Success in the long run

Sequoia_GrantA lament in American and European policy circles is that short term corporate thinking is harming the economy and society.  Consider:

“In a nutshell, short-termism is a fixation by company managers and investors on immediate gains with little if any consideration for longer term benefits or harm,” contends the UK’s Chartered Institute of Management Accountants in Building world-class businesses for the long term: challenges and opportunities.  “The attitude has been blamed for some of the worst excesses of the global financial crisis and an excess of ‘public bads,’ as green economists see environmental damage and other negative externalities to society that aren’t represented in the financial statements.”

“Serious social problems (loss of jobs, stagnating income, growing inequality) and eventually a decline of the public sector (an inability to fund health and pensions, or investments in ‘the commons’ such as infrastructure, training, education, and basic research, fields that the private sector had abandoned)” have flowed from corporate leaders adopting “an approach to management that focused attention on the stock price and short-term performance.”  So states the report on the Harvard Business School’s 2012 survey on U.S. competitiveness, Competitiveness at the Crossroads.

But do businesses need to be held captive by short term thinking?  Rich evidence that long term thinking can yield greater benefit to organizations was offered in presentations last week at the Association for Strategic Planning’s annual conference in Long Beach, California.

A COMMITTED CORPORATION

A corporate strategy leader laid out a case demonstrating a need for and a potentially huge pay off from long-term strategic thinking.

Hakan29c2963For MannKind Corporation, according to President and COO Edstrom Hakan, without committing to what has been an 11-year journey and making a $2 billion investment to date, the company would not be expecting final FDA approval by mid July to bring its groundbreaking inhalable insulin to market.

The Valencia, CA, based company believes Afrezza, which Hakan describes as a clearly differentiated technology, has the potential to transform diabetes treatment and offer diabetics a much better insulin delivery option.  Hakan says in terms of revenue Afrezza has “blockbuster potential,” offering a “multibillion dollar opportunity” globally and $5 billion by 2015 in the U.S. alone.  In the process of developing Afrezza, the company has also obtained more than 500 patents; its technology has potential for other applications such as fast delivery of pain medication for migraine headaches.

MannKind Corporation’s journey was guided by a strategic planning process involving a question and answer approach.  It set its innovation focus on diabetes based on its knowledge of the space, the history of the space, current expectations and future expectations. Hakan highlights the importance of taking both “outside in” and “inside out” analyses in its decision to move ahead to develop the technology.

MannKind Corporation’s subsequent planning process addressed:

  • Purposes: “What will we do for whom and why will we do it?”
  • Analysis: “Who will use it, who decides the need, etc.”
  • Process: “How will it be recognized in order to be successful?”

The planning process also considered alternatives, involved SWOT analysis, addressed emotional decision criteria, and more.

Hakan says after the firm’s strategies were decided, it developed objectives, which he defines as “the state of affairs or position we intend to be in at a particular time.”  Activities then drove the firm to its objectives, says Hakan.  He noted the importance of aligning activities with objectives so the firm could “decide what not to do as well as what to do,” adding, “some people confuse objectives and activities.”

The journey has been longer than MannKind Corporation expected: The uniqueness of its technology has resulted in an extremely long and involved FDA regulatory approval process that Hakan says “has been very difficult for us to manage.”  Even with approval, MannKind Corporation still expects to spend another $1 billion working with a yet-to-be-selected strategic partner for sales and marketing.  Hakan says the company will bring in the outside partner to avoid myopia about the skill sets it needs to execute its plan and reduce organizational risk.

Yet Afrezza is ready to be marketed, pending the FDA label to apply to the already-designed packaging.  Hakan says the company has current manufacturing capacity to serve 450,000 patients and has plans to dramatically expand that capacity.

COMPLEXITY AND SIMPLICITY

Over 30 years Cisco Systems has survived economic and market challenges to grow to a highly profitable corporation with $48 billion in annual revenue, 75,000 employees, presence in more than 165 countries and more than 470 offices.  It has had continued success while many competitors have fallen away.  Today it ranks number one in market share for carrier routing systems as well as telepresence, and number two in market share for blade servers (a business it entered just five years ago).

TamPatrick Tam, Cisco’s Director, Corporate Planning, says drivers of this long-term success have changed over the company’s life.

In its first 16 years, the San Francisco-headquartered company was in high-growth mode, hitting $18.9 billion in revenue and half a trillion dollars market capitalization.  The focus was “executing as fast as you can,” says Tam.  In a time of such growth “planning is all about executing.”

Then the dot-com bubble burst.  Cisco’s stock fell 72% in six months, 16% of the work force was laid off, the company incurred $1.17 billion in restructuring charges and wrote off excess inventory, and no employee bonuses were paid.  Tam was told, “From a planning perspective, this is your time to set up.” New CEO John Chambers called the company’s situation the equivalent of a “100-year flood.”

Under Chambers, now Chairman as well as CEO, for the next six years the company’s strategic focus shifted to operational efficiency and being as profitable it could be, according to Tam.  Many other companies in Silicon Valley did not survive.  “There was road kill all around us.”

The company regained strength and profitability, and in 2007 a focus on innovation was added to the operational excellence approach it had been pursuing.  A “board and council” planning model was adopted for its many units with the intent of “getting closer to the customer” and identifying “markets we could enter,” says Tam.  The many opportunities explored included “mobility, connected stadiums, routers in space, and smart grid,” with the “intent to force cross-functional collaboration, break down a ‘siloed view’ and work across the company.”

While the intent was laudable, the resulting process was “a challenge,” says Tam.  Its complexity led to “a lot of different opinions [and] slower decision making,” and lack of clarity about “who is really accountable.”

Thus, in 2011 a chief operating officer was hired and the company moved from the broad council and board structure to “strengthen the connection of strategy and execution across functional groups and streamline operations across the company.”  Tam’s corporate planning function moved to the COO’s office.

For the past three years, Tam has lead the effort to “establish a planning culture and mindset” and create a simplified corporate planning process.  (No fancy planning software for Cisco: A starting step was circulating a Microsoft Word document among executives to gain planning input.)  With general management and profit and loss responsibilities distributed among units, the planning process focuses on communications and creating alignment across the corporation through interlocked plans and financial targets, and joint accountability for execution and results.

Cisco’s planning process happens annually but “it never ends,” says Tam.  Phase one is August-December, when the company undertakes “a three year strategy refresh” and assesses the business environment, reviews the strategy baseline, tests assumptions, evaluates scenarios and bets, and establishes three- to five-year goals.  The resulting plan is “consolidated up” and shared with the board, employees and financial analysts.  Phase two is January-July, when the three- to five-year goals are translated into annual priorities, annual plans are built, financial targets are set, and budgets are allocated.  Ongoing planning governance and communication are facilitated by quarterly business reviews.

Tam’s three-person office coordinates 70 people on the corporate planning team across Cisco.   According to Tam, “We spend most of time focusing on alignment.”

RULES FOR LONG-TERM SUCCESS

Raynor004edabMichael E. Raynor, Director, Deloitte Services, LP, spent five years creating a database and analyzing more than 45 years of data on 25,000 companies to determine what drives long-term exceptional success.  He was surprised to find that sticking to three simple rules makes the difference.

Among the 25,000 companies, just 174 “miracle workers” had return on assets (ROA) in the 9th decile or above over the period.  Only 170 “long runners” fell into the 6th to 8th decile of ROA over the period.  Raynor compared these long-term exceptional performers to 1,208 middle of the pack “average joes” in terms of return on assets over the period.

After hitting “one dead end after another” in seeking what separated the groups of companies, Raynor and his peers discovered that what differentiated the “miracle workers” as well as the “long runners” from the “average joes” was that the exceptional performers doggedly followed what he has deemed the three rules, “fundamental answers” derived from “fundamental questions”:

  1. How do you create value for customers?  Rule #1: Better before cheaper.  The top performers focused on delivering non-price value to customers.
  2. How do you capture profit for yourself?  Rule #2: Revenue before cost. The top performers drove higher profitability through greater revenue rather than by reducing cost.
  3. How do you change when the world changes around you?  Rule #3: There are no other rules.  However the top performers addressed strategic opportunities and challenges, all that consistently made a difference was delivering greater non-price value and driving profitability first and foremost by growing revenue.

As for what separated the “miracle workers” from the “long runners,” Raynor says the answers are that “miracle workers” tended to be both high performance and high price, and tended to have “superior revenue.”  As an example of how “miracle workers” apply the rules, he cites Apple, which has pursued many different innovation models over the years but has been consistent in opting for non-price product value and high gross margin rather than low cost.

Raynor says he posited his findings as rules, not “good ideas,” because the evidence shows they should be followed especially when it seems not like not a good idea.  He notes that leaders’ tendency is to focus on being cheaper and cutting cost because doing so seems “tidy, familiar and reliable.” He observes that while generating revenue “is very messy problem, strange and dicey,” nonetheless it is “the most valuable, less risky task” even though “it never looks that way.”

Raynor’s book, The Three Rules: How Exceptional Companies Think, co-authored with Mumtaz Ahmed, offers details on the research and more thoughts on what it means for strategic leaders.

DECISIONS AND PORTFOLIOS

Ryan13b4138AT Kearney partner Sean Ryan and principal Andres Mendoza Pena presented a “Future Proofing” approach to strategy designed to produce a framework that provides ongoing strategic direction and the organizational agility to make it happen, in part by managing a portfolio of strategic advantages rather than being linear, trend based and myopic.

Ryan says “strategy is about making choices,” which is more difficult in a time of accelerated change.  Drivers he cites that are producing rapid market shifts include:

  • Digital economy
  • Globalization
  • Resource volatility
  • Hyper-mobility
  • War for talent
  • Dysfunctional government

“The speed at which choices need to be made has increased,” says Ryan, which means “our ability to make the right choices is more difficult.”  He observes, “The right choice is the more secure future.  But we face multiple futures.”

Ryan stated in his presentation on decision making that “what makes great companies great is making great decisions when it really counts.  Long term successful companies are making the right decisions when it matters.”

He says choosing the more secure future is complicated because:

  • “History is no predictor of the future.”
  • “We try to see patterns when none exist.”
  • We have been “using small sample sizes to extrapolate to the future.”

The aim of “Future Proofing” is to see the “multiple futures rolling towards us,” says Ryan.  “Big data” is one new tool that can help, using “huge, messy data sets” to see causation rather than just correlation and to derive “predictive analytics.”

Pena says his firm’s work shows that common pitfalls leading to strategy failure include:

  • Top down, isolated development and a failure to launch.
  • Business as usual, incorporating accepted wisdom and trended analysis
  • Singular strategic focus, putting all the eggs in one basket, being myopic around the core of the business with a lack of comfort in thinking beyond the core business.

Pena says AT Kearney’s approach counters these pitfalls by changing the strategy process:

  1. From “outside in” to “inside out” analyses, to bring “future-in strategic inspiration.”
  2. From cascading strategies down into the organization to “organizationally inclusive” strategy development, to motivate employees, provide meaning for their work, align strategy with “the organizational DNA,” and overcome a bias for inaction.
  3. From pursuing a single linear competitive advantage to managing life-cycles of competitive advantages. Advocating adoption of Rita Gunter McGrath’s concept of “transient competitive advantage,” Pena says organizations should “manage sources of competitive advantage with a portfolio mindset” and be prepared to “launch new strategic initiatives again and again” as current advantages erode.  Ongoing “management of advantages” will increase strategic capacity.

Such an approach, Pena contends, will “produce a framework to deal with uncertainty” over time by “balancing strategic direction with organizational agility.”

DESIGNED CONVERSATIONS

Ertel116a4d4Chris Ertel quotes leadership writer and thinker Ron Heifetz: “The most common cause of failure in leadership is caused by treating adaptive challenges as if they were technical problems.”

A practitioner of design thinking, Ertel is a director with Deloitte Consulting LLP and the Deloitte Client Experience and Deloitte Consulting Innovation teams.  He explains that technical challenges are well bounded and can be addressed using familiar skills by people with the best skills calling the shots.  On the other hand, he explains, adaptive challenges are messy,  open-ended and ambiguous, and can call for group learning to be resolved.

Ertel advocates intentionally designing strategic conversations to address adaptive challenges, for the “extremely important work” of “getting people in organizations to think more long term and to think more broadly.”

Ertel says designing “the journey of exploration and discovery” to address adaptive challenges is hard.  His approach is to start by determining if the purpose of the conversation is to provide information, pose a question to gain feedback or guidance, or to make a decision.  He sees the design journey as having three phases with 10 “journey spaces” from which to select when designing the journey for the group to take:

  • Building understanding.

Establish purpose.

Raise awareness.

Get unstuck.

Set priority issues.

  • Shaping choices.

Identify potential visions.

Frame choices.

Flesh out choices

  • Making decisions.

Set a common vision.

Provide strong guidance.

Make decisions.

Ertel has facilitated 100s of strategic conversations for leaders and teams in a wide range of situations. He counsels those designing effective strategic conversations to go beyond holding well organized meetings,  He advocates:

  • Defining your purpose instead of declaring objectives.
  • Engaging multiple perspectives and getting the “dream team,” instead of just identifying participants.
  • Defining a common platform and igniting “a controlled burn” that drives understanding.  Framing the issues instead of just assembling content.
  • Setting the scene beyond finding a venue.
  • Making it an experience rather than just setting the agenda.

Ertel offered several examples of how designed strategic conversations can differ from just holding well organized meetings and produce “a moment of impact” that generates “a willingness to adapt.”

  • Plum Organics, an entrepreneurial baby food company, paired Board and staff members to “game” a story on how specific competitors might seek to knock out the company.  The two-hour session was labeled “Baby Food Fight!” Ertel says the requisite Internet research done by each pair and the stories they weaved triggered experiential learning in which “the theoretical becomes visceral” and promoted “systems thinking more than fragmented thinking.”
  • To show the power of mobile smart phone applications when they were their infancy, several Intuit customers showed 18 top Intuit executives how they ran their businesses from their smart phones.  Then the executives were sent in teams on a highly engineered 90-minute scavenger hunt and were required to use numerous smart phone apps to complete the hunt through a San Francisco suburb and get to dinner.  This “cascaded the conversation” to the need for Intuit to provide its offerings through more powerful phone and tablet apps.
  • When Gensler, a large architectural firm, had a client require what would normally be a month’s worth of design decisions to be made in half a day, the firm labeled the decision making session “The Black and White Meeting” and promoted the theme with black and white clothing and decoration.   Ertel says the focus on straightforward choices “got them through four hours of rapid decisions and diffused the tension.”

Ertel’s approach to designing strategic conversations is detailed in the book Moments of Impact: How to Design Strategic Conversations That Accelerate Change, which he co-authored with Lisa Kay Solomon.