September 2011

Strategic Planning Mishaps to Avoid (Part 2 of 2)

In Part 1 of this two-part article, Ken Naglewski of Seabiscuit Partners rendered a definition of strategy, identified the core elements of the strategic planning process and provided a perspective on strategic planning best practices. In Part 2, Naglewski will provide insights into why strategies fail and will highlight potential strategic planning mishaps CEOs need to recognize and avoid.

In his vexing parody, Alice’s Adventures in Wonderland, Lewis Carroll wrote, “One day Alice came to a fork in the road and saw a Cheshire Cat in a tree. ‘Which road do I take?’ she asked. His response was a question: ‘Where do you want to go?’ ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘It doesn’t matter.’”

Strategic Context and Perspective — (What Do We Do Now?)

Against a backdrop of well-reported accelerating changes in the world economic order (e.g., the economic rise of China, India and other emerging markets), shifting production and rapid increases in technological know-how, an organization that does not understand its position in the market or how it will remain competitive risks becoming irrelevant. Status quo is a risky position. The marketplace for nearly all companies is changing too quickly for an organization to be behind the curve on planning its future.

Strategic thinking and effective planning are not easy endeavors. They can be emotional, politically divisive and fraught with the risk of choosing the wrong strategy for an unforgiving marketplace. But, strategic planning is the most important job of the CEO. The CEO (and his or her advisors) must have a realistic and dispassionate insight into the reality of the current situation and seasoned foresight into the possibilities of a marketplace where the only constant is change and there might be a montage of potential strategies.

Failure to have a plan occurs more often than one would think. In many organizations the annual business plan together with a set of financial projections (often prepared by the CFO with little input from others) constitutes what planning there is. Many companies claiming to have a strategic planning process merely go through an annual process of financial goal setting. Their business plan tends to be reactive to the actions of competitors and wants of existing customers and based on internal opinions versus the reality of the marketplace determined from good business intelligence. Without concrete direction, the organization tends to drift with the economic tides.

Arthur A Goldsmith, professor of management at the University of Massachusetts, noted in his paper entitled, “Making Managers More Effective,” “If organization strategy is a key to organization performance, it follows that savvy managers ought to work in a methodical way to develop sound strategies for the organization. Too often managers have not.”

For many businesses a strategy is needed to at least stay relevant in the marketplace. The once mighty and dominant Sears, for example, has been outflanked by myriad of more nimble competitors. Its income has plummeted to approximately break even, and it is now fighting to stay relevant in the marketplace.

In addition to the cardinal sin of not having a well-conceived strategy, there are many reasons businesses fail in both strategic planning and execution. Here are a few.

Fix Blurred Mission Statements — (Raison D’ Entre)

The effectiveness of vision and mission statements as a part of an overall strategic direction should not be undervalued. These statements became de rigueur in the 1970s. Few are crafted carefully and most people seem to view such statements as blasé. Many mission statements could apply to any company. Can you guess which well-known company has this mission statement? “To grow our business by providing quality products and services at great value and where our customers want them and building positive, lasting relationships with our customers.” (The mission statement is the stated mission of Sears Holdings.) If you change the word “customer” to “clients” it could be my mission statement.

Every organization needs a clear understanding of why it exists — what its economic value to society is and what its strategic vision is. The statement should be realistic, clear and action driven. The young brains at Google have the idea right. Google’s mission prominently presented in its annual SEC 10-K is: “to organize the world’s information and make it universally accessible and useful.” Clear, concise and meaningful. Google’s Vision: “To develop the perfect search engine.”

Great mission statements do not guarantee success. But, well-conceived, to-the-point vision and mission statements, continually reinforced, are powerful in branding the company, focusing the organization’s rank and file and reminding executive management of its strategic direction.

Lack of Objective Perspective — (How Much is a Pound of Perspective?)

While being objective and dispassionate in analyzing a situation are great traits, it certainly helps if you also have keen insight and foresight, strong management abilities and good business sense.

A dispassionate assessment of the internal situation of an organization as well as the external environment is critical to developing an effective strategy. There is no question in my mind that people populating organizations have difficulty in being dispassionate and objective about their organizations. Emotional and political commitments to floundering or failed strategies are strong and not easily discarded.

CEO Magazine’s “CEO of the Year” Alan Mulally was not a “car guy” when he took the helm at Ford. He has been able to objectively view the internal and external landscape with a fresh perspective and without the drag of any internal political entanglements to failed programs — personal strengths acknowledged by internal and external audiences. Because he was neither a “car guy” nor a long time Ford executive he was able to change the culture, breakdown worldwide silos (not easy tasks) and dispassionately trim the product line. (Latest reports from Ford are that a pound of Mulally’s objective perspective costs about $60 million — but well worth it.)

Lou Gerstner was anything but a computer guy when he took the helm at IBM. The decision to breakup the company into a number of “Baby Blues” had already been hotly debated and made. In what is now considered Gerstner’s defining decision of his successful tenure at IBM he reversed the decision to break up IBM. Gerstner reasoned that the pace of information technology advances dictated a need for a company, like IBM, that could bring complete solutions to customers’ needs.

Objective perspective does not need to come from an external party. During one of the low points in the up and down history of Intel, a senior executive raised the question: “If the board replaced us what would the new guys do?” The agreed upon answer was: “They would get out of the DRAM chip business,” (a business Intel invented). To which the response was: “That’s right, so why don’t we do that?” And that is what they did. This turned out to be the correct strategic decision.

Avoid Stretching the Capabilities of the Current Infrastructure — (Keep it Simple)

To improve the mediocre performance of a manufacturer of plastic dinnerware and utensils sold to fast-food restaurants, a private equity investor retained a well-known consulting firm. The firm did a commendable job of analyzing the market and developing a strategy to establish the company as the dominant manufacturer of its products together with a comprehensive step-by-step action plan. Based on the plan, the private equity group invested an additional $15 million for implementation. Several million of the fresh cash was for acquisition of costly, state-of-the art machinery that would increase output, reduce cost and improve quality.

Eight months later, income had plummeted and the cash was gone. The company’s asset-based lender was asked for a “temporary” over-advance to bridge the gap until profitability was restored. As a condition of considering the proposal, the lender requested a third-party review of the current situation and the strategy. Immediate findings were 1.) cash need was much greater than the over-advance requested, 2.) company personnel were unable to make the complicated machinery operational, and 3.) an additional $10 million was needed to implement the initial plan. The lender was unwilling to loan any additional funds without a full guarantee. The private equity firm was unwilling to guarantee an over-advance or invest directly, and the company was liquidated.

On paper the strategy appeared simple and sound. So what happened? While the company had management and process issues, the strategic mistake was laying a complex implementation plan on an organizational infrastructure not up to the task. The lender’s workout officer, a former U.S. Marine officer, commented afterwards that the complex implementation strategy was akin to giving an Air Force motor pool company a military objective that should be handled by a battalion of Marines. (No offense to the Air Force intended.)

Focus on Core Competencies/Strategic Advantages — (Do What You Do Well)

A recurring strategic misstep is attempting to grow by expanding into areas where the organization does not have core competencies or any competitive advantage. It rushes into new markets without first building the infrastructure and management talent necessary to compete effectively. I’m all for reaching for the stars on occasion, but build a solid knowledge base before you charge ahead into uncharted territory.

In the mid-1980s the chairman and CEO of MidCon Corp, a former Fortune 500 company with deep expertise and vast experience in building and operating long-haul natural gas pipelines, was “coached” by a well-known, blue-chip consulting firm into implementing the notion that it was not a pipeline company, “it was a diversified energy company!” The company had little expertise in the rough and tumble world of exploring for oil and gas in the hinterlands of Texas.

Despite warnings from some members of his executive team, the chairman and CEO, caught up by the exciting thought of being the head of a diversified energy company, poured hundreds of millions into what turned out to be mostly dry holes. The charge into being a diversified energy company also led to over-priced and non-synergistic acquisitions of an underground coal mining business and a hydrocarbon drilling operation. Share price fell and the company was soon put into play and acquired.

Don’t Kill the Messenger (Tell Me What I Want to Hear)

While the bearers of bad tidings are no longer killed, it is not uncommon for underlings having viewpoints and perspectives not in sync with the official viewpoint are chastised, driven out of the organization or quickly learn that challenging the official view is a bad career move.

Soon after taking the helm at Ford, Mulally held a status meeting with senior executives. One by one each reported that all was great. It was reported that the attendees held their breath when one executive reported that a problem with a critical component was going to delay an important new vehicle launch under his responsibility.

In the pre-Mulally era, this might have been career seppuku. It was reported that Mulally looked long and hard at the executive and then started to clap his hands in recognition of the straightforward honesty for telling it like it is. In Ford’s ultra competitive and CYA culture Mulally gave a strong message that it was okay to tell it like it is.

Dispassionate analysis and differing opinions are not generally welcomed. People like to hear good news and will grasp on to good news no matter how shallow and will turn away from bad news no matter how well documented and plausibly presented — a sure way to lose. If you don’t accept reality there is nothing you can do to change it.

Avoid Execution Failure — (“Do or Do Not Do, There is No Such Thing as Try,” Yoda)

Every professional involved with lending to, investing in or managing and organization has probably heard a story that the strategy was great, but it was not executed. Recent studies and executive surveys into the causes of strategic failures conducted by academics and organizations associated with Harvard University and the University of Michigan identified a plethora of causes companies either fall woefully short or fail completely in meeting strategic goals. Some of the major reported failure drivers included: unclear or lack of execution accountability, conflict with corporate culture and lack of follow-up. Some CEOs blamed the employees. Employees blamed the leadership.

Well-educated employees increasingly populate most organizations; and I believe most people have a desire to perform well. The notion of inability to execute a strategy seems incongruous with the modern business landscape dominated by lighting-fast information and communications. A strategy fails to deliver its intended results for two reasons and only two reasons. First and foremost, it is the wrong strategy.

  • The strategy is at odds with the realities of the market (a strategy based on faulty market assessment).
  • The strategy is overreaching in relation to the capital resources and infrastructure (people, processes and systems) necessary to execute. A fine line here. Sure, it was an execution failure, but either the allocated resources and/or infrastructure strength made successful execution improbable.

Second, a strategy might fail because unanticipated mega changes (not easily foreseen, or understood fully) in the economic/political environment or new technological innovations render the strategy ineffective or obsolete. Increasing consumer acceptance of e-commerce has wrecked havoc on the business models and strategies of many brick and mortar companies. Amazon’s Kindle has changed the world of book publishing and distribution while tablet computers, led by Apple’s iPad, appear to be doing the same to the personal computer.

Final Thought — (Make it Happen)

For many firms retaining an experienced strategy advisor familiar with strategic planning processes is a worthwhile investment. General Electric’s legendary CEO Jack Welch used strategy consultants extensively. An experienced advisor knowledgeable of strategic planning processes will facilitate the process, provide the needed objective perspective, provide some new ideas based on experience with other organizations and, most importantly, be in a position to raise sensitive issues with less fear of political reprisals (but I have seen more than one case where the advisor’s objective perspective was not well received). The strategic advisor should facilitate the strategic process not produce a turnkey strategic plan.

For a strategy to have the platform for success, it has to be embraced by the organization. It can’t be just the CEOs strategy; it needs to be the organization’s strategy. It needs to be well understood and ingrained. It is the CEO who must make this happen. The CEO needs to affirmatively address the following questions: 1.) Have I established a reasonable strategic planning process? 2.) Have I made sure that our employees, particularly those that will have a direct impact or influence on the strategy, understand the strategy? 3.) Have appropriate resources been allocated? 4.) Is a disciplined execution process in place? and 5.) Am I monitoring execution?

Sounds simple, but too often it is not done. Whether the CEO is the architect of the strategy or the one person who has given the final nay or say, it is his or her job to pave the way, to set the wheels in motion and to monitor and manage strategic execution.

Ken Naglewski is a principal of Seabiscuit Partners, LLC, a provider of strategic advisory and other services to both healthy and financially distressed businesses as well as capital formation and investing in distressed situations. He has been a CEO, COO and CRO for several companies and a frequent speaker and author. He is a CPA, CIRA and CTP. M&A Advisors named him Turnaround Consultant of the Year for 2008. He can be reached at 615-491-7331, or by e-mail at ken [at] seabiscuitpartnersllc [dot] com.