Strategic Planning Expert

Can success breed failure? This seems like an oxymoron doesn’t it? But world class companies continue to fall into this trap - Toyota is the latest example.  Toyota gained market share in the automotive market by focusing on quality - this was their strategic competency.  This single-minded concentration on quality built trust with consumers worldwide, wooing consumers away from other less conscientious manufacturers. But the recent recall of millions of Toyota vehicles over several model years shows how Toyota’s loss of focus on quality has severely damaged the trust that had been built up over decades.  The cost of the recall will be millions of dollars in the short-term, but the loss of future sales and its reputation is incalculable. 

Toyota - Culture of Quality 

How did Toyota institutionalize its quality culture?  One aspect of the “Toyota Way” is that newly hired engineers were mentored for 10 years to ensure that they are fully imbued with the values around which the culture is built. Another aspect of the quality culture was the concentration on analyzing consumer complaints and acting on the analysis quickly.  However, when Toyota set its goal to become the world’s largest automotive manufacturer, it lost sight of the key values that gave it its reputation in the first place.  In order to meet its growth targets Toyota had to hire many new engineers globally; however it did not have the senior engineers available to mentor the new team in the manner that it had in the past.  In addition, it no longer spent as much time analyzing consumer complaints - and in some cases it came up with low cost “fixes” (e.g. replacing floor mats in response to complaints of sticky accelerator pedals).  One final aspect of the decline was that Toyota did not share safety information worldwide, so problems that cropped up in Europe were not shared with the US.  Hence its “failure to connect the dots”, as stated by Akio Toyoda when commenting on the recent recall. 

What Should We Learn? 

Toyota’s early growth resulted from its relentless pursuit of quality - this was its strategic competency; however, it lost its way when growth took priority.  When you lose sight of your strategic competency, the very differentiator that gives you your competitive advantage, you will damage your reputation in the market. This reputation often takes decades to build.  So as you look to grow, make sure that the growth does not cause you to grow faster than you can grow your strategic competency. This means that you must have plans to ensure your intellectual capital (strategic competency) grows at the same pace as your sales growth.  This competency expansion is a critical consideration as you develop your strategy.

Denise Harrison is Vice President of the Center for Simplified Strategic Planning, Inc.  She can be reached at harrison@cssp.com.

Strategic Planning Expert Robert Bradford

When assessing strategic opportunities, we have for years examined four variables in the Simplified Strategic Planning process – value, probability, management effort and financial risk.  Recently, I have taken to including a secondary analysis of opportunities, undertaken when reviewing opportunity screening worksheets in meeting number two.  This screening is particularly useful when you are evaluating far more opportunities than your team can realistically handle (in my experience, from three to ten strategic opportunities, depending on the team and its resources). 

The purpose of this screen is to enable your team to quickly sort out the opportunities with the greatest strategic potential for your organization.  When reviewing opportunity screening worksheets, you simply ask the team to rate each opportunity on two dimensions – resource requirements and strategic impact on the organization.  For resource requirements, you may want to anchor the rating on a one to five scale.  In a medium sized company, a one might indicate resources commensurate with an individual employee’s initiative – requiring little management of either manpower or money.  A two could correspond with departmental level resources, a three with two or more departments, and a five would indicate a need for co-ordination of resources across the entire company.  For strategic impact, we used one for “nice to do”, three for “important” and five for “critical to our future”.  Note that we do NOT rate on a purely financial basis, and in practice, opportunities with a strictly financial payoff were generally given a three impact rating – that is, a simple boost to profit is not enough to earn an opportunity high marks on strategic impact.

Some interesting insights arise when using this assessment tool.  Your team will doubtless agree that priority should be given to high impact, low resource opportunities – I call these “no brainers”.  Equally obvious should be the automatic disqualification of low impact, high resource opportunities – though, in many organizations, these grind up a lot of recourse as individual employees take on pet projects as personal initiatives.  The most difficult discussions – and often the most strategically dangerous issues – occur in the middle zone – opportunities with moderate impact and/or moderate resource requirements.  Each presents a different danger to a well crafted strategic plan – the moderate resource requirement opportunities can choke middle management as senior executives delegate a growing number of “just do it” initiatives to the next layer of the organization.  The medium impact opportunities may actually receive top-level commitment in strategic planning – after all, how can you deny an opportunity that increases your profitability?  These opportunities can mire your strategic level resources in initiatives that produce only incremental improvements in your organization’s performance, while more fundamental, truly strategic opportunities are starved for resources because they are “too difficult”. 

If your organization is plagued by a surplus of incremental projects or “just do it” items that are overwhelming mid-level management, this approach to opportunity screening may give you one more way to rationally say “no” to things that will impede your strategic progress.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com. 

Strategic Planning Expert

“First, the bad news, the market for buggy-whips has disappeared; but the good news is, that we have cornered the market for 8-Track tape players.” 

Who makes the screens that go into electronic readers - you know the screens on Amazon’s Kindle^TM and Sony’s Reader^TM?  Prime View dominates this market; how did Prime View become the leader?  Is this a new company?  Well yes and no. Prime View was started by a Taiwanese paper company who saw that paper was being replaced by other media, in this case liquid crystal display (LCD) screens.  Prime View was born from this view of the future.[1] 

The Importance of Market Analysis 

The senior management team of the paper company correctly identified what the market really needed; the market did not need paper, the market needed something to display the written word.  Correctly identifying the true market need enabled the company to see electronic readers (e.g., Kindle^TM) as a substitute for using paper to publish books and other media.  Once this alternative technology was identified, the team developed a strategy to enter into the electronic reader market.  The electronic reader market is a very small segment of the overall LCD display market.  The larger segments of the LCD display market are dominated by large electronics companies, which are often competing on price.  Prime View selected the electronic reader market, a market that was still being driven by technological advances rather than lower cost. 

Once they identified the electronic reader market, they decided that it would be easier to buy/partner to obtain the technology required, rather than develop it in-house.  They acquired several companies including Philip Electronics, NV’s e-reader division who was providing screens for Sony’s Reader^TM.  They licensed E-Ink’s technology to further enhance the product and subsequently became Amazon’s e-screen supplier for the Kindle^TM product.  Finally, in order to control the technology the company purchased E-Ink.  Now they dominate the e-reader screen market, and all the key providers (Amazon, Barnes & Noble, and Sony) of e-readers use Prime View screens in their products. 

Keys to Success 

1. Truly understand what the market needs - this is not necessarily what the market is already buying from you.  If you correctly identify what the market really wants, you will be able to see indirect competition and substitutes on the horizon.  Prime View realized that the market did not need paper, but an alternative medium to display the written word.  They realized that LCD screens would be used in place of paper. 
2. Select a market where your company will be successful and develop a strategy to enter that new market.  Prime View selected the electronic reader market where technology was key to market differentiation, rather than lower cost. 
3. When entering a new market, make the “make/buy” decision early; can you grow the competencies needed to compete in this market in-house or is it faster and more cost-effective to buy a company with the required competencies? 

What is next for Prime View? 

Now that Prime View has the dominate position in this market, it cannot rest on its laurels.  The good news is that the market is growing quickly; the bad news is that this market growth has attracted many competitors.  How long will this market be technology driven? What does Prime View need to do in order to continue to be the market leader?  When will the transition come that will move this market from a specialty market to a commodity market where low cost defines the winner?  How does it go about looking for the next emerging segment in the LCD industry - a new segment where technology is driving success rather than low cost?  As the market- dominate player, you cannot kick back and enjoy success, you must plot the next move on the chess board so that you are positioned for success for years to come.

Denise Harrison is Vice President of the Center for Simplified Strategic Planning, Inc.  She can be reached at harrison@cssp.com.

One of the hardest things to get right, strategically, is the true value of your product or service.  This is understandable, since the only true measure of value is what an individual customer will pay at a specific point in time.  Most of us look at our costs- commodity based - or competitors’ prices- also commodity based - when thinking about pricing.  This is silly when pursuing a specialty strategy, since the customer is your best source of value information. 

Some companies, realizing this, will ask their customers directly what the value of a product or service would be.  While this can give you decent guidelines for pricing, we should be aware that customers won’t verbally answer this question the same way they would if they were actually reaching into their wallets to buy your product or service.  Indeed, in many situations, customers will consistently under-report the prices they would be willing to pay, because they expect their answers will cost them in the future.  Fortunately, there are a few other clues we can look at to help us with our thinking on prices. 

1.           Substitutes 

Substitutes are a rich source of information about value.  There are three key substitutes you should be aware of in pricing:  (1) Directly competing products, (2) Indirectly competing or combination products, and (3) the ultimate substitute, not buying anything at all. 

2.           Measured changes 

This source of value information relies upon the impact of purchasing your product or service.  Sometimes, this is very direct - using a product or service may save your customer money that they would have spent on something else.  A super simple example would be drinking cheap beer instead of expensive champagne - you know the value is no more than the price of the champagne, since the customer will save that much by switching to another (if inferior) product.  Another example would be consulting services - if working with a sales trainer, for example, is guaranteed to increase your sales by a certain amount, you would expect the cost to be less than or equal to that net value. 

3.           Actual buying behavior 

Without question, this is the best data on value.  When a customer buys, you know that the value - to that customer - is greater than or equal to the price.  Conversely, when the customer does not buy, you know the customer’s perception of value is less than or equal to the price.  If you have many, many pricing opportunities (such as in retail sales), you may want to rely very heavily on this data, as long as you have a good means of tracking buyer behavior. 

How do you set your pricing?  Given that 90% of pricing errors are under-pricing, what do you do on a routine basis to evaluate how your pricing fits with your company’s overall strategy?  We’d love to hear any stories you have about what is - and isn’t - working.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

Strategic Planning Expert

How is your total new product development process performing for your company?  There are a number of elements to consider before answering this question. Elements of the analysis should likely include: Market Intelligence sufficiently equipped to provide well-documented and well-thought-out analyses of potential new products and markets; Development capabilities sufficient to actually develop the new products specified by the market intelligence at the appropriate level of costs, including marketing, selling and distribution costs; production capabilities appropriate to make the products developed; marketing and sales abilities to promote and sell the products; distribution/logistics with the capacities to stock and deliver the products as needed.

First: How well does your market intelligence report on the real needs and preferences of your customers, current and/or targeted?  Effective market intelligence is a necessary element to an effective product development process.  By properly analyzing your customers’ wants and requirements, what your competition is offering and what your company is capable of delivering, market intelligence should help your company focus its product development process on those projects which show the best possibilities for success in the future.  Financial analyses which include the costs of development, manufacturing costs, logistics and distribution costs, selling and marketing costs should be detailed, along with an assessment of appropriate pricing should be completed early in the process with a goal of pursuing those projects with the highest likelihood of success as well as another goal of eliminating those projects which probably won’t reach your profit and sales volume goals. 

Second: Does your new product development (NPD) group possess the tools and knowledge needed to develop the products recommended by marketing?  Do they have time to devote to these new products, or are they already committed to other development projects?  Do you maintain and regularly update your NPD priority list to be sure that your assets are employed in their highest and best use?  At the same time, are you allowing your NPD group to jump from project to project or are they focusing on projects within their capabilities and pursuing them to completion? 

Third: In your NPD process, do you involve production in the development process to be sure that any new product developed can actually be produced on the production equipment your company has?  If your company does not have the capability to manufacture, do you have the outside resources available to provide the productive capacity needed to bring the product to market?  At the same time, do you have the internal ability to effectively work with and monitor the external production of your products to assure timely delivery and appropriate quality and adherence to standards you require? 

Fourth: Do marketing and sales have the capability to promote and sell the products developed?  Do they have the contacts and channels needed to actually bring the product to those who will be buying the newly developed product?  Does marketing have the talent and capacity to promote the new product effectively?  Does sales have the necessary abilities to sell the product to potential users? 

Fifth: Once the product is sold, does distribution/logistics have the ability and capacity to deliver the products as needed?  If you can’t get the product to the buyers, it can’t be successful.  Do you have the distribution network necessary for getting the product to market?  

While this is not an exhaustive checklist, it does point at key elements in any new product development process, which should be included in the overall analysis of whether to proceed or not with a specific project. 

Digging Deeper:  The author recommends referring to Elements of Innovation, a collection of articles by Center for Simplified Strategic Planning consultants (available through www.cssp.com).  See specifically the diagram on page 71 - also found in the article “Innovative Measures” in the Article Archives of www.cssp.com

M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. and can be reached at baldwin@cssp.com.

© Copyright 2009 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution

Strategic Planning Expert

“As the housing market collapsed in late 2007, Moody’s Investor Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.”[1]

Banks failing, real estate loans made to people who did not have the means to repay them, institutions using derivatives without fully understanding the risk - what happened?  Were executives just trying to meet their short-term goals?  Did these goals enable them to qualify for significant bonuses?  Did this achievement of short-term goals lead to long-term instability?

Many of the financial institutions currently in distress did not pay heed to the warnings of a real estate bubble.  Instead many institutions developed plans to keep the top line growing in spite of the increasingly risky nature of the borrowers and the overvaluation of the underlying collateral.  Could this have been prevented? 

Well, hindsight is 20-20, but the lessons here are important and should be a part of your strategic planning process:

• Evaluate external forces - (e.g. is there a bubble?)  Are your goals consistent with the external environment?  How are you positioned if the bubble bursts in 1 year? 2 years? 3 years? Are you making the naïve assumption that business will continue to grow? Do your goals explicitly take risk into consideration?
• Are top line growth goals in line with long-term stability and profitability and perhaps survival?
• Are you not investing in key projects in order to make the top line?
• What will the consequences be if you do not invest?  Will it impact your long-term growth?
  • Will your phone system go down if you do not invest?
  • Will you have a safety issue if you do not continue with training?
  • Will you have inadequate staff for the upturn if you do not replace key positions now?
• Are you taking on customers who are a time sink in order to make your top line?
• Are you using the right metrics?  Are you measuring success from a customers’ viewpoint?  (If you are UPS should you measure package delivery or package receipt - i. e. did the addressee really get the package?)

During economic turbulence, be sure you set realistic goals that do not jeopardize your company’s long-term viability.  Position your team and your company for the recovery by setting reasonable targets that are not solely focused on short-term results.

Strategic Planning Expert

At the conclusion of the due diligence process you should have at your finger tips a great deal of knowledge concerning the acquisition target.  At this point you will be making a go/no go decision.  If the decision is a “go,” you have the information that you need to start your integration process if you decide to move ahead with the acquisition.  You now know where the strengths and weaknesses are and where the differences are in policies and procedures.  You also have an idea of what the organizational structure will look like once the acquisition is completed.   But you can not develop the integration plan in a vacuum; you need the buy-in of the key players of the acquisition target.  How do you get their buy-in?

Look to the future to help determine integration priorities

Instead of getting into the details first, we find it is important for the key players on both teams (acquiring company and target) to have a similar vision of where the industry is going (Industry Scenario) and what the key characteristics are of the winning company (Winner’s Profile).  If you start with the big picture, often the details fall into place and the priorities become more obvious.  Another option, if time permits, is to develop a full strategic plan.

What about risk?

In the due diligence you develop Threats to the business - but you should do this as a joint team and assess which of the threats has a potentially high impact and a high probability.  The combined team should discuss different ways of mitigating the risk.

Now for the details

Once you have a big picture view of the industry, have developed the key characteristics of the winning company and have assessed threats, you are ready to discuss the Acquisition Issues that arose during the due diligence process.  What topics need to be addressed? At this point, you will spend time looking at the issues that arose from the due diligence - both teams need to be involved in developing solutions.  In addition, you need to develop other aspects of the integration plan:  Communication - what will it look like to the employees of both companies?  What will we tell our customers?  What will we tell our suppliers?  Are there any policy and procedure changes we need to make as we go through the integration process?  What is the transition plan for the health care plan and other employee benefit plans (e.g. 401k)?  How are we going to transition the financial system so that we are all working on the same system and there is transparency in the numbers?  What do we need to do to get the other business systems working together?

At the end of the Acquisition Issues discussion you need to determine what the key implementation Objectives are - the key projects for the next 30, 60, 90 days and the plans that need to transition over the rest of the year.  You will need to set and communicate goals so that people understand what targets they are shooting at to achieve success.

Now you need to discuss the detailed plan with the owners of the business - ideally they have been involved in its development - but still you need to check back and make sure they are fully bought in - otherwise this can be a deal-breaker.  This means you need to be brutally honest about what is going to change after the acquisition is complete.  A financial forecast is a must - and this too must be agreed to - you must have a clear understanding of what the numbers will look like during the integration phase.  You must have agreement on the integration plan and the financial forecast before you close on the deal.

In addition to the integration plan you need to think through how your company will add value to the acquisition target - because if there is no value-add, this probably is not a good acquisition.

After the closing

The first two quarters will be the most important in terms of getting buy-in from the acquired company.  If this is the case, why do so many companies miss the importance of this time period?  A common mistake is putting all the energy into “doing the deal” and then not focusing on the integration process in the “after deal let-down”.  This lack of focus can seriously impact the success of the acquisition.  The newly acquired team needs to know that they are now part of a new team and that they are appreciated for the capabilities that they bring to the table.

During the initial period after the closing

Set-up a meeting before the month-end closing to make sure that the financial accounts have been properly transferred to the financial system. Check on progress for the integration objectives - is anything veering off-track?  Can you get it back on track or do we need to reset expectations?  Get into this routine right away - this will help prevent large surprises down the road.  Try to get the acquisition target onto your financial system within the first quarter after closing - then the numbers should be much more transparent as everyone is working with the same system. 

Make sure that you have sufficient resources allocated for the integration process - providing support and follow-up as required by the integration objectives.  Often people do not allocate enough of these resources and the acquisition drifts and small problems grow into crises.  There should be as many, if not more, resources dedicated to the integration process as you had doing the due diligence.

Communicate

In a vacuum rumors spread both within the company walls and outside in the marketplace- make sure the acquiring company team is visible - talk about what is going on and what is going to happen - even if it is unpleasant. Hiding information does not make the bad news go away. 

Monitoring

Monthly: make sure the integration objectives are on track

Quarterly: do a deep dive into the financials - are there any red flags?

After one year - release the escrow - there should be not major surprises after 12 months - unless you have not been involved. Monitor your key metrics:

-         Are you meeting your financial targets?

-         Are you retaining the key people?

-         Has the acquiring company added value to the acquisition?

-         Would you do the deal today if you knew what you know now?

Integration is a complex process and each deal will generate different objectives.  We have found that, if you agree on a shared industry vision and the characteristics of a winning company, the priority objectives become clear to the teams on both sides of the table.  Integration objectives and goals will flow from the common industry vision.  This is not to say there will be total consensus - there still will be some difficult times, but this will get the team on the path to a successful integration process.  This integration is often neglected during the after deal let-down, but if your team focuses on integration and resources are allocated to make the process a success, your acquisitions will be more successful.  Remember, more the 80% of acquisitions fail to live up to management expectations.

Integration Process - Option 1 - 2-3 Days

This process can occur either before or after the transaction is completed, ideally before.

1.      Industry Scenario

2.      Winner’s Profile

3.      Strengths and Weaknesses

4.      Threats

5.      Acquisition Issues

6.      Objectives

7.      Communication

8.      Monitoring Process

Integration Process - Option 2 - Full Strategic Plan - 3 Months

1.      Situation Analysis

2.      Strategy Formulation

3.      Implementation