STRATEGY – IS IT A DECISION, DESTINY OR BOTH?

YET ANOTHER WAY OF LOOKING AT STRATEGY

It is one of those things that keep coming back again and again – Is strategy a decision, destiny or both? While analytics has positioned strategy as a set of decisions – there is also merit in the argument that without a proper destiny, those strategic decisions have no relevance. The question, however, is which one comes first – Decision or Destiny? An insightful analogy- I have come to grips in recent years is that strategy is a “beautiful pottery”– with destiny as the clay and decision as the water - and together they are molded in to a fine piece of pottery called strategy. Before we put the piece of clay (destiny) to start the actual molding process, we need to add enough water (decision) into it- in order to make it pliable and soft enough - for it to be able to actually use it. Without enough water into the clay, the clay will remain too rigid to be able to actually mold it – similarly, without enough decision focus, destiny has no relevance, and without destiny mindset, decision has no meaning. And so, “doing both” is the way to go when it comes to strategic planning in the words of Inder Sidhu and Roger Martin.

DOING BOTH - DECISION AND DESTINY

Now, back to our analogy - after we add enough water (decision) into the clay (destiny) to make it soft and pliable – the next thing we need to do is put them in the center of a electric wheel called analytics (i.e. balanced quantitative and qualitative analytics) before we start the molding process called strategic planning. To get to that “doing both” mindset within that molding process – like most things in this world – strategic planning must also adhere to certain guiding principles for it to align properly within the center of the electric spinning wheel.



DESTINY FOCUSED PRINCIPLES

• Principle of Team – Addressing “who we are” question in terms of forming the right team – get the right people first on the bus - and then (together as a team) formulate the strategy - in the words of Jim Collins.
• Principle of Purpose – Addressing the "why do we exist" question in terms of the purpose dimension.
• Principle of Place – Addressing “where to play” question in terms of market geography.
• Principle of Difference – Addressing “what to play” question in terms of differentiation and exploitation.
• Principle of Value – Addressing “how do we win” question in terms of top line focused innovation excellence ideas.

DECISION FOCUSED PRINCIPLES

• Principles of Talent – Addressing “who we are” question in terms of forming the team with a good mix of skill, talent and gifting.
• Principle of Profit – Addressing the "why do we exist" question in terms of the profit dimension.
• Principle of Focus – Addressing “where to play” question in terms of product and services categories.
• Principle of Conformity – Addressing “What to play” question in terms of prevention and mitigation.
• Principle of Rewards - Addressing “How do we win” question in terms of bottom line focused operational excellence ideas.

As we can recognize from this set of destiny-decision balanced principles, it is clearly evident that balancing them is a key- and so it is all the more important for organizations to use the proper electric wheel (analytics) to solve the right strategic planning issues with a "doing both" mindset. In addition, augmenting these principles with the right set of accountability/governance processes and principles will indeed make our organizations a best in class in our industry vertical.

Where Eagles Dare, Strategies Dare…

In an earlier blog, I had explained the purpose-profit balanced strategy with an Eagle metaphor- to help learn few strategy lessons. Over the weekend, I heard back from some folks (both formally and informally) –more specifically, asking me to expound upon the metaphor little more - from the standpoint of eagle’s directional sensing compassing skills, their effortless energy riding techniques and above all - their master preying skills – as it relates to developing successful business strategies. Given the enthusiasm, I thought that it is worth our time – to clarify and improve upon those lessons with some specific strategy examples- as one of our friends put it - where eagles dare, strategies dare!

1. Eagle’s direction sensing compassing skills are second to none!

While it is absolutely amazing to see how eagles fly under those wind thermals, it is equally impressive to see how eagles learn to maintain their sense of direction – leave alone reaching their final destination flawlessly - in almost all situations. How do they do that? Eagles – apparently, have a lens balancing fluid within their retina - and when they get off their intended track – the balancing fluid senses the misalignment and causes some kind of a pain in their neck- indicating that they have to change their course and get back to their original track. As it turns out – this in-built directional compass is what keeps them staying focused – and equally important – it is a great lesson for us to learn from as well– i.e. to learn to imbibe the directional mindset in our business strategies. Within the context of developing this compass driven strategies using our strengths/opportunities (or wind thermals)– I have put together a 10-box strategy model using the SWOTC analysis constructs - to help develop few laser focused directional strategies (as depicted in the diagram on the top of the page). It is a 5x5 matrix of SWOTC elements for our company on the column side and the competitor on the row side- with each box being filled with one of the following four strategy categories.

• Differentiation strategies are the “edgy” disruptive innovation strategies leveraging company’s strengths.


• Exploitation strategies are the “edgy” growth strategies to exploit competitor’s weaknesses/constraints.


• Prevention strategies are the defensive/preventive strategies to overcome company’s weaknesses/constraints.


• Mitigation strategies are the risk mitigation strategies to reduce company’s vulnerability from competitor’s threats.
  

2. Eagle’s effortless energy riding skills are one-of-its-kind!

Speaking of eagle’s energy sustaining effortless riding skills – as it turns out - this is one of the most important skills companies must learn to master at – learning to execute (or ride) the 10 box strategies efficiently - using repeatable processes, tools, techniques & templates very much like how eagles learn to ride the wind thermals effortlessly. More specifically, I recommend us taking a holistic energy/effort portfolio approach within the strategic planning process to effectively optimize the energy efforts (& sources) with a 3P (people, profit and purpose) mindset to get to that effortless riding mode. Following are the few pragmatic strategies to help us to get to the “almost zero marginal/emotional equity cost model” from both purpose and profit algorithms standpoint.

2.1 People dimension – leading to "almost zero marginal cost model" within profit algorithm

• Form teams with “right person for the right job with complementary skills” mindset with differentiated nurturing/reward schemes. Learn to differentiate skills from talent and talents from gifts and nurture/reward them accordingly. Please see my comments at one of the recent HBR blog (http://blogs.hbr.org/bigshift/2010/04/are-all-employees-knowledge-wo.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+harvardbusiness%2Fbigshift+(The+Big+Shift+on+HBR.org)&loomia_ow=t0%3As0%3Aa38%3Ag4%3Ar2%3Ac0.000000%3Ab0%3Az6.


• Encourage people to use repeatable processes, templates, tools and techniques in every part of their job within the value chain to achieve economies of scale and scope benefits.


• Develop the lifelong learner and train-the-trainer culture and encourage/reward knowledge management/sharing behaviors i.e. promote “not reinventing the wheel” mindset.

2.2 Profit (or Plant/Equipment) dimension - leading to "almost zero marginal cost model " within profit algorithm

• Classify the business processes within the value chain in to commodity, standard, transformational and value-add - and move towards the tapered integration based virtual enterprise model - i.e. leverage best in class providers to perform standard/commodity processes with well defined engagement model and service level agreements.


• Optimize the value chain – more specifically, focus first on the manufacturing and supply chain processes (including GTM) with measurable KPI’s - as performance is as good as your weakest link and so identifying those bottlenecks using techniques like lean/six sigma are paramount for achieving efficiency/effectiveness goals.


• Innovate with disruptive business models – specifically, by reducing the idle capacities resulting from seasonality, infrastructure gaps and the emerging equipments miniaturization trends (similar to what happened in computer industry).

2.3 Purpose dimension - leading to "almost zero emotional equity cost model " within purpose algorithm

• Energize the bottom of the pyramid with “social enterprise” minded product/service bundles they can afford. Project Shakti by Unilever is a great example (http://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspx).


• Encourage healthy products and herbs from the region’s native plants and medicines and make it part and parcel of the products and services your firm sells.


• Elevate global understanding of critical externality based environmental issues (pollution, waste etc) with timely and functional innovative solutions. Please see some of my comments within the context of the recent externality debate within HBR (http://blogs.hbr.org/what-business-owes-the-world/2010/06/bp-the-gulf-and-the-great-exte.html).
  

3. Eagles preying skills are unmatchable!

As a result of flying under the wind thermals,-as it turns out- eagles can fly to heights that no other bird can. Apparently, eagles can fly as high as some of the modern airplanes can fly under perfect conditions. Equally interesting is the fact that eagles are also masters at zeroing in on their prey from a far apart distance (in some cases up to a mile apart) and then swooping down to catch them. In a way we can call them absolute masters at hunting down and catching their prey, whether it is on the land or in the water. Just as eagles are considered to be masters with how they can catch the prey (fishes in water or birds at land) – our strategies must outsmart our competitors with a perfect accuracy.

Bottom line: Why should we exhaust our energy when we can do that effortlessly by coming to terms with productive people, efficient processes and sustainable environments?

Strategy is like Eagles mounting up with its Purpose-Profit balanced wings?

It is one of those dilemmas that keep coming back again and again – Is our strategy supposed to be purpose focused, profit focused or both? An insightful analogy- I have come to grips in recent days is that - Strategy is like the eagles mounting up in to the skies without them actually flapping their wings. What does that mean? Eagles - as part of God’s creation are gifted to fly without them actually flapping their wings as long as they are flying under the wind thermals. A wind thermal is a big gust of tailwind coming out of the warm atmosphere - that helps eagles to latch onto it - and thereby making the eagles to fly along its gradient (or riding the wave) without them actually flapping their wings (and thereby conserving less energy).

What does it have to do with strategy? Well, hold on a minute…the analogy does not stop there – the eagle insights also expand to their wings, eyes and above all to their directional focus -as outlined below. Hopefully, we can use this analogy as the lynchpin for the next few blogs – perhaps one lesson each week - as we have lot to learn from this analogy - as it relates to developing impactful business strategies.

1. First of all, strategy as a whole is the eagle.
2. Its wings represent Purpose and Profit dimensions respectively.
3. The wind thermals represent the tailwinds helping the eagles to soar without flapping their wings– representing strengths/opportunities part of our business strategy.
4. The normal winds are the headwinds that help eagles to take-off initially- but, after a while, slow them down if they don’t latch on to the wind thermals quickly – representing the weaknesses/threats/constraints facing the business strategy.
5. Direction sensing large eye (with dual cones and fovea) that is used by eagles to differentiate and stay focused on its journey - representing our differentiation strategy against competitors.
6. Prey protecting/sensing eyelid that is used by eagles to sense their prey at a far distance - representing the prevention/mitigation strategy against competitors.

With this analogy as the foundation – we are going to focus on three key take away messages as part of this blog- besides the fact that strategy is the eagle.

• Balance the purpose and profit part of the strategy equation.
• Lead your industry vertical with your wind thermals (tailwinds like strengths/opportunities)
• Learn to stay afloat (under) the wind thermal and flap like eagles with less energy(i.e. leverage the strengths/opportunities to get to the almost zero marginal cost or emotional equity cost model - as we saw in the Degree of Operating leverage(DOP) and Degree of Purpose Leverage (DPL) measures in the previous blog ( http://strategywithapurpose.blogspot.com/2010/07/what-in-world-is-world-class-purpose.html ).

In other words, if our strategy does not have the well balanced purpose and profit agenda- that is tightly latched on to the wind thermals (tailwind like strengths/opportunities), it is impossible to stay float with less energy. As it turns out - if the eagles do not latch on to those wind thermals quickly when they come up on them, they will forever stay perched. In the same way, if our strategy does not take off quickly on those tailwinds (or strengths/opportunities), we might never learn to stay float (i.e. with the almost zero marginal and emotional equity cost model) - and our strategy will eventually perish right before our own very eyes.

Bottom line – Strategy is like the eagle - with its wings representing the purpose-profit dimensions - and the wind thermals representing the strengths/opportunities that make the strategy to soar very much like how wind thermals make eagles to soar. Not only that - this tailwind driven strategy -with almost zero marginal and emotional equity cost model (like eagles flying without flapping their wings) —is indeed the best in class strategy that is guaranteed to succeed. Isn’t God creations wonderful?

What in the world is a “World Class Purpose Model”?

Courtesy : Google Images



One of the "golden rules or the litmus tests" investors apply before investing in a firm is the sustainability of its business model (or) the ability of its business model to make money for the long haul. As a matter of fact, investors value the business model more than anything else (even more than the financial plan itself) as– at the end of the day – a sound business model is the one that is going to guarantee the sustainable value or return for their investment. Speaking of this sustainable value/return – most recently, investors also have come to grips with the reality that long term value is not just achieved by the money making guarantee of the business model - but also, by the purpose criteria (KLD scores, sustainability indices, corporate governance scores etc) on top of the profit metrics - as outlined in one of my earlier blogs. In other words, these purpose criteria enabled business models are the ones that is going to give the sustainable value for the investors (& to all the other stakeholders/society alike) as opposed to the mere profit metrics based business models - and I call them as purpose models (http://strategywithapurpose.blogspot.com/2010/06/purpose-driven-strategy.html) as they re-purposes the vision/mission/value/BHAG of the firm within the context of the cross border industry boundaries with a 3P (people, planet and passion) based purpose mindset.


Within the context of this renewed purpose inspired thinking – it is equally important for business models to have a balanced purpose/profit formulas to qualify itself as a purpose model- as corporations are not in the business of running charities. In other words, purpose models must augment the “value based purpose metrics” with “cash flow based profit metrics” to position the firm on a solid ground for the long term sustainable success to further qualify it as the world class purpose model. Speaking of a world class purpose model – we are going to come up with two more complimentary metrics (one for profit and one for purpose) to help investors to evaluate whether a given purpose model can qualify as a world class purpose model.


With the fact that “cash is the king” in today’s business context – we have chosen “operating leverage” as the key measure to assesses the overall health and wellness (& risk level) of the purpose model and to qualify whether it can become a world class purpose model from profit sustainability standpoint. Similarly, with our mantra being “purpose is the queen” – we have chosen “purpose leverage” that assesses the overall purpose and values (& tolerance level) of the purpose model and to qualify whether it can become a world class purpose model from purpose sustainability standpoint.


Operating leverage in my mind is the relationship between fixed and variable cost – the higher the operating leverage, higher the cash flow and vice-versa. In other words, those purpose models with a higher operating leverage and lower marginal cost are the world class purpose models from profit sustainability standpoint. A quick degree of operating leverage (DOL) measure, which shows the extent to which operating profits change as sales volume changes can be calculated as outlined below . More specifically, DOL is the percentage change in income (or EBITDA) divided by the percentage change in the sales output.

DOL = (Q (P-V))/ (Q (P-V) – F)

Q= Quantity produced or sold
V=Variable cost per unit
P = Sales Price
F=Fixed Operating Costs

So, higher the DOL leverage, higher the change in operating profit and better the purpose model is. In other words, in actual numbers, let us say we have a purpose model with a DOL index of 2 along with a 25% change in sales volume - the potential change of operating profit for this purpose model will be 50% (2*25%), a great number, which will definitely make it as a world class purpose model from profit sustainability standpoint.

Purpose leverage, on the other hand, is the relationship between fixed and variable emotional equity – the higher the purpose leverage, higher the emotional attachment of the stakeholders (consumers, investors and suppliers) to the firm and vice-versa. In other words, those purpose models with a higher purpose leverage and lower emotional equity cost are the world class purpose models from purpose sustainability standpoint. A quick degree of purpose leverage (DPL) measure, which shows the extent to which purpose inspired profits change as sales volume changes is can be calculated as outlined below from purpose sustainability standpoint. Specifically, DPL is the percentage change in income (or EBIT) due to the purpose inspired emotional equity divided by the percentage change in the sales output.

DPL = (Q (P’-V))/ (Q (P’-V) – F)

Q= Quantity produced or sold
V=Variable cost per unit
P’ – Purpose inspired marked up premium sales price (i.e. higher sales prices consumers are willing to pay for the super premium products/services because of the firm’s purpose agenda or their emotional attachment/equity to the brand or firm. For example, a Health and Wellness/Green minded consumer will be willing to pay higher price when they know that the firm’s purpose align with their personal purpose/values.
F=Fixed Operating Costs

So, higher the DPL leverage, higher the change in operating profit and better the purpose model is. In other words, in actual numbers, let us say that we have a business model with a DPL index of 5 along with a 10% change in sales volume - the potential change of operating profit for this purpose model will be 50% (5*10%), a great number, which will definitely make it as a world class purpose model from purpose sustainability standpoint.

Bottom line: As represented in the justice model picture at the top of the page, the DPL-DOL balanced purpose model that gets us the repeat customers - where the cost to deliver incremental products/services for an incremental customer approaches almost zero, where the cost needed to bind additional customer’s emotional equity to the firm’s brand approaches almost zero, and where we get a lots of the cash up front and where we have lots of good will and emotional equity on the purpose bank—is what makes a purpose model a world class purpose model. What more can we ask for?

Who are these Purpose Idealists?

Courtesy : Dilbert's Google Images



While most folks agree that "doing both purpose & profit" is the right thing to do- I still hear some refrains from some quarters: Who are these Purpose idealists? Why are they telling us to do purpose instead of business, ideals instead of innovation — and charity, instead of profits? Doesn’t it sound more and more like the mission/vision statements generated by Dilbert’s mission statement generator!


Although I see some merit in those refrains, they are valid only - when we define business success purely based on the quarter by quarter financial results. In other words, the purpose-profit debate is not about whether it will help the corporations to meet the next quarter’s numbers – rather, it is all about whether the corporations can sustain its momentum 3- 5 years from now? This is where we need to be re-structuring our frame of reference and asking different set of success questions for us to be sustainable in the long run.


Interestingly enough, more and more corporations are using KLD scores, corporate governance scores, and sustainability indexes to measure success apart from the traditional financial KPI’s. The reason for the shift in this thinking is that - this holistic way of looking at the success makes corporations’ investment more meaningful, less risky and above all more sustainable. With that thinking - I am proposing a new hypothesis that “True business Success is not just based on today’s success criteria, but also based on today’s and tomorrow success criteria”.


I hear some folks asking again – “Well… Mr. Purpose Idealist- this might sound good from PR standpoint – what data points do you have to substantiate your hypothesis? Do you want us to run a charity instead of a profitable business?” Definitely not! All that I am saying is – it is time for corporations to focus on at-least on one purpose strategy that is intertwined with your profit strategies - in the words of Rick Warren as outlined in his famous book - Purpose driven life - “If you want your life to have an impact, focus it! Stop dabbling. Stop trying to do it all. Do less. Prune away even good activities and do only that which matters most. Never confuse activity with productivity. You can be busy without a purpose, but what's the point?”


I guess the right answer is to prune and focus on those purpose activities that matters the most. In other words, select one key purpose objective in each of the three purpose dimensions – People (social), Planet (environment) and Passion (values) and do it with a high impact. This 3P (People, Planet and Passion) mindset not only helps us to create a sustainable business, but also will help us to honor the people we serve, nurture the environment we consume and uplift the values of the community we are part– and finally, above all, lay the foundational track for an all-inclusive purpose journey. With us living in a time of a global transformation, this type of a “3P mindset” producing tangible results will definitely help us to validate our purpose driven hypothesis in the long run as well. From pragmatic standpoint, here are few purpose objectives to consider -

• Energize the bottom of the pyramid with “social enterprise” minded product/service bundles they can afford. Project Shakti by Unilever is a great example (http://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspx).


• Encourage healthy products and herbs from the region’s native plants and medicines and make it part and parcel of the products and services your firm sells.


• Encourage virtual green farming business models with state-of-the art green technologies.


• Empower indigenous cultures of the countries you serve via sustainable high yield agriculture farming methods.


• Educate agriculture innovators of the world with leading edge green focused training courses taught by world renowned purpose instructors.


• Elevate global understanding of critical externality based environmental issues (pollution, waste etc) with timely and functional innovative solutions. Please see some of my comments within the context of the recent externality debate within HBR (http://blogs.hbr.org/what-business-owes-the-world/2010/06/bp-the-gulf-and-the-great-exte.html).


• Encourage volunteering activities within your company - and make employees to visit at least one global country your firm is serving as part of their individual purpose objectives.

While I agree that these purpose strategies may not change the world tomorrow, it will however, help us to take the baby steps needed to create a better tomorrow. I am pounding this message over and over again - neither to score a point nor -for that matter -to call myself as a purpose evangelist – rather, I want the purpose focused corporations to succeed and outperform their peers in the larger interest of the society they serve — based on today's and tomorrow’s success criteria as outlined in our hypothesis. Well… enough of purpose preaching this week - where there is a will, there is a way. When time is on our side- let’s embrace it! Wish you all a happy July 4th weekend.