Author: Mark Rhodes

If you are interested in the theories of business strategy covered in the blog post below, you may want to read Henry Mintzberg’s excellent book, Strategy Safari: A Guided Tour through the Wilds of Strategic Management. For example, Mintzberg and his co-authors provide a more lucent (and compact!) description of Michael Porter’s Five Forces Model than does Porter himself!

The demise of the cozy and friendly book store was well told in the Meg Ryan/Tom Hanks classic, You’ve Got Mail. Tom Hanks shows up in character as Joe Fox, and his Fox Books mega-store pounds the quaint little store owned by Kathleen Kelly (Ryan) out of business. Even as the movie graced screens in 1998, we watched the real life rise of twin titans Borders and Barnes & Noble as they dominated the book seller scene, crushed the small business booksellers, and absorbed the struggling mall vendors Waldenbooks and B. Dalton (remember them?) .

Don’t you remember places like Ryan’s Little Shop on the Corner, where you could talk to someone who knew every book and would happily fill your order within the week? We got our answers and stole away to find the book we needed cheaper– and in-stock– at Borders, B&N, or — just as likely — at Wal-Mart.

But as Ryan’s shop keeper might say, what goes around comes around. Just this week, Mike Edwards, the President of Borders announced that the company would enter Chapter 11 Bankruptcy. Battered by poor sales, continuing financial losses and heavy debt, the company will close about 200 of its 642 remaining stores and lay off about 6,000 of its 19,000 workers.

At its peak in 2003, Borders operated 1,249 stores under the Borders and Waldenbooks names, but now it will soon prune itself down to a third of that number. Its annual revenue has fallen by about $1 billion since 2006, the last year it reported a profit.

“You’re at war,” Hanks told Ryan. “’It’s not personal, it’s business. It’s not personal it’s business.’ Recite that to yourself every time you feel you’re losing your nerve. I know you worry about being brave, this is your chance. Fight. Fight to the death.”

This week, Borders announced it was losing the war. Citing reduced customer spending and a lack of liquidity, Edwards says the company “does not have the capital resources it needs to be a viable competitor and which are essential for it to move forward with its business strategy to reposition itself successfully for the long term.”

Strategic Thinking

Let’s turn to Michael Porter’s Five Forces model to understand betwixt which rocks and hard places Borders now finds itself. Porter recently wrote that “ In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. “ In addition to the competitive forces evident in today’s competitive landscape, Porter stresses the importance of the additional four “forces,” as shown in the graphic below.

Barnes & Noble entered the on-line sales in time to play second banana to Amazon. Borders didn’t open an online store until 2008. Too little too late. Big-box bookstores have struggled, as more people buy books online, in electronic form, or at grocery stores or discounters such as Wal-Mart

Substitutes: In Porter’s Five Forces model, substitutes are thought of as challenges from other industries. In this case, there are a remarkable number of industries beginning to infringe on the turf of the bookseller. Amazon and the internet, sure, but what about the telephone industry, for goodness sakes? You can read books on your smart phone now! And why wouldn’t Starbucks begin to feature content for readers next to the featured CDs they already offer. Why, they could hand you a classic book on a thumb-drive you can start reading before your latte is finished.

Buyers: Clearly, consumer habits are changing, our culture irreversibly affected by innovations in technology. Next time you fly, walk up and down the airplane aisle and look to see what people are doing. I see 20% watching movies on laptops, 15% listening to music on their iPhones, 30% reading a book or magazine, and as of today, a full 35% are reading their Kindles, iPads and Nooks. (Yes, these statistics are entirely made up by the blogger, but the point of my story is nonetheless true.) Suffice it to say, consumer habits are changing, and changing fast.

New Entrants: Here in the second decade of the 21^st century, internet services and electronic book readers are hardly new entrants. Best guess for the future, look to the Apple iPad. Once upon a time, a company called Wang enjoyed modest success selling dedicated word processing machines, until consumers realized they could do the same tasks – and so much more – on personal computers. The makers of Kindle and Nook know this, but as they work to add functionality to their machines, look for the iPad and other tablet computers – not to mention our smart phones – to take market share from the dedicated reading tools.

Suppliers: Some publishers have already stopped shipping books to Borders altogether. But of Porter’s five competitive forces, the supplier base has the least impact on current market dynamics. The relevant suppliers are the book publishers, authors, artists and other content providers. Traditional publishers stand to lose along with Borders, and continue to fall into the black hole already populated by the uh, record companies (remember them?)

Back to the Little Shop on the Corner

You May Not Be Interested in Strategy… But Strategy Is Interested in You… Leon Trotsky

So as we see, the game of strategy is being played around us all the time and we are all actors in the play. As Trotsky said, we may not be interested in strategy, but strategy is interested in us, and will continue to affect our everyday lives. We can learn from this war over book-selling and apply insights to our own businesses and other endeavors.

Whatever business you are in, the winds of change are blowing your way too. What to do?

• Anticipate the future. How will changing technology affect you? What do you need to do to mitigate this threat?

• Set up barriers to entry. How can you lock in your customers and stave off competitive threats? Perhaps push your strategic approach to greater customer intimacy?

• Attack competitor weaknesses. Come to think of it, there is some room in the Chapel Hill market just now for a little bookshop on the corner. As you’ve read, Borders has gone away. The wicked witch is dead. A smaller, more nimble competitor can take advantage of still-profitable market fragments. In fact the up-start competitor enjoys several competitive advantages, as I have written about here: The Strategic Advantage of the Upstart Competitor

Suggested Reading:

Strategy Safari: A Guided Tour through the Wilds of Strategic Management.

Click on the Image of the book for further information provided by Amazon.

Imagine that you could dump all the words of a million books from the past 500 years into a giant database, and look to see how various words have waxed and waned in usage over the centuries. You could look and see when archaic words like thou and yon disappeared from popular usage. You could identify the year the word internet first appeared, and when people started saying garbage instead of rubbish.

Oh… You can do that now?! Yes, the Google Monolith has indeed scanned more than a million books into a searchable soup, and we can now play with this facility using something called the Google Books Ngram Viewer. Let’s put the thing to work and examine our favorite topic: Strategic Planning. In the graph below, we can see the degree of usage of the words planning (in red) and strategy (in blue) since 1860.

Strategic planning is an oxymoron. Strategic thinking does not lead to a plan, it leads to a strategy. Rather, planning must follow strategy. If you don’t want to call it operational planning, call it “Planning that Follows Strategy.”

Henry Mintzberg, The Rise and Fall of Strategic Planning

Mintzberg argues that organizational strategy is often “emergent.” That is, answers to strategic questions do not arrive like the result at the bottom of a math equation. Rather, strategy emerges and changes as the strategist observes the world and reflects upon the dynamics of the competitive environment. Of course, there is debate among experts as to what exactly constitutes strategic thinking. Michael Porter, perhaps the most widely cited expert on organizational strategy, says that “strategic thinking rarely occurs spontaneously.” As if to prove his point, Porter provides a dry, methodological approach to the quest for competitive advantage and organizational strategy. Porter provides a set of strategic analysis tools that are serious and rational enough to make any Taylorist or Behaviorist proud. And granted, I have often found Porter’s framework and methodology useful in understanding the competitive dynamics of an industry.

But a quick study of the History of Strategy provides a blinding flash of the obvious: Successful strategy-making is most often an “emergent” process. Employing the emergent approach, the strategist maintains an open mind as to the future direction of the organization, and seizes the moment when opportunity matches organizational capability. In the end, strategy-making must be thought of as a creative process, as rich in spontaneity and magic as any other art. To apply these notions to our own decision-making , remember that strategic thinking is a yin and yang of left and right brain thinking. To engage in strategic thought, think and reflect on the big picture – the diverse players and forces in your environment. Think about the future. Use your left brain’s capacity to generate rational questions and answers. Use your right brain for intuition and wisdom.

The strategist is one who is concerned about the future of his or her personal, family or organizational life, and spends time and thought considering the best possible direction upon which to set forth. Yes, this makes us all strategists.

Strategy is, simply, chosen direction. Smaller, perhaps, than the mission or purpose of an individual, group, or organization — strategy can nonetheless be considered the directions we choose in our quest toward mission fulfillment. To establish direction, a strategy must be articulated to others.

That is, in addition to establishing a course for the future, one must get others on board for the ride. Influential strategists Gary Hamel and C. K. Prahalad posit that strategic leaders must not stop at analysis and resolve, they must spend quality time engaging others in understanding the chosen strategy.

So as a planner of strategy, you too must spend considerable time communicating… expressing… teaching… articulating. You must find ways to lead, inspire and move others. How to do this? Let’s look to one of the greatest communicators in history, Abraham Lincoln.

Lincoln’s deep empathy for the people of America motivated him to agonize over finding just the right words to truly articulate his vision of the future. Gary Wills points out in Lincoln at Gettysburg: The Words that Remade America that in Lincoln’s three minute address during the dedication of the Gettysburg cemetery, he reestablished the meaning to which Americans attribute the Constitution.

Surely, you recognize the words, which began: “four score and seven years ago our fathers brought forth on this continent a new nation conceived in Liberty and dedicated to the proposition that all men are created equal.”

This brief introductory sentence encapsulates what we now remember as what the American Civil War was about – freedom and equality for all people. Gary Wills and other historians tell us, though, that until Lincoln spoke these words, these ideals were not what the war “was about.” Wills says that today the Civil War means, to most Americans, “what Lincoln wanted it to mean.”

The majority of Southerners fighting in the war were not slave owners. Rather, many believed that they were fighting for a “way of life.” Larger issues such as the dynamics of the Southern economy also contributed to the situation. At the 1864 gathering at Gettysburg, Lincoln knew that he needed to articulate what the nation was fighting for — and he did.

Lincoln’s facility for expression — his “way with words” – enabled him to frame the meaning of the war for the people of his day in a manner that would empower Americans to frame their quest for civil rights a century later, and to the present day.

Lincoln’s use of the Declaration’s phrase about all men being equal elevated the notion to a single, supreme proposition about which we must all agree. Wills says that “by accepting the Gettysburg Address, its concept of a single people dedicated to a proposition, we have been changed. Because of it, we live in a different America.”

Now from Lincoln back to you. Remember that you are surely the master strategist for something. Whether we are talking about your own life, that of your family, or that of an organization you help to lead, it is important to articulate a desired direction for the future. To talk about the future in the manner that Lincoln did, try the following:

1) Don’t just state facts and numbers. Speak in emotional terms in order to connect with other people. Talk about the meaning of the places and accomplishments toward which you travel. A great way to bring emotion and meaning into your words is through story telling. Lincoln was a master story teller, endearing him to those around him. For more on this, look for an article called Story Telling that Moves People containing an interview with Robert McKee, in the June 2003 issue of Harvard Business Review. You can download it from HBR.org, or write to me at markrho@mindspring.com and I’ll send you a synopsis.

2) Use metaphors and imagery to convey a larger meaning. Lincoln’s well known metaphor that “a house divided cannot stand’ served to perfectly state his strategic position on matters of cessation. As another, Lincoln’s use of the phrase “the mystic chords of memory,” invoked a rich and spiritual understanding of how the American people are connected to each other… people of the north and south… people of the past and the present. A metaphor always draws the reader or listener from a specific matter in the here and now to a more general and larger truth to be told. For more thoughts on the use of metaphor in strategy, see my blog post called Metaphors Be With You: The Strategist as Poet.

The historian Alfred Chandler of Harvard Business School wrote a seminal book published in 1977 on the history of strategic decision making at the highest levels of Corporate America , including DuPont, General Motors, Standard Oil and Sears Roebuck. The book was called The Visible Hand: The Managerial Revolution in American Business. In this work Chandler proclaimed a maxim for the ages that has been followed as doctrine by strategists and consultants alike ever since. The maxim:

“Structure follows Strategy.”

That is to say, all aspects of an organization’s structure, from the creation of divisions and departments to the designation of reporting relationships, should be made while keeping the organization’s strategic intent in mind.

Strategy, of course, lines up the arenas and markets in which a company will compete, proclaims a targeted customer base, and asserts the matters by which the company will seek to differentiate itself. Chandler described how the successful progress of mid-twentieth century General Motors can be attributed to the strategic foresight of Alfred P. Sloan, who laid out the famous divisions of GM: Chevrolet, Pontiac, Oldsmobile Buick, Cadillac – listed here in order of pricing segment and lined up with market segments — so that each division could seek to please an intended customer segment. This is structure following strategy. Chandler showed that the need to reorganize — or to “restructure” — is triggered by a strategic shift driven by new technologies or market changes.

The way that you organize your company or organization to optimize the pursuit of strategic objectives is an important part of organizational design. Other design elements, such as hiring and personnel development practices, communication and decision-making systems, reward, recognition and renewal systems, all must be aligned around the chosen structure, but first you must decide upon the optimal structure for attaining your strategic objectives.

When considering a change in organizational structure, keep in mind the following criteria for a good structure:

• Aligns the organization to best follow strategic direction
• Allows for clearly defined roles and responsibilities
• Clarifies who makes what decisions.
• Enables clear accountability.
• Minimizes handoffs that affect the customer experience. Minimizes the customer “runaround.”
• Minimizes handoffs that create confusion over who is responsible for what outcomes.
• Pulls together the people who most need to work closely with each other.
• Allows information to flow unrestricted to those who need it.
• Creates manageable spans of control.
• Is augmented by informal channels of cross boundary communication.

Generally, there are five ways to structure a company or corporation: Organize by Function, Product, Customer Segment, Business Process, or Matrix. Here are the pros and cons of each:

Functional Structure (e.g. Operations, HR, Finance, Marketing Departments):

Pro:

• People with a common profession work together so standards of performance are well understood
• People in a unit “talk the same language”
• Easy to maintain stability

Con:

• Conflicts arise between organizations/departments since priorities and objectives often conflict
• Decision making must be done at the top, where a cross-functional team sits together at the same table

Organizing around Product Lines or Programs

Pro:

• Strong identification with products
• High degree of coordination between functions
• Can allow rapid response to market changes affecting a class of product
• Employees can see big picture and relate to a common outcome
• Opportunity for employees to learn other functions
• Decisions can be made closest to those working on product, more bottom-up decision making

Con:

• Can be lack of coordination between product lines
• Functional or professional development can suffer as functional experts are isolated from each other
• Can be duplication of efforts across product groups. R&D can be parochial, only focused on present clustering of products

Organizing around Customers or Market Segments

Pro:

• Deeper understanding of customer needs.
• High coordination among functions aimed at meeting customer needs.
• More responsive to customers. Greater flexibility within business units for purpose of adapting to needs of a particular customer segment.
• Team members see the big picture.
• Innovation is customer-driven.
• Can be more satisfying for workers, as mission of customer focus is clear.
• Opportunity to learn new functional skills.

Con:

• Can be lack of coordination between business units.
• Functional or professional development can suffer as functional experts are isolated from each other.
• Can be duplication of efforts across product groups. Team members cannot relate to disparate customer segments.

Organizing as a Business Process (as championed by many experts on corporate “reengineering”)

Pro:

• Clarifies business outcomes at every stage of value delivery
• Organizes people in such a way that problems do not fall between the cracks or go unattended
• Enables people with a common language across the organization, making it easier to identify and reinforce accountability
• Facilitates cross-functional understanding of the business

Con:

• Can diminish focus on the customer unless customer-facing processes are truly prioritized
• Experts in functional areas such as Finance, HR, Marketing, etc. can be devalued and unheeded
• Can be duplication of efforts across process groups.

Organizing as a Matrix (e.g. customer segment groups crossed in matrix form by functional, supporting departments.

Pro:

• Simultaneous focus on external and internal business requirements. Can lead to more integrated, holistic decision-making.
• Employees can be reminded of the needs of the whole business enterprise.
• Functional expertise can be directly and immediately applied to needs of program, product or customer issues.

Con:

• Can lead to diffusion of accountability.
• Can be difficult to locate cause of organizational issues.
• Can mean doing more with less people, and result in individual frustrations.
• Can lead to confusion among customers who wish for a single point of contact.
• Requires a very high level of competent lateral communication capability

Strategy-making begins with an idea. Without a guiding idea there can be no sense of direction. Yet many articles and books about strategy do not address a most important matter: how to generate ideas. To conceive the essential set of ideas that we call strategy, the strategist must understand and master the art of the metaphor. As Aristotle said in Poetics, “the greatest thing by far is to be a master of metaphor.” It is “a sign of genius, since a good metaphor implies an intuitive perception of the similarity in dissimilars.” Effective strategic thinkers display openness to new and different ideas, and one way to generate ideas is through the use of metaphor, or its close relative analogy, perhaps the most advanced form of human thinking.

Good strategy does not fall out at the bottom of an equation. Yes, analysis is necessary… Yes critical thinking is essential… But in the end, great ideas about “what to do” come to us through inspiration.

In a wonderfully insightful book called An Alchemy of Mind Diane Ackerman says that “Metaphor is one of the brain’s favorite ways of understanding the ‘this and that’ of our surroundings, and reminds us that we discover the world by engaging it and seeing what happens next. The art of the brain is to find what seemingly unrelated things may have in common, and be able to apply that insight to something else it urgently needs to unpuzzle.”

In their Harvard Business Review article entitled “How Strategists Really Think,” Giovanni Gavetti and Jan W. Rivkin show that reasoning by analogy plays a major role in the thinking of successful strategists. As an example, these writers point to Intel chairman Andy Grove’s story of how he came up with an important business strategy. Attending a management seminar, Grove heard the story of how fledgling “mini-mills” in the steel industry began in the 1970s to offer a low-end product—inexpensive concrete-reinforcing bars known as rebar. Establishing market share with the low-end products, these steel companies then began to migrate up the hierarchy of products toward the higher-end, more lucrative steel products. U.S. Steel, which had ceded the low-end products to the smaller and seemingly insignificant players, was caught unawares by the companies attacking the market for their core business and lost market share over a number of years.

An epiphany struck Andy Grove as he sat in that management seminar, thinking about the steel industry. Using what Gavetti and Rivkin call “analogical thinking,” Grove saw that Intel was sitting in a similar situation to that of U.S. Steel in the 1970s. Intel had theretofore leaned toward ceding low-end computer chips to niche players, a strategy that, Grove now realized, would put Intel in a dangerous situation. He began to see low-end computers as “digital rebar,” a metaphorical image that helped him in articulating his strategy to Intel management. “If we lose the low end today,” Grove said, “ we could lose the high end tomorrow.” As a result of this thinking, and the deliberations that followed, Intel redoubled its efforts to market the low-end “Celeron processor” for low-end personal computers.

As Diane Ackermans says “… the brain forms metaphors in order to understand ‘one kind of experience in terms of another,’ as new metaphors create new realities…” It is the leap of thought from one set of conditions to an analogous one, that brings us that truly great idea for action. As Ackerman concludes, this is “what metaphor does so well: illuminate some of what can’t be wholly understood. “

Kenichi Ohmae says in The Mind of the Strategist, “In business as on the battlefield, the object of strategy is to bring about the conditions most favorable to one’s own side, judging precisely the right moment to attack or withdraw and always assessing the limits of compromise correctly. Besides the habit of analysis, what marks the mind of the strategist is an intellectual elasticity or flexibility that enables him to come up with realistic responses to changing situations, not simply to discriminate with great precision among different shades of gray. In strategic thinking, one first seeks a clear understanding of the particular character of each element of a situation that makes the fullest possible use of human brainpower to restructure the elements in the most advantageous way. “

To conclude? Perhaps a poem…

We’re coming to the edge

running on the water

coming through the fog

your sons and daughters…

Let the river run

let all the dreamers

wake the nation

come, the new Jerusalem

… by Carly Simon

For more thinking about strategic thinking, see Mark’s website; http://strategybydesign.org

From the days of ancient warfare, large armies have struggled with an inherent disadvantage: Sheer size presents an easy target for a quick and nimble attack force. The red-coated, regimented British struggled to fend off undisciplined American revolutionaries. The Vietnam era Americans could not defend themselves adequately from the pesky, unpredictable Viet Cong.

In the modern strategic arena, an upstart company can gain advantage over larger and well established rivals by identifying an attractive and profitable niche of their rival’s customers. “Cherry picking” initiatives seek to snatch away the most profitable customers from a market leader, while leaving the other company with the more cumbersome and less profitable dregs among their customers.

Have you seen the Progressive Insurance commercials touting the way their service people will provide you not just with a quote from Progressive, but also with sometimes even more desirable quotes you might receive from their competitors?

Altruistic? Hardly. Because of their superior information technology, Progressive is able to sort the customers they do want from the ones they don’t. That is, if you as an automobile driver are likely to drain off more money in claims than you’ll restore by paying premiums, Progressive will gladly help you find a nice insurance provider down the street… one who’ll give you a lower fee than will Progressive. If you are recognized by the company as a safe driver – meaning Progressive is safe from the risk of having to pay you for a claim – then Progressive wants you and will compete aggressively to get you. For Progressive as the smaller attacker, that’s cherry picking the profitable customers while saddling the larger opponent with an ever more needy and draining customer base.

In recent years, Progressive has reinforced the notion of the insurance business as a free wheeling “marketplace,” as characterized by their “store lady” hosting a grocery market of insurance products, encouraging us all to “shop” for the best deal. Allstate’s notion of “good hands”? The comfort of a long and trusting relationship as touted by State Farm? Well, that’s defensive strategy as the insurance behemoths of old urge us to stay in place. By way of contrast, the Progressive lady wants us out shopping for new and exciting relationships so the company can pry loose the most desirable customers.

What to do? Let’s look to the ancients for advice… The most influential treatise on military strategy between the age of the Romans and the Napoleonic era was written by the Roman citizen known as Vegetius in the fourth century A.D. His writing was cherished as the Bible of Strategy by Charlemagne, Richard the Lion Hearted, and England’s Henry II. Vegetius’ De Re Militari contains insight into strategic and operational planning that are relevant still.

By Vegetius’ time, the great empire of Rome was in its waning days, its once mighty military descending into atrophy and decay. The days of Julius and Augustus Caesar were a vague memory, having passed four hundred years earlier. Vegetius wrote about “the ancients,” the generals and leaders of Rome a centuries before his time, and sought to capture and share concepts of strategy that had put Rome civilization into its long-held position of dominance. Despite his aspiration to help restore Rome to its days of glory, Vegetius came along too late to make an impact, and he was little noticed by Romans of the time. In the centuries to come, though, his work became a staple for strategists and leaders throughout Europe.

Among the key advice we receive from Vegetius: Avoid unnecessary impedimenta. Impedimenta, the encumbrance of supply trains and support people and materiel, impedes the ability of an army or organization to move about the strategic space in a nimble, flexible manner. Clearly, for example, Southwest Airlines has sustained its success for decades in competition with the so-called “major” air carriers because its leaders have minimized impedimenta, while American, Delta, United and the others remain encumbered by large “hub” airports, a variety of planes and equipment requiring redundant teams of pilots and technicians, and large, entrenched, and increasingly inflexible workforces.

Vegetius said this:
“An army too numerous is subject to many dangers and inconveniences. Its bulk makes it slow and unwieldy in its motions; and as it is obliged to march in columns of great length, it is exposed to the risk of being continually harassed and insulted by inconsiderable parties of the enemy. The encumbrance of the baggage is an occasion of its being surprised in its passage through difficult places or over rivers. The difficulty of providing forage for such numbers of horses and other beasts is very great.”

Advice for the strategist: heed the direction of Vegetius. Smaller, ambitious businesses should and will identify desirable niche markets and pursue them aggressively and precisely. You cannot take on the established competitor full force to full force. But you can win a niche and establish a beachhead from which to pursue future expansion.

If you are the entrenched but wary player, then as strategist you must slow the erosion of advantages, and continually seek new high ground representing future competitive advantage. Good strategic thinking for established businesses means scanning the competitive environment for unwanted challenges, and staying nimble enough to do battle in the niches that count. Moreover, the strategist must erect “barriers to entry” to protect present advantages.

In preparing for battle I have always found that plans are useless, but planning is indispensable.

Dwight D. Eisenhower

One of the ironies of the recent oil spill debacle in the Gulf of Mexico is that it is the oil industry that is most often credited with devising and putting to use a strategicplanning tool meant to anticipate major changes in the environment – from disaster to depression – and to enable organizations with plans for immediate strategic response. The tool is called scenario planning.

Scenarios are “alternative futures” that cannot be predicted due to uncertainty. The term is borrowed from the world of drama, since each alternative future is described in the terms of a “story” or scenario. Scenario planners identify clusters of events that could happen, and imagine how things would be impacted should these events actually occur. The story is then shared as the beginning of a long range planning exercise.

In order to respond to undesired happenings such as the collapse of credit markets or the recent oil spill, strategic leaders must devise and develop flexible, adaptive, nimble organizations ready to change and respond as circumstances dictate. Noted economist and strategic thinker James Bryan Quinn said that “The essence of strategy – whether military, diplomatic, business, sports [or] political – is to build a posture that is so strong (and potentially flexible) in selective ways that the organization can achieve its goals despite the unforeseeable ways external forces may actually interact when the time comes.”

Scenario planning as we know it today got its start in the 1970s. Though oil prices had remained stable since World War II, leaders at Royal Dutch Shell worried that disruptive change could happen with severe adverse effects on their business. Among the disruptive events they feared was a sudden increase in the price of oil sparked by the rise of the Organization of Petroleum Exporting Countries (OPEC).

The price increases did happen in October of 1973. Many oil companies struggled with the effects of the new competitive dynamics. Shell thrived. They had prepared a plan – a scenario plan – for what they would do as these circumstances unfolded, and they implemented their plan while others were just gathering to deliberate on next actions.

Today Americans are deeply concerned with another sort of oil crisis — the disastrous and seemingly unstoppable gusher in the Gulf of Mexico. Many are outraged that BP had no apparent contingency plan for dealing with the crisis. Though the oil industry is known for thinking out plans for dealing with price changes or the introduction of alternative sources of energy meant to challenge dependence on oil and gas, it is now apparent that the hunt for oil at increasingly remote or deep places led to risk-taking without appropriate contingency plans.

Eventually, the unexpected is going to happen. That, we can expect.

Scenario planning has been the topic of numerous books over the past twenty years. Numerous companies have been touted for their use of the technique – Novo Nordisk, Electrolux, AT&T, BellSouth, Nissan, American Express, IBM, Cisco, Ford, and on and on. One survey indicated that as many as 50% of Fortune 500 companies have incorporated scenario planning into their broader strategic planning efforts. The extent to which these companies have heeded their scenario planning process is likely somewhat less than so many authors would have us believe, but examining possible scenarios as alternate futures is invaluable as one seeks to build strategic flexibility.

Before beginning scenario planning, remember that it is often the planning process per se, rather than the resulting articulated plans, that matter most. Dwight Eisenhower, as general in charge of the D-Day planning process, said “in preparing for battle I have always found that plans are useless, but planning is indispensable.” By involving a broad swath of people in the planning process, the intent of the plans will be etched in their hearts and minds, allowing people the flexibility to make wise and well-reasoned decisions once a crisis occurs.

The basic steps of scenario planning include:

1. Identify the uncertainties that could affect your company. Uncertainties can come from the worlds of politics, technology, economics, government & regulation, societal, as well as the cataclysmic or climatic changes that can happen in the natural world.
2. Identify possible futures that would present change from the status quo. Ask “What events, whose outcomes are uncertain, could have significant effects on the implementation of our strategic plans?” Drilling down (please excuse the phrase) you may ask “do we know what we’d do if the economy enters a recession or depression?” “Do we know what we would do if a natural disaster destroys our headquarters?” Are we prepared for changes in the market should a competitor introduce a new and highly desirable product?”
3. Formulate plans for dealing with each scenario. Identify key departments and resources throughout your organization who must know ahead of time what would be expected of them.
4. Craft overall strategic plans that will allow your company to stand prepared in case each of the scenarios comes to fruition.
5. Monitor the environment and watch for carefully identified trigger points that will tell you when a given scenario has arrived. In the classic case of Royal Dutch Shell anticipating the manipulations of the market by OPEC, trigger points were based on the price per barrel of oil. Obviously, quantitative triggers are easiest to monitor and recognize, but not all scenarios come with neat and apparent warning signals. Rather, strategic leaders must have thought about each scenario before its arrival, and must learn to observe clues of its arrival.
6. As scenarios become more plausible with time, increase investment and preparation for the scenarios that are becoming more likely. Embed scenario planning into organizational development and corporate education programs.
7. Continue to assess what you do and don’t know about what will happen in the future, and shape strategic plans accordingly.

Mark Rhodes. Ph.D. consults on strategic planning and decision making. He has facilitated dozens of scenario planning exercises for clients in a variety of industries. See his website, Strategic Thinking.

The Law of Nemesis is a useful concept for leaders, strategists and strategic planners. In a nutshell, the law states that if things are going well in your enterprises, you must be aware that Nemesis is lurking, since no successful effort goes unnoticed by competitors. Mark Rhodes of Strategy by Design explains the concept in this short clip of his teaching.

The Law of Nemesis

Does it ever seem to you that just as prospects for your business begin to look brightest, someone will rise out of nowhere to pick off a valued client, or to introduce a product line that matches or trumps your own? This dynamic is sometimes referred to as the Law of Nemesis: “Find a good thing and count on this: a nemesis will want to snatch it from you. Nothing good is yours forever because others will always want a piece of it.”

Nemesis was the Greek goddess who meted out divine retribution for wrongdoing… especially hubris. If Nemesis believed that some mere mortal was having all the luck – or getting too much credit for things – she would find a way to smite the individual by sending bad luck and ill fortune in the direction of the offending person. The Romans, too, believed that fate will eventually punish those who have gained unmerited advantage.

All of us, of course, have the notion from time to time that the luck always seems to fall the other way. But whether these were matters of divine retribution or not, strategists know that one thing is certain: Every positive situation in life and business bears the seeds of its own reversal.

Count on this: Competitive advantages will always erode. Find a good corner for a gas station, draw some interest, and someone will open up another station across the street. Work to craft a new offering of professional services, and copy cats come out of nowhere. Design a nice blog or website, and find an exact duplicate a week later. Without question, competitors learn how to imitate sources of competitive advantage.

To stave off the Nemesis, you must find sustainable advantages. The strategist must slow the erosion of advantages, and continually seek new high ground representing future competitive advantage. Moreover, the strategist must erect “barriers to entry” to protect present advantages.

Strategic planning must include plans for defending ground, for minimizing the work of Nemesis. Companies can:

Continue to set up and defend barriers to entry in order to slow the entrance of new competitors and to stay a step ahead on the innovation curve. This can mean locking in intellectual capital and proprietary procedures. It can mean staying very close to existing customers and locking in relationships by establishing mutual trust and dependencies. It can mean making capital investments in improvements that competitors cannot match.

Another way to stave off Nemesis is through competitive intelligence gathering, so that you, as strategist, are aware of what the competition is up to and how competitors will likely react to your own initiatives. Because so much information about competitors is now available over the internet and through public domain sources, many companies are empowering their entire work force in seeking information helpful in adapting to changes across the competitive landscape.

A simple way of thinking about this is that strategic decision-making is about putting your army onto the battlefield, your company into competitive space, armed with strategic advantage – a head start of sorts. Strategic advantage is essential. Some say, as a matter of fact, “if you don’t have advantage, don’t compete.” Then, once you are in the game and have advantages in place, be aware the Nemesis is watching and that competitive advantages always erode. Add the Law of Nemesis to your arsenal of thought as a strategic thinker, and enjoy success over the long term.

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Mark Rhodes is a highly experienced organizational strategy and design consultant with Strategy By Design. You can reach him via email at markrho@mindspring.com.

Nike makes shoes, right? Well, not exactly. Nike is a wonderful company with superb marketing capability. But Nike outsources the actual manufacturing process to someone else. So in that sense, Nike does not make shoes. Nike’s competitive work is the design and marketing of athletic shoes. Obviously, the company has succeeded for years at doing just that. Knowing when to outsource work and when to keep it in-house is a key to successful strategy.

The underlying principle of business strategy is that you cannot excel at everything since resources are always finite and limited. Instead, you must make strategic choices. Key among these choices is a critical decision: which elements of work must be done by the company itself, and which elements should be outsourced? To make a sound decision of this sort, begin by identifying the work of the organization that is “mission critical.” Mission critical work cannot be trusted in the hands of another organization.

As a start toward culling the mission critical work from work that can be outsourced to others, it is helpful to perform and assessment of all the work processes performed by your company and sort each into one of three categories. Once work is categorized, the organization can be aligned to properly support the requirements of each type of work. These three categories are:

Competitive or Strategic Work. This is mission critical work. It is the core competence of the organization. Strategic work is that which creates sustainable competitive advantage and distinctiveness. For example, Nike differentiates itself through its strategic marketing work (sending non-core work such as manufacturing overseas), while Apple excels at product design. Competitive Work is always performed and managed in-house.

Competitive Enabling Work. This work “leverages” the competitive work, or enables the competitive work. Companies that stake their reputation on the excellence of their personnel will often consider employee development and education to be Competitive Enabling work. As another example, while Wal-Mart’s strategic differential and competitive work is considered operational excellence — managing information and keeping stock ever present on its shelves – the company’s competitive enabling work is both the development and maintenance of their state of the art information technology (IT).
If Competitive Enabling work is done better, the Competitive Work becomes more distinct in the eyes of stakeholders.

Business Essential Work. This work must be done to stay in business, but is work that customers don’t really value. Even if done at a world-class level, business essential work does not create sustainable competitive advantage. Nonetheless, if done below industry standards, the outputs of business essential work can cause disadvantage and/or poor performance. Business Essential work includes “compliance” work which is performed to comply with governmental regulations or to mitigate legal risk to the organization. Designers of high performance organizations should heed this important guiding principle: Business Essential work, if left unabated, will consume the organization’s competitive work. That is, people can get so consumed by the busy work of the company that they put off and lose focus on the organization’s truly strategic endeavors.

It’s critical for leaders to understand that by categorizing work as Business Essential, it doesn’t mean that this work is not important to the organization. On the contrary, it is essential to the organization to stay in business. In fact, if Business Essential work is done below the industry standard, it can lead to disadvantage. At the same time, if leaders invest a lot to get this work above a level at parity with competitors, it will never lead to distinctiveness in the eyes of the customers.

Outsourcing selected business processes has become an important strategic option for companies wanting to maintain a focus on their strategically important or competitive work. Resourcing decisions should be dictated by the type of work and the nature of the individual skills and knowledge required to perform the work.

Work that is not categorized as competitive work is subject to consideration for outsourcing of one sort or another. To determine the best possible distribution of work, we use the following model

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Mark Rhodes is a highly experienced organizational strategy and design consultant with Strategy By Design. You can reach him via email at markrho@mindspring.com..