less than complete information. You must then be prepared to adjust on the run, or even retreat when the planning assumptions are proven to be off target. However, there is a danger in being too aggressive. Sometimes delaying a decision is the best strategy. It is a critical balance.
Following are some ways you can bring some order to the decision-making process.
- Gather as much data as you can, but in uncertainty, it is the ‘gut’ of deeply experienced people who have ‘been there done that’ which often makes a critical difference to the quality of the outcomes from the decision. By definition, in highly uncertain times, there may not be much relevant data available.
- Ensure those experienced people are heard in the decision-making process. Ensure ‘due process’ is observed
- As part of the consideration exercise, undertake a ‘reverse 5 why‘ exercise.
- Ensure you have what I call an ‘Andon‘ system in place. This term comes from Toyota, where there is an ‘Andon chord’ which anyone on the production line can pull to stop production in order to prevent a fault progressing to the next stage, and being hidden as a result. It works for Toyota, and has been adopted widely elsewhere as a means to deliver consistent quality
- Gather as many ‘metaphors’ and similar situations in other industries as you can, there will be lessons there. For example, disc brakes were developed first to stop trains in the 30’s, and aeroplanes during WW11, as drum brakes were woefully inadequate. Citroen introduced the first successful mass production of discs on their ground-breaking DS in 1955, and now they are on every car made.
- Leverage ‘reverse planning’ and ‘What if’ questions. Every decision is based on both data and some level of instinct. When considering the future, few questions are as powerful as ‘What if….’ Being prepared by asking a wide range of questions that subject the assumptions often made automatically, often without consideration, will prepare for the unexpected.
- Be very clear about the problem being solved. Any decision can have second and third order impacts, so consider them beforehand as far as possible.
- Never move away from being customer centric. When this becomes a slogan, or ‘core value’ whose only role is a place in the reception of head office, beware!
- Don’t be a wimp. Make the tough calls while being transparent that not all the information you may like is available, but that the very least it will be a learning experience.
As a final note, good decisions can sometimes deliver poor outcomes, and the reverse is also true, bad decisions can lead to good outcomes for all the wrong reasons. Do not confuse the two.
Header cartoon credit: Gapingvoid.com
Jul 28, 2022 | Analytics, Leadership
Psychology drives our behaviour, and yet we struggle miserably to forecast the impact it will have. Therefore, we cannot predict behaviour with any real accuracy, except with the benefit of hindsight, or across the average, assuming we ask the right questions.
There are five important psychological factors that profoundly impact the sorts of decisions, big and small we make every day.
Status, Certainty, Autonomy, Relatedness, Fairness.
Psychologists put them together into the ‘SCARF’ model as they set about understanding the drivers of behaviour, which centres around ‘away’ movements to minimise threats, and ‘towards’ movements to maximise rewards.
Status. We all know it is important, that is how Mercedes manage to squeeze 4 or 5 times the money out of buyers than a perfectly adequate, reliable, and outfitted with bells and whistles Korean or Chinese alternative. It is why people pay tens of thousands for a watch, assume crushing debt to have a luxury car in the drive, and Louis Vuitton is the world’s most valuable luxury brand.
Certainty. Uber nailed this one. The time we wait for a taxi is different to the time we wait for an Uber, even when the Uber wait is longer. This is because we are waiting with certainty, we know when the Uber will arrive, we know where it is right now, and we can walk out of the building as it pulls up, which adds a feeling of status to the equation. By contrast, call a taxi and then wait, uncertain when it will turn up.
Autonomy. We all like to feel we are making our own decisions, even when we are not. We love that feeling of freedom, even when it is an illusion, or inside a tiny arena of personal space.
Relatedness. Human beings are social animals, we like to feel like others are aware of us, and concerned with our needs, views, and ideas. It is like being in a book club, there are psychological rewards to being in a group that values your presence. We also need the group for protection, as it is the outliers that become a lion’s breakfast.
Fairness. Instantly we rate things on a fairness scale, we like to be seen as fair, even when we are diddling the books. Is it fair that the bloke next door who does the same job gets paid 20k more?
None of these things appear in economic models.
It was Einstein (amongst others) who said, ‘not everything that matters can be measured, and not everything that can be measured matters’.
Jul 13, 2022 | Governance, Leadership
Building a culture of……. (insert your own word)iIs a bit of a cliché. I have seen it in many documents that purport to be describing the mission, purpose, and all the rest of a business. Often it becomes a melange of meaningless words that offer no sense of direction to anyone, no sense of what you do around here, and what you do not.
Culture emanates from the senior levels of an organisation, particularly the person at the top.
Walking the talk is the absolutely essential ingredient in creating a culture.
Walking through a significant Sydney factory with the businesses MD some months ago, one that has a culture, and resulting productivity to which other manufacturers should aspire, he made a simple gesture that personified the culture.
The factory bashes metal, so is inclined to accumulate dust, off cuts, and debris in many forms, but this one is clean enough to eat your lunch off the floor. As we were walking, he bent over and picked up a small piece of paper, looked up at me and said: ‘Culture becomes what you are prepared to tolerate’
Nobody in that factory would walk past a piece of paper, or any other sort of litter on the floor.
If you want an orderly factory, keep everything orderly.
If you want accountability, give people the authority to get the job done, and hold them accountable.
If you want to remove gossip, never talk about someone unless they are in the conversation
If you want transparency, be transparent.
People may listen to what you say, but their behaviour is driven by what they see you do.
Culture is like a house of cards: hard to build, easy to destroy, really hard to change.
Jun 27, 2022 | Governance, Leadership, Personal Rant
The ‘Insiders’ program on the ABC yesterday morning featured considerable debate about the coming wave of inflation, the increasing wages gap, the structural deficit now built into the national budget, and an interview with the new treasurer Jim Chalmers. I was struck again by the narrow focus of the conversation on the expenditure side of the equation, irrespective of the specific topic of the moment.
It seems to me that while we have an expenditure problem, about to become worse with the combination of inflation and the promises made to get elected, the real problem is with revenue.
While it is both sensible and well overdue to chop out the waste and costly lifestyle cushioning of liberal ‘mates,’ that will not solve the problem.
Long term we need a more productive economy, which does not mean less jobs, but it does mean that we need to edge up the international productivity ladder. This requires further investment in education, technical training, and investment in science and the means to commercialise the outcomes of that science.
Unfortunately, this takes investment at a time when investment is challenged by the scarcity of money. Anyone running a business understands this to their core. They also understand that to dig out of the hole, they need to generate added revenue to enable the investment, as cutting costs can only be useful at the fringes, and longer term is well documented as a failed strategy.
The government simply must examine revenue and put in place measures to increase it. Politically, and practically, increasing personal income tax is off the table. In addition, the temporary cut in fuel excise will end on 28 September, adding to costs throughout the economy and no doubt creating howls of protest.
The obvious way to generate revenue is to really bite the bullet politically and chase multinational companies that currently pay little or no income tax in this country. That would invite a huge PR response from these companies, comfortably headquartered in many of the tax havens around the world, exercising transfer pricing, related party loans, and the many other rorts that go on. They will claim that the competitiveness of investing in Australia has been destroyed, and deliver a litany of tales about the damage to the economy the withdrawal of that capital will deliver. Remember the effort the Minerals council made to force the Rudd government to abandon the mining ‘tax’? That would pale into insignificance compared to the shouting a real across the board tax collection effort would bring.
Bring it on I say. I am sick of seeing multinationals use the infrastructure, resources, and capability of Australians to benefit a group of obscure owners and shareholders hiding behind the curtains of tax minimisation and avoidance possible as a result of the simple reality that tax rules are national, while money is international, aided by political hubris.
Header Cartoon credit: Scott Adams and Dilbert.
