Strategic Failure: Profit

There’s a common Internet meme that has been around for some years now in which includes three step-by-step directions, to wit: 1. Buy Products; 2. Sell Products; 3. Profit! As far as I can tell it started out as a sarcastic comment on people doing things that shouldn’t normally gain a profit, either because one or two of the steps involve criminal/unethical behavior, or because at least one of the steps involves something for which no sane person would pay money. What may not be clear, especially now that the meme has become something of a cliché, is that this faulty strategic approach is responsible for a very large number of business failures every year, especially in the case of online businesses and websites that are intended to make a profit…

With the rapid expansion of online businesses in the late 1990s and early 2000s, a lot of people with brilliant technical and programming skills but limited business experience began creating websites that they believed would be an effective license to print money. I got to work with some of these folks during my time with the Small Business Development Centers program from the SBA, and almost inevitably, the founders of the company had created an amazing product or service, but had never considered how they would get paid for their work. Most net citizens at the time would not pay for content, and selling advertising on the site was difficult unless you could prove that the advertisers would be able to generate actual sales off those specific ads…

Even today, it remains difficult to get people to pay for online content unless it serves some function they can’t get in the real world or just steal off of any of the various pirate sites. Selling advertising is still a possibility, of course, if you have millions of visitors each day, but the presence of sites like YouTube and Facebook make that harder for a small business to achieve, not easier. Most internet advertisers today will only pay on the basis of verifiable “click-throughs” – people who saw their ad on your site and clicked on it – and some won’t even pay for that traffic unless it results in a verifiable sale. This has led to some to some desperate and often far-fetched approaches…

Consider, if you will, any of the Internet businesses that will allow you to use their basic services for free, and then attempt to get you to purchase an upgraded version or add-on features for the free version (or occasionally both) – the so-called “freemium” services. Pandora is probably the best-known example, but I can list dozens of others; one could actually see any of the media sites with a “paywall” arrangement as using the same tactics (e.g. newspapers that will allow you to read 10 articles a month off their online site, after which you have to pay). Some of these have met with limited success, but even something like Pandora, which provides a service to recording artists and music holding companies as well as consumers, has struggled to stay operational, and with the appearance of the App Store it’s increasingly difficult for anyone else to sell software…

My experience is hardly universal, and even the published research isn’t entirely clear on this point, but it has always seemed to me that this particular strategic failure comes about because people immersed in the challenge of building a new product or service aren’t usually thinking about the strategic aspects of the new business that their invention will create. Even within the business community itself, the kind of long-term strategic planning that is one of the staples of the management function is not widely appreciated by our colleagues from other disciplines. After all, why would anyone want to spend their time working on a musty old business plan, articulating the strategy that will make their business a success, when they could be coding, drawing, animating, welding, soldering, polishing or shipping their products? Or, for that matter, tracking sales, balancing the books, paying the vendors, managing the other stakeholders, or investing the proceeds? But unless there is some method by which people will give us money for doing whatever it is we are doing, the whole thing is a hobby, not a business – and it won’t last any longer than our hobby budget does…

Of course, failure to create an adequate business plan is a strategic failure in its own right – but that’s a discussion for another day…

Where’s the Strategy?

I’ve always tried to stay away from politics in this blog, partly because along with religion it’s one of the two things you should never discuss in public, but mostly because I don’t feel qualified to talk about it. I’m just as business instructor, albeit at a top business school, and none of my degrees are in Political Science, Social Psychology, Economics or Law. More to the point, perhaps, the Internet is already overflowing with opinionated idiots who believe that their personal confirmation bias makes them the only one who truly understands the situation at hand, whatever that might be. But one of the things I teach is Strategy, and one of the things that has been bugging me lately is people who really should know better displaying no understanding of a very basic strategic concept…

You may have heard the saying “Plan for an enemy’s capabilities, not his intentions” at some point, especially if you study strategy, tactics, or military history. Or, I suppose, if you eat out a lot, you might have seen these sentiments in a fortune cookie somewhere. Regardless of its origin, the phrase has relevance in a number of situations. It isn’t possible to know whether an adversary is really going to attack you; even if they say they will (or will not) you can’t be sure of their intentions short of the event. What a lot of otherwise very shrewd people seem to be losing track of these days is the fact that if your intelligence regarding an adversary’s capabilities is sufficiently accurate you may be able to determine that they will not be able to attack you regardless of what their intentions may be…

Suppose, for example, that a small group of ordinary citizens decide that the Dell organization has offended them for the last time, and they are going to acquire controlling interest in the company by purchasing 51% of its common stock, and then institute some changes. This is improbable for several reasons – notably including the fact that the company has an annual revenue reported to be on the order of $55 billion per year, which would put such a takeover beyond the resources of most average people, even in large numbers. It is, however, also impossible, because Dell is a privately-held company, and therefore has no publicly-traded stock to acquire…

By the same token, members of the Executive Branch of the Federal government can’t pass legislation, no matter how much they may want to do so. It is possible for the President to veto legislation, but since Congress can override a veto, even that isn’t certain if a measure has sufficient support. The President also cannot declare war on anybody, approve or vacate treaties with other countries, or randomly imprison people – these are not powers given to that office. It also is not possible for Congress to pass laws that violate the Constitution or any of its Amendments. They can vote to amend the Constitution again, but passing such an Amendment requires ratification by the states. And while the Supreme Court can strike down existing laws as Unconstitutional, they can’t create new laws of their own…

Now, I’m not going to suggest that there isn’t any point in planning for an opponent’s capabilities – I’m a planner by nature, as well as occasionally by trade, and I believe in planning for all the foreseeable contingencies. I also believe in employing a team of pessimists, assuming you can afford them, to consider every possible way in which things could go wrong and what would happen to your organization if they did. People will dismiss planners and strategic planning in general by claiming that you can’t, by definition, plan for the unexpected – which is perfectly correct, of course. It’s also the whole point of developing plans in the first place, however. After all, if you have already planned for a possible event, it’s no longer unexpected…

I’m not saying that this new year isn’t going to bring with it disasters, unpleasant changes and difficult decisions; most new years do, after all. I’m just suggesting that the problems we’ve already got, and the new ones that we will not be able to avoid, are going to be quite sufficient without worrying about the things that can’t happen – no matter how many times a politician claims they are going to…

You Had Better Duck

Some time ago in this space I wrote about the adventures of a 60-foot yellow rubber duck that had exploded in a harbor in Taiwan, which I used as an example of unexpected operational failures and the need to stay at least one move ahead of whatever else is going on. At the times this may have seemed a bit harsh, given that rubber ducks do not usually explode, and that if you are in the middle of displaying an 18-meter tall inflatable sculpture half a world away from your home base (the duck’s creator is from The Netherlands) there are probably a great many things on your checklist that come before “Make Sure Duck Does Not Explode.” For example, making sure that the duck does not get loose from its moorings and float away down a river, never to be seen again…

You can pick up the story from the BBC News site if this is getting too fantastical for you, and I certainly wouldn’t blame you if you did. Apparently, after exploding (or bursting, at least) in Taiwan and deflating in Hong Kong, the duck had been taken to a port on the Nanming River where it was mounted on a 10-ton metal platform and anchored to the riverbed using steel cables – none of which appears to have slowed it down when flood waters hit the installation and sent the duck drifting away. Despite the fact that the duck weighs over a ton, is as tall as a five-storey building, and is bright yellow (like the bath toy it resembles) there have been no reported sightings of it confirmed at this time…

Now, I will be the first to admit that I don’t know anything about public art installations, meteorology, river currents, large-scale rubber fabrication or the relative tensile strength of steel anchor cables. But I do know a few things about preventable failure, and I must admit that if a project I was running had already exploded, deflated, been attacked by eagles (as reported here), and was a larger-scale version of an installation that had already gotten loose from its moorings once in Europe (although that time the duck was caught again – when it became wedged against a large bridge, effectively blocking travel on both the roadway on the bridge and the canal below) I might consider asking how certain everyone was that this particular installation was safe…

Fortunately for all parties involved the duck isn’t really part of a business venture; its International tour (which has already passed through Sydney, Sao Paulo and Baku without incident) is intended mainly to bridge cultural barriers and increase understanding between nations by exposing them to something so completely absurd and yet aesthetically adorable that anyone whose sense of wonder hasn’t been surgically removed must stand in amazement and/or swear off of whatever they were drinking the night before. But advertising stunts using smaller inflatable constructs are becoming increasingly common in some countries (including the US), and the duck’s misadventures give an excellent example of just how far an otherwise harmless publicity stunt could potentially go off the rails – or, in this case, down the river…

It has often been noted that while all human beings learn from mistakes, the truly successful person is usually the one who learns from someone else’s mistakes. I certainly hope this is true – especially if any of my readers (assuming I have readers) is planning anything that involves large-scale public installations, river conditions, or inflatable waterfowl…

What Could Possibly Go Wrong?

Every so often you will run across a news story that makes you assume that either the reporter who wrote it has gone barking bad or you have; something so surreal that you find yourself looking for signs of Photoshop even when you know there won’t be any. Or, at least, that was my reaction when I saw the story headlined “Giant yellow duck explodes in Taiwan” at the head of an AP story featured on an Australian news site…

It turns out that the duck is the work of a Dutch artist named Florentijn Hofmann, and it’s a larger version of a 2007 piece (the original was 16.5 meters tall; the current duck is 18 meters tall) that made the news a few years ago when it got loose from its moorings and became stuck up against a large bridge in Europe, effectively blocking boat traffic along a river/canal system for several hours before it could be towed out of the way. Since then, the ducks have toured 13 cities around the world without significant incident, until a powerful earthquake in Taiwan knocked out the air pump filling the current duck, causing it to partially deflate. When power was restored and the exhibiters began re-filling the duck a combination of poor handling and unfortunate winds caused the duck’s rear to blow out and flatten the entire structure…

I have often heard people claim that all strategists are inherently pessimists, because of the time we spend trying to anticipate all of the things that could go wrong with any project we’re working on, and the effort involved in working out contingency plans for those events. People who have actually spent time developing or implementing strategy will tell you that they are realists, concerning themselves with what to do in the event that specific outcomes occur, rather than just assuming that something bad (or good) will happen because it can. We should probably admit that this does lend itself to spending a lot of time determining all of the things that can go wrong and working out responses to them, since it generally isn’t necessary to make contingency plans for coping with success. However, this doesn’t make the process any less important…

If we are working with any structure or installation that requires electrical power in order to function, including the electric air pumps needed to keep a giant duck construct inflated, then it isn’t unreasonable to take some time and consider what you should do in the event that the local electrical power grid goes down. This is especially important if the local grid is rendered less than 100% reliable because of faulty generating plants, government malfeasance, operational incompetence, or regular natural disasters (such as earthquakes) that interfere with power generation or power transmission. By the same token, we should probably consider what we will do if the water currents or prevailing winds are stronger than expected (or are going in an unexpected direction), what we will do in the event that the duck gets loose from its moorings, what we will do if the duck becomes stuck against a bridge or overpass, and how we will deal with the negative news stories, civil lawsuits, and public backlash against us and/or our duck…

Because the truth is that an 18-meter (60 foot) tall rubber duck construct is a wonderful and whimsical thing, and we should not permit minor challenges in operations or safety to interfere with the viewing public’s enjoyment of our duck. And while it isn’t strictly true that everything that possibly can go wrong does – sometimes there are multiple bad outcomes that are mutually exclusive, for example – it’s still our job to identify and plan for as many of those contingencies as possible...

Because if anything is certain in this world, it’s that there are more potential failures lurking behind the scenes than we have planned for so far…

Helmet Law

Some time last year Nigeria passed a new helmet law, which apparently took effect New Year’s Day. Readers from California may remember the controversy that surrounded a similar law passed in that state, pitting advocates for the right of motorcyclists to ride with the wind blowing freely through their hair against advocates for the rights of everyone else not to have to pay for expensive medical care (and burials) for uninsured motorcyclists who would die from head injuries that could be prevented with the use of helmets. Eventually the helmet law passed, and that should have been the end of the matter, if not for a handful of stubborn bikers and enterprising businesspeople…

In response to the law, several companies began manufacturing helmets that conformed to the very minimum requirements of the helmet law – that is, which provided just enough coverage to prevent a policeman from being able to ticket the rider. It seems that the law hadn’t specified that the rider’s whole head and face had to be covered, just that their headgear provide a certain level of crash protection. The resulting designs were vaguely reminiscent of military helmets used in the early 20th Century (German or British styles, depending on the brand) and didn’t provide the same level of protection that a full-coverage helmet would have, but allowed the user an increased feeling of exposure to the elements over a conventional helmet…

In Nigeria, a somewhat different solution is being used by motorcyclists who can not afford to purchase a conventional helmet: dried pumpkin shells. A story being reported on the BBC News Africa website tells the unusual story of improvised motorcycle helmets being adopted by Nigerians who make their living transporting people on the back of their motorcycles (motorcycle taxis, another service that would never occur in the U.S.). Nigerians are also protesting the helmet law on the grounds that it is possible for someone to put hostile magic in a helmet, which would permit the taxi driver to rob unsuspecting passengers…

Why does he tell us about this? I hear some of you asking. No one reading this post is ever likely to move to Nigeria and invest in a motorcycle taxi business, and if you did you’d certainly make sure that you have enough startup capital to afford TWO helmets, one for your and one for your passenger. So why am I wasting your time with this exotic tale of business and government regulation once again coming into conflict? Because, you guessed it, this situation plays out in one form or another every day in ever country in the world, and sooner or later you, too, are going to have to deal with the equivalent in your own business…

I’m not sure what aspect of your business our government is going to decide is unsafe, environmentally unfriendly, too expensive for your poorer customers to afford, or otherwise displeasing to the powers that be (or to some hyper-liberal advocate group with a really strong lobby); I only know that if you stay in business long enough, sooner or later there will be some form of safety law passed that will require you to spend money you can’t afford on safety provisions that will not make your business any more safe (but will generate a lot of money for whatever company makes the safety equipment). In your next strategic planning cycle you should probably add the possibility of blue-sky government safety laws being passed to the list of potential threats in your business environment; and if you don’t already go through a regular strategic planning cycle, you might want to consider starting…

Alternately, I suppose, you could look into shifting your production capabilities into making safety equipment…

Throwing Snow

Today I got to operate my snow thrower for the first time. If you read yesterday's post (and goodness knows I'm not suggesting that anyone should have) you already know that one of our purchases this fall was a snow thrower (called a snow blower by people who live in warm-weather cities and have never used one). Specifically, it's a Craftsman 24-inch 2-stage snow-thrower from Sears, with six forward gears, two reverse gears, an electric starter (for those times when the pull-start just won't cut it), and an overhead-cam gasoline engine that sounds a lot like a chainsaw. Unless the port where the snow come out of gets clogged (which happens every few minutes with snow this wet), in which case it sounds like a chainsaw being strangled by a quilt...

No, I don't have any idea how that would happen, either. But if it ever did, it would sound exactly like the snow thrower getting clogged with snow and ice...

I'm not sure how to explain the sensation of guiding a self-propelled gas-powered machine through the snow and watching as snow cascades merrily out one side and a completely clean path appears underneath it, but I will try: It is cool. And it's only going to get cooler as I get used to adjusting the choke so that the engine doesn't stall out when you hit a really heavy patch of snow...

The only major downside of the morning, in fact, was trying to put fuel in the snow thrower. This is because our recently-acquired gas can is equipped with safety devices to prevent spillage and keep small children from pouring gasoline on themselves. Like most "child-proof" devices, this one works so well that it's extremely difficult even for a grown man (currently in grad school) to get any gas out of it, although I imagine a small child would have have no problems with it. But eventually, I got the idea of pushing the "spout" in as you try to pour, and the rest was easy...

Okay, so far this sounds like the story of a 44-year-old "noob" experiencing his first attempt to clear a driveway since roughly 1971, and his first attempt (ever!) to run a snow thrower. But imagine if I was working a job where I have to be at my desk by a specific hour, but I had to take 40 minutes to fuel the snow thrower, fire up the engine, clear my driveway and sidewalk, dry everything off and put it away before going to work. Imagine if everyone in the office had to do these things, too. Imagine if we also had to get a truck with a snowplow blade on the front to clear the parking lot before we could park in it, or the approach to the loading dock before we could get the trucks in...

Now, I realize that none of these things are novel, let alone surprising, to anyone who lives in a cold climate. I know that anyone who has ever lived in East Lansing longer than I have would have allocated the necessary time to get ready in the morning. My point here is that I DID allow for extra time to clear the driveway, extra time to drive to work very slowly and carefully, even extra time to get from the parking lot to my desk. But I hadn't counted on not being able to figure out how to operate a newfangled gas can...

Getting SWOT

I was saying to someone the other day that the thing I like most about the study of strategy is its simplicity; the way a progression of data will lead you through the steps you need to follow. In writing a business plan, for example, I've always suggested that my clients (or students, when I was a teacher) start with the mission statement, which explains what the company or venture is intending to do. This will, in turn, drive the explanation of why we are going to do it, and what we will need to accomplish these things. These choices will drive who our customers are, which will determine who our competition is, which will in its turn determine how we will have to advertise and what all of this is going to cost. Although if there aren’t enough customers, or if our competition is too tough to beat, then we may need to rethink the whole venture…

Which brings me to one of the basic tools used to assess the current industry situation and determine the strategies needed to direct our company; a technique so simple it can be summed up with a four-letter acronym: the SWOT analysis. The acronym stands for “Strengths, Weaknesses, Opportunities, and Threats,” and in theory all business ventures (and most other organized human endeavors) have to deal with these factors at all stages of their existence. Every group of people has strengths and weaknesses, just as the individual members of the group do; a company or agency will also have tangible assets (equipment, supplies, properties, money and so on) as well as intangible assets (intellectual properties, reputation, goodwill and so on). It may also lack things it needs – the “Weaknesses” of the title.

By the same token, nearly all of us will have to face threats and make the most of our opportunities every day of our lives – and this does not change when we gather in groups to accomplish a mission. Unserved or underserved customers are the most common opportunity businesses look for, but there are many others as well (e.g. the chance to acquire technology, property or information before they become prohibitive; the chance to corner the market on something, or the chance to expand into a new field in time to stake out a dominant position in the market). By the same token, most people believe that threats are primarily comprised of competitors, but changes in technology or the economy, new regulations or trade barriers, or even changes in customer buying habits can offer a much larger threat to your company’s operations.

The key thing to keep in mind about a SWOT analysis is that it truly offers no judgment of the company or the people in it. If we make lawn frogs (like a lawn gnome, only it’s a frog), and the current trend in lawn statuary if for lawn bunnies (like a lawn gnome, only it’s a rabbit), this does not mean that we have failed our families, our customers or our country; it just means that we have to retool our production facilities to make figurines that look more like rabbits and less like frogs. The only possible issues with a SWOT analysis are the people who refuse to do one (because they already have a “perfect” understanding of the market and the industry) and the people who refuse to act on what the SWOT analysis tells them (because they just KNOW that the public will come back to wanting lawn frogs, and it doesn’t matter that the competition can make a better one, or that the government is going to regulate them)…

Done properly, a SWOT analysis can tell you what your company should be concentrating on, what areas it needs to work on, what new products or services you will be able to offer to better serve your customers and to make more money, and what you need to watch out for in the future. Our Strengths drive the activity we should be attempting to focus on, and the Opportunities will tell us where we might be able to use those strengths. The Threats are the hazards we need to look out for, and we need to make sure that our Weaknesses do not make us vulnerable. Trust me on this one, folks: it really is that simple. If you’re willing to do it, of course…

Global Economy

Regular readers of these rantings (and I'm pretty sure there are some) have heard me going on about the Global Economy, and how no matter how isolationist you might happen to be, you still ignore Globalism at your own risk. Or, as I have said at least twice in this space, "It doesn't really matter if you believe in the Global Economy or not; the Global Economy believes in you!" Well, today in the news online, there was a story that proves that point once and for all.

BBC News is reporting that a factory mass-producing those "Free Tibet" flags you keep seeing all over the world on the news has been uncovered operating in Southern China. That's right, folks; the same people who are going to bad-movie parody lengths to squash the "Free Tibet" movement and anyone who might support it are also making money off of the movement. In fact, since doing business in China automatically includes making "gifts" to local officials to get things to happen, it is a virtual certainty that actual members of the Chinese government have been receiving money in exchange for making this happen.

Now, from a business standpoint, this seems only logical. Since crushing a popular rebellion is dirty, expensive work, it would only make sense to make as much money off the by-products of the situation as you can. In fact, it seems a shame that the U.S. Government has never made anything off the sales of all of the "Che" t-shirts and posters that stupid people who don't actually know anything about Ernesto “Che” Guevara buy, considering the amount of money our government has spent fighting everything Guevara stood for (and trying to prevent or counter the revolutions he was trying to start). It’s an irony that Guevara himself would have considered grotesque, although probably no more so than the fall of Soviet Communism and the rise of a free-market economy in China…

But whether or not this strategy has any utility from a government/revolutionary/counter-revolutionary standpoint is irrelevant. From a leadership standpoint, or simply from the standpoint of trying not to look like a clueless jerk, it would probably be a good idea to avoid manufacturing the banners of protest that the enemies of your government are waving...

Why does he tell us this? I hear some of you asking. You know you'd never accidentally do anything that would cause the Department of Homeland Security to pay YOU a visit, right? You know the complete details of every part of every product that your company manufactures, and there's nothing there that could possibly give aid or comfort to an enemy, make you look like a drooling idiot, or destroy your company simply because you didn't read what it was you were going to be manufacturing before you signed the contract, right?

Right?

Sure, I'll wait…

The Success Paradox

Did you ever notice a business operating in your neighborhood that seemed to be doing everything right, packing in the customers, raking in the money, generally outselling all of their (apparent) competition, and then vanishing without a trace? Not a seasonal business (like a Christmas tree lot or a pumpkin stand) or one that was intended as a one-off event (like a public liquidation sale), but a regular business that seemed too good to possibly fail – and yet, somehow did? Ever wonder how that happens? Well, needless to say, there as at least as many causes of business failure as there are failed businesses in the world, but many of those failed businesses were doomed from the start, never worked in the first place, or had some fatal flaw built into their business concept. I’m speaking here of the paradox of a company that was so successful that it actually did them in.

Consider the case of two restaurants I’ve patronized frequently over the past few years. I’m not going to name any names, again, because I don’t want to publicly embarrass anyone (and I’m not that keen on being sued, either), but neither of these cases is exactly unique. If you ask around, there are probably parallel cases in your neighborhood. First, we have the case of a diner, not that far from here, that was packed full most of the time, and on high-traffic times (like Sunday morning and early afternoon) literally had a line out the door. The wait for a table could be over an hour, and even if you could get a table, the atmosphere was like being in a basket full of kittens, but the food was good, the service was excellent, and the prices were reasonable. They also catered to the fitness and bodybuilding crown in the beach cities, offering huge “protein plates” with no carbohydrates and enough cholesterol to choke a horse. People would wait hours for a table.

So what happened to them? Well, people got tired of waiting for a table and began exploring the other options for brunch in the area. Some of these, like the IHOP location I mentioned back in November, took this opportunity and ran with it, siphoning off a lot of the diner’s less patient customers. Other customers got tired of the noise, the crowds, and the sensation that somebody else’s child was about to run over your foot every few seconds, and changed their eating-out patterns, too. The stress level got to a lot of the veteran employees (lowering the quality of service and eventually the quality of the cooking, as well), and the owners spent money on the wrong things (new menus, an outdoor seating area, more television sets, and so on) instead of keeping their operational standards high.

The upshot is that the last few months, the Sunday Brunch traffic has dropped off until there’s no wait for a table at all. The owners are attempting to cut costs (presumably to keep profits up) by scheduling fewer waiters, using busboys for more direct service functions. They haven’t gone under yet, and may still be able to pull out of this tailspin – IF they return to what made them a success in the first place. But each week there are fewer and fewer cars in their parking lot when we drive by…

The other case is even simpler. The owner of a very popular restaurant was getting a divorce, and did not want to pay his wife any spousal support. So he shut down the restaurant during the proceedings, ostensibly for “redecorating”, figuring his effective income would drop to zero, he’d be off the hook, and he could just re-open and go back to raking in the profits. Unfortunately, many of his operating costs continued while he was closed, such as rent, advertising, interest on loans, and so on, and the divorce case dragged on far longer than he’d expected. I can’t say for sure if his wife or her attorneys did so on purpose (to counter his “no income” tactic), but the upshot was the same. By the time the dust settled, the owner was in bankruptcy, with no way of re-opening the restaurant even if he’d wanted to. The runaway success of his enterprise had made him think he could game the system, but as previously noted, the laws of Economics may not be as precise as those of Physics, but they’re just as difficult to ignore…

Of course, in addition to overconfidence, lack of concentration on your core business, bad spending choices and pure hubris, there are other errors that attack successful businesses. But that’s a post for another day…

Value Added

Like many terms that come up in strategy discussions, Value Added is one of those things that sound simpler than they really are. In fact, in recent years it has often been hijacked as part of those strategy statements that are mostly a collection of buzzwords and obscure jargon, and don’t actually mean anything. So let’s take a look at what the term really means.

In many cases, when we attempt to sell something, the largest problem we are going to encounter is than many other vendors are selling the same product, or at least something from which the purchaser can get the same functionality. In extreme cases, of course, we are selling a literally identical product – table salt is going to have the same chemical formulation no matter who has packaged and labeled it, for example. Products that the consumer can’t possibly tell apart without a label are generally called commodities, and most of the time the only way to gain a competitive advantage in selling them is to offer a lower price than the competition.

But suppose we can convince the consumer that our version of the product has something going for it that the (supposedly identical) competition does not. Perhaps our table salt has a “fresh, clean” flavor to it, or our gasoline has “detergents” that prevent “engine knock.” Suddenly, we have the basis for selling our product as superior (and therefore worth more) than the competition. It doesn’t matter that all table salt tastes the same, or that all gasoline sold in the United States has the same additives (and is in fact often bought and sold among the oil companies themselves as needed), so long as the customer believes that there is a difference in the products.

This process is generally called differentiation of the product, and one of the classic ways of doing this is to offer the customer something extra. If I offer to provide free car washes and free oil changes to anyone who buys a car from my dealership, customers are more likely to buy from me than from the dealership down the road that is selling exactly the same vehicles (but not offering the freebies). If our company includes a free printer, monitor, scanner and set-up service with every computer, we can argue (correctly) that despite the fact that both machines have the identical Intel™ chip, our product is a better value to the customer, particularly if we are charging the same price as the competition.

This is the classic definition of Value Added, and forms the basis of the Value Added Strategy, in which a company attempts to portray its product as being more valuable than the competition. This can take the form of improved quality or safety (Volvo and Mercedes-Benz come to mind); lower operating costs or efficiency (Toyota, particularly the hybrids), or additional product at the same price (consider any computer product bundle). Some familiar examples even include intangible factors, such as the case of automobiles and clothing lines that add prestige to the obvious value of basic transportation and/or not being arrested for public nudity.

Of course, caution must be taken to insure that the expense of adding value to a given product does not consume the additional profit to be made from increased sales… But that’s a topic for another day.

Strategic Defense

I was starting work on a post about the Strategic Defense/Tactical Offense concept a while back, when it occurred to me that unless the reader is a strategy scholar, the concept is probably a bit confusing. After all, there are tactical as well as strategic aspects to both offense and defense, and many management professionals dislike the comparison between military operations and business in the first place, claiming that war is inherently about destruction (and is thus entropic) while the purpose of business is to create wealth (or in the case of non-profits, value). Unfortunately, this is another one of those concepts that has some validity regardless of whether or not we like it, and is probably with a closer look.

The origin of the phrase “Strategic Defense – Tactical Offense” is probably lost in the depths of History, although you can find excellent examples of what it means in the Belisarius series by Eric Flint and David Drake. It should be fairly self-evident, however, that many aspects of a military defense do need to be strategic in nature, or at the very least, worked out far in advance. If our defense requires large ditches to slow down vehicle traffic, for example, we will need time and equipment to dig them; if we require improved armor to protect vehicles or people from new weapons, or bio-chemical gear to protect our troops from germs or nerve gas, we will need time to design, build, test, manufacture and deploy them; if we need to shoot down airplanes or intercept missiles, we will need to give a huge amount of money to defense contractors who will take it and buy large estates in the country and hire expensive lobbyists…

All right, that last bit was uncalled for, but you get the idea. In business terms, many of the same issues apply. Changes in market conditions may require us to produce cheaper, more efficient products, offer different services or levels of customer support, or adapt to new technologies. No single employee or work group can handle issues like these on an ad hoc basis; if the customer wants to buy fuel-efficient vehicles and all we have are 1950s era gas guzzlers, we can’t meet our sales goals no matter how good we are at selling. If government regulations are going to require us to drop our carbon emissions by 50 percent, we’d better have that planned out well in advance; it’s going to require equipment upgrades, procedural changes, and compliance audits.

The ideal form of Strategic Defense is to develop a position where you can’t lose, no matter what your offense does. The classic example is probably the American Colonial forces in the Revolutionary War. The British needed to win outright to recapture the breakaway colonies, while the Colonial government only needed to prevent this – in effect, not to lose would mean winning. People claim that this can’t be done in business without first establishing a monopoly on a specific market, but I doubt that the people who are trying to compete with the iPhone using last year’s tech products would agree with that. Or, for that matter, that the companies that are trying to compete with Google would pay much attention.

If our Strategic Defense has done its work properly, our business units (and individuals) will be going to work with the training, equipment, skills and products needed to successfully compete for our share of the market. Taking advantage of opportunities to generate income and/or take market share away from our competition is still going to come down to the day-by-day operations of our line business units, however, which will always be tactical in nature,

But that’s going to be my next topic…

Getting Organized

As you might expect, Organization is very nearly a science in and of itself, encompassing everything from organizational design to how you arrange items on your desk and I don’t intend to try to cover it all in a single blog post. That said, there are a few key concepts I want to call to your attention precisely because they are so little known and poorly understood – even by the people who should know better.

First off, let’s consider idea of organizational design. Clearly, we want to have as few levels or “layers” of management as we can, since management personnel command high salaries but don’t themselves generate revenue. This means having a few managers and as many workers as we can. In a perfect world, we would just have the CEO supervise everyone else, producing a company with only two levels (an extremely “flat” structure, in business school terms). Unfortunately, this is impossible except in very small organizations. There is a limit to the number of subordinates (or subordinate units) a given manager can supervise effectively; in b-school terms this is referred to as Span of Control.

If our people are doing work that requires very little direction (physical labor, like digging ditches, being the most common example) then a single supervisor might be able to control as many as 30 of them; if they are doing complex intellectual tasks (accounting, writing code, consulting, managing a department) then the Span is more likely to be in the 3 to 8 range. This isn’t an easy balance to strike, but it is critical to the long-term success of the organization. If the span is too large, quality will inevitably suffer because the supervisors will be unable to correct mistakes, and efficiency is likely to drop because the supervisors will also have too many subordinates to direct effectively. If the span is too small, the company will lose money paying too many management personnel, and is likely to suffer from micromanagement on the part of the underutilized management personnel.

Also, note that the Span of Control will vary at different levels of the organization. One foreman can probably handle several dozen ditch-diggers, but a manager will have his hands full trying to supervise more than five or six foremen and their crews, and a Director will do very will to control more than three or four work groups.

Then there’s the issue of duplication of effort. Quite often in large organizations you will have multiple departments engaged in the same task, while other activities are completely ignored. During the planning process you will have broken the overall mission of the company down into goals, objectives, and tasks; while getting organized it pays to group those tasks by similarity, so that work groups with the resources to handle multiple similar tasks are assigned to do so, and multiple groups are not assigned to the same things.

Of course, for any of this happen, the management personnel at all levels need to become involved in the process; ultimately, it is just as important for a single team leader to organize his or her people into the optimal configuration as it is for the Chief Operating Officer to make sure his or her divisions are not working at cross-purposes. The only way to be sure that your subordinates (or subordinate units) are operating efficiently, not duplicating effort, and receiving the correct level of supervision is to understand the process and know what needs to be done – and what everyone reporting to you is able to do. If you came in at the entry level and have worked your way up, you probably already understand what the people and groups reporting to you are doing. If not, there’s no time like the present to find out…

Planning

Of all of the manager’s functions, the one that has probably gotten the most ink in recent years is the Planning function. This is not to say that it is the best understood, however. A quick search on Amazon, for example, yields 432,112 different entries, including such similar sounding (but completely irrelevant) topics as Event Planning, Estate Planning and Financial Planning. Even restricting your search to business topics will bring up tens of thousands of books about planning at different levels, not to mention journal articles, lectures, tape series, videos, and (ahem!) blogs.

Like many other disciplines, the details and minutiae of Planning can take years to master, but the basic concept isn’t actually all that complicated. When you look at a large task, like building a new brand of automobile, eradicating world hunger, or even getting all of this week’s work finished, there’s obviously a lot of things going on. The trick is to break each one of them down into smaller and smaller pieces, until you reach a level where there is a concrete action you (or one of your personnel) can take to complete that task. This type of planning is often called “Planning By Objectives” or PBO, since what you are doing is, in effect, breaking your overall mission down into subsets or Goals, and then defining the Objectives that must be met to complete each goal.

Once you have the individual action items worked out, it is helpful to arrange them according to the order in which they need to be completed. For this, the Gantt chart can be extremely useful. Keep in mind, of course, that this becomes exponentially more complicated as the scope of your overall mission grows. A complete Operational plan for a five-member work group might take you only a few minutes each week; the plan to start a new car company would take months to complete, and a (workable) plan to eradicate world hunger has so far eluded even very large organizations formed to do just that…

In general, a Strategic Plan is one that covers the complete scope of the organization, starting with the Mission of the agency, and working down to actual tasks and action items. An Operational Plan deals with a specific unit’s operation, and is most often limited to the immediate period under review (e.g. a monthly, quarterly or annual plan). One could think of the organization’s Strategic Plan as being the sum of all of the Operational Plans completed for the duration of time during which it exists. A Daily Plan may or may not be necessary, depending on how many subordinates you are responsible for, and how many tasks are to be accomplished in that given day. When employed, it can be considered an Operational-level plan with a duration of only one day.

Of course, once you’ve planned out what you need to accomplish during a given period, the next step is to determine what resources you will need and who will be tasked with which action items. That step is collectively known as Organizing, and it will be my next topic…

The Manager’s Job

By now I’ve made so many comments about managers doing their jobs (and failing to do so) that some of you are probably wondering what it is that a manager is actually supposed to do. Asking around the office won’t help; your supervisor will probably start going on about making schedules, wrestling with budgets, writing reports, making sure that key operations do not become fouled up, and lot of other specific duties that won’t tell you anything about the science of management. Asking a management professional probably won’t help either; most of us would claim to make the sun rise and the crops grow if we thought anyone would believe us for a moment.

All of this contributes to management science appearing to be much more complex than it really is, and helps to keep the salaries of people trained in it from plummeting any farther than they already have. As a result, too many people are intimidated by the idea of studying management, and wind up either faking it and hoping for the best, or staying out of management positions altogether. The truth, however, is far less grand. The science of management is comprised of four (and only four) main parts: Planning, Organizing, Directing and Controlling.

Planning includes Strategic Planning, Operational Planning, Daily Planning, and a variety of more specialized planning functions. Some companies actually maintain a Strategic Planning (or Forward Planning) department, usually reporting to the President or General Manager, specifically to help the various senior managers keep their plans straight. So if you’ve ever felt that a manager who refuses to plan things out in advance is derelict in his/her duty (as well as incompetent), you are quite correct…

Organizing is probably the least understood of the functions – and consequently, the one most often done incorrectly or ignored altogether. If the Planning function is the means by which we determine what we want to accomplish, then the Organizing function could best be described at the means by which we determine HOW we will accomplish these things. This will mean determining which personnel will perform which functions (organizing the company into departments, workgroups, and teams), how much time and money and other resources will be devoted to each task (the scheduling and budgeting functions), and what processes will be used to insure performance, quality, proper supervision, and so on.

Directing is the function most people associate with active management: telling your subordinates what you want them to do. Managers of a strict and hierarchical nature may see this as “giving orders” while those of a more artistic bent may see it as directing a play or conducting a symphony. Some people are so uncomfortable with this concept that they will give it a less forceful-sounding name (such as “leading” or “coordinating”); true failures may actually refuse to do it, and let the employees just do as they will.

Finally, Controlling is the feedback part of the process, whereby the manager monitors the progress being made toward goals and performance targets, corrects problems, adjusts plans, rewards those exceeding expectations, and brings those who are failing back into line. It is important to note that the Controlling function must be part of the manager’s daily responsibilities; limiting the Controlling functions to annual reviews or the occasional disciplinary action is every bit as incompetent as limiting the Planning function to a few days each year when the budgets and sales targets are formulated.

Of course, any specific manager may also be tasked with additional functions by higher management, and many professionals serving in the manager’s role will also have work of their own to complete. But the manager’s job itself remains the same – and has, in fact, since the first group of people began working on a project together. The only real questions facing the management professional are “Are you performing all four of these functions?” (you’d better be!) and “How do I perform all of these functions?”

Which is a topic for another day…