How Old Metrics may strand you strategically

Ever stIMG_0267op to consider how the ever present changes going on around you make your own transformation easier?

John Hagel relatively recent blog post describes the opposite.

In a world of accelerating change, one of our greatest imperatives is to “unlearn” – to challenge and ultimately abandon some of our most basic beliefs about how the world works and what is required for success.

Accenture a few years ago noticed that many different companies had shifted their approach to strategy. Perhaps, the availability of cheap, powerful computing capacity and Big Data are responsible for driving changes in strategy development as more organizations using technology find it easier to build consideration of the future into their present planning.   Hagel, a long time fan of scenario planning would applaud these efforts too.

With the rise of automated business processes, analytics too get incorporated automatically to enhance decision making and may be simultaneously compromising management capabilities to internalize all of these changes or understand the underlying dynamics traditional measures mask. Several articles provided case studies in different industries provided the basis of discussion around transformation (see the bottom of the post for specific article links).

how to lie with staticsSuccessful organizations rely on their strategy to put forward action plans, realize new ideas while averting risk. Statesmen and management alike find themselves in precarious places when they assume a trend will continue without change. Many statistical methods and decision-makers use of data remain unchanged from 1954 when Daniel Huff first published How to Lie with Statistics. His timeless book describes very simply the perils of improper use of methods that were designed to capture and explain if not contextualize the significance of singular observations, or data.   The current transformations enabled by technology have done more to alter behavior than organizations seem to recognize. That’s the path our discussion took.

The capability for insight

Prospective vs retrospective cohort analysis  and data mining techniques are far from new. Though the volume and speed of available data to digest and process with ever The increasingly sophisticated tools and the ease with which volume and speed of available can be processed may help as well as hinder their digestion. Sure the time to test alternative scenarios may be faster, but how do you choose the model?

Do you begin with the intended outcome? The scientific method and numerous models from multiple disciplines make it possible to isolate factors, determine their significance, and estimate alternative scenarios and assess how these variations produce changes in impact.

Similarly, the cross pollination of data modeling from one discipline into multiple industries and use cases continue to shift management beliefs regarding the importance of specific factors and interactions in their processes. The perennial blind spot denies many organizations and their leadership the insight necessary to transform both their internal strategic thinking process and business operating models. Last month’s discussion of McDonald’s and Coca-Cola illustrated how easily leadership misinterpreted fluctuating performance as temporal issues versus recognizing structural factors. It’s one thing to balance efficiency and effectiveness, quality and satisfaction and another to manage awareness of change and insights necessary to your continued survival.

What else thinking

“…both the digital world and the physical one are indispensable parts of life and of business. The real transformation taking place today isn’t the replacement of the one by the other, it’s the marriage of the two into combinations that create wholly new sources of value.  “

The sudden availability of online data tracking provided many organizations with the proper capability to understand user behavior differently. A whole new industry arose to focus on interpretation while creating of new measures while also introducing new thinking about effectiveness in sales, customer service, training etc.  Metrics, once created to prove out a strategy or an idea, now leave many organizations vulnerable until they build up the capacity to understand this new thinking let alone make corresponding operational changes necessary to sustain their business.

This is not the story of companies who fail to adapt such as Kodak who invented digital cameras only to retain their focus on film; but maybe it is.

http://www.cognoise.com/index.php?topic=17598.0Computerized reporting dashboards summarize specific indicators or activity associated with managing process or business relevant factors. The time and reporting cost savings that result from the automatic generation and ready access to information by managers and executives reinforce existing thinking and leave little room for understanding wider changes that may be impacting their business. It wasn’t long ago that analysts, and teams of them, spent their entire day pulling data and then calculating critical statistics detailing the effectiveness and efficiency of organizational activities to create reports for senior management. These efforts also made them accountable by insuring the data was clean, verifying whether outliers were real or indicative of a model failing to fully capture the wider dynamics. I was once one of those managers.  Today, automated reporting has eliminated many of the people capable of deeper data exploration and who chose what data, which statistics and the context necessary to understand the situation. The second problem is that data shared graphically or in tables never tell the whole story, though infographics do try.

A good analyst is taught to review the data and results, double-check whether the model or calculated results makes sense. Sure managers and executives may be quicker to detect aberrations and then raise questions but , how many of them have the time, patience or skills to test their ideas or intuitions? I imagine very few if any. Where are these available resources and how widely known are they to questioning executives?   How might the dashboard provide additional information to help frame the results executives see as they too seek to understand or make sense of the results?

Outside in thinking

Established data flow processes and automated reporting do deliver great advantages but they may also explain why outsiders find it easier than insiders to create new business models.   Where’s the out of the box thinking? And how can different data help?

Sure, it’s easy to blame regulatory requirements or compensation structures incentivized to focus on effectiveness and efficiency that leave little latitude to notice opportunity. For example, in the airline industry route fares were once set by regulations. The minimum fares were intended to cover airlines operating expenses that both insured passenger safety and access to air travel in more locations where market forces may lead airlines to cut corners. Deregulation may have given airlines additional freedom but many manage their business using the same metrics that they report to the Department of Transportation. Likewise in Healthcare, the imposition of new regulatory requirements came with new metrics that forced hospitals to focus on patient outcomes not just their costs.

When executives bottom line focus limits their thinking as an exercise in how making corrections in operation may maximize that number they overlook other contexts. Data quality issues should surface quickly in most organizations, but what if another factor created the data issue? A misplaced data point, or inconsistent treatment of the content of a data field rarely explain all aberrations in the results.   Weather, for example exemplifies a ubiquitous, exogenous variable. Observable data fluctuations may be directly or indirectly responsible by affecting other more directly connected factors, such as a snowstorms that change people’s activity plans. I’m not familiar with any automated reporting system that will automatically create a footnote to the data point associated with the arrival of a snowstorm. The reviewer is forced to remember or manually if possible add the footnote for others.

Bigger transformations to come

Bain believes there are significant implications for every organization that result from this digital and physical combination of innovations , they call Digical. It’s not easy to keep up with the corresponding behavioral shifts that result from these rapidly changing technological capabilities.

Focusing exclusively on efficiency and cost data helped management measure impact in the old era, though still necessary today they may no longer suffice. Do you know how social behaviors of your customers impact your bottom line? The technologies to support your business, such as your website or your cash register misses out on the social behaviors evident on sites like Facebook, Twitter, Yelp or even their bank. Mapping the ecosystem and then aligning the digital tracking data can now be supplemented with sensor data that may be anonymous to specific customers but can inform movement and actions relevant to your engagement.http://intronetworks.com/making-amazing-connections-siggraph-asia/

Naturally, as mentioned earlier bias plays a role in our inability to notice the significance of new data. The more we automate and configure systems to measure what we always knew mattered, the less likely we are to be able to recognize new data and its significance. What should you the analyst and you the executive do to counteract these factors?

Takeaways

Monitor the activity of smaller companies as they experiment to learn what’s most relevant.

Don’t make assumptions, exercise strategic intentions to become more open receptive and curious about anomalies and be more creativity and persistent in identifying the drivers or possible factors.

Historically, metrics were an output designed to assess the validity of your strategy –did it work and/or deliver value. Not it’s time for strategic thinking to view metrics as an input. The use of statistics enabling analysis tools partnered with business knowledge and acumen must be part of communicating to higher levels in the business.

Often we measure the wrong things because the incentives are misaligned. Am I paid based on my proven ability to produce widgets at specific levels , or to produce effective, sustainable results for the business, not just my business unit?

Computers are useless they can only give you answers. For strategy, validating the questions may be important but so too is taking the time and effort needed to determine even better questions.

ARTICLES

Alternative case examples

Bain’s study and understanding of the state of “digical” transformation:
http://www.bain.com/publications/articles/leading-a-digical-transformation.aspx#sidebar
Fast Food
http://www.qsrmagazine.com/reports/drive-thru-performance-study-2014
Wireless
http://www.rcrwireless.com/20140812/opinion/reality-check-new-metrics-for-a-changing-industry-tag10
Television
http://fortune.com/2014/10/23/adobe-nielsen-tv-ratings-system/
Gaming
http://www.gamesindustry.biz/articles/2014-03-10-social-currency-has-real-value

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Changing Social Compact? Naa, just good sound long term strategic planning

On Shared ValueShared Value is neither new or an unusual a strategy as the media and popular press suggest.   Any company who has been deliberate and committed to strategic planning quickly discovers  the imperative  to invest  in their future and develop ancillary parts of their market. Deloitte’s global chairman and CEO-elect UK responded on the phenomenon in a letter to the editor of  the Economist that appeared in March.  (Note, our apologies for not noticing  and bringing it to discussant’s  attention earlier).  Deloitte’s position:

Society is more affected, for better or worse, by the core activity of a business than by its community investment projects, social initiatives and other peripheral activities…Good businesses recognise and understand the contribution they make, alongside government and non-governmental organisations, to economic, environmental and social progress. According to our analysis, over a fifth of Fortune Global 500 companies already have a clear, society-focused purpose underpinning their activities.

These views appear somewhat consistent to other reports such as the Global Reporting Initiative (see earlier post).  Questions circulating in the Friday discussion did not challenge the value of the activity.  Comments focused on complexities and organizational thinking that prevent more than a few companies from pursuing these strategies.

The search for Profits

Fundamentally, profitable growth comes from one of three sources:

1. Expanding your customer base–more customers

2.  Higher profits per customer–which means expanding the margin by either shrinking costs or raising prices; and

3. Increasing the number of things you sell, or sell the same things more often, or create more products to sell to existing customers-

Throughout history, the intersection of  supply and demand, creates value. Companies who effectively overcome logistics that separate the two, and with efficiency, naturally  benefit.  Business practices that optimize  costs, resource use or adopt solutions that minimize risk however,  are not always synonymous with ethical practices.  Add  cultural differences and attitudes into the wider system of decision variables  and it’s  easy to see why history is full of stories about companies who failed to share their economic benefits with local  workers or communities.

In 2011,  sustainability or persistent business operating practices depend on a wider decision frame that encompasses local good will and good behavior.  The repercussions of bad or exploitative behavior may upset the strongest of a company’s standing in the marketplace, especially because of the speed in which any number of stakeholders can usurp social media to exact revenge.

The global, wired world is only one reason we increasingly learn of companies behaving more responsibly globally. It turns out behaving responsibly is also cheaper.   Averting the damage, by doing a little more upfront, or taking on some upfront risk may in fact limit if not eliminate back-end risks. Perceptions are important to keep up, but equally important are relationships.

Numerous global companies seeking to expand their presence in alternative markets are finding NGOs reliable partners, thus earning the project the shared value label. Knowledge of local custom, culture and conditions, when integrated into investment decisions, mitigates possible failure and offers added security from future liabilities.

Is  it really a surprise to see corporations increasing their reliance on NGOs local knowledge to help penetrate new markets?  To the assembly of strategy minded Chicago Booth MBAs and professionals, leveraging ability to enter a market indicates a prudent well thought out, long-term strategic initiative.  The rising number and prominence of news  stories that expressed the value of pursuing long-term strategy initiatives, that was a surprise.  Maybe these are examples of capitalism at the extreme.  Is there anything inherently wrong with a company creating downstream demand for its products and services?   More cynically, the stories and highlighted attention around shared value merely reaffirms the reality that there’s no pure charity going on.  Both business and NGOs are no longer distracted by taking adversarial positions, and instead both are more productively realizing their aims.

In modern times, new market expansions up the stakes considerably, made evident by the lessons from earlier experiences.  Recall the disaster in Bhopal.  This accident continues to haunt DOW, no matter how much money, support or distance they attempt to create.  The  clear lesson for business today, is that its best to know your way around the market where you are trying to set up a toehold.  The easy pickings in most market are gone or governments and other organizations more hesitant to roll out the red carpet.  The increased risk  of crossing cultural divides is something that NGOs have felt more viscerally, as when their failure to deliver puts peoples’s lives at risk, not just the loss of investment capital.

What does maximizing value look like? 

Value , as earlier stated is not just a measure of profit; and as such doing good to more of your stakeholders, regardless of your tax or operating mission, may indeed create value.  It’s simple to believe that shareholders are only interested in returns near or short term.  Ample evidence exists that investors consistently pay more for companies who derive direct and indirect value from multiple sources.  [Anyone have a reference or citation for this? ]

Another cautionary tale

Nicholas Negroponte’s vision for accelerating learning in impoverished communities, widely shared with other luminaries in technology has fallen short of collective expectations.    In establishing the onelaptop per child foundation, the mission was simply

  to empower the world’s poorest children through education.

One laptop in Africa

Nobility aside, ample data and analysis correlates education level with higher income making this a logical path to empowerment, sufficiency, economic independence etc.  The founders, rather than deal with the complex system of resource coördination in locations short on infrastructure,  seized upon the silver bullet in the form of a simple laptop. The private foundation and their very sophisticated, resourceful founders and network  encountered more than one bump in their path to distributing the 1 million laptops across the globe.  A recent evaluation  contrasted  reality with the dream by acknowledging the  foundation “failed to achieve its ambitious goals when it met its intended market.”

In short, the answer that emerges when sitting in a resource rich environment failed to fully consider the ancillary factors that were key to realizing the project.  With the best of human intuitions and insights, they  tried to think of everything. The impressive self-contained laptop with software especially designed  toward natural learning, included a crank battery and internet access via satellite.  But the technology was simply too big a leap for populations who struggle to support basic necessities for their survival.  Click here for  More of the story. 

We welcome other thoughts or comments, and invite you to share them here.

Seeing the Iceberg, Strategic responses to Business Disruptors

Titanic image

By the time we see the iceberg, is it always too late to change our course? Business model disruptions often blind  fast growing companies– shareholder  darlings, and result in their precipitous decline.  The impact of the hit is rarely limited, as the wake of the disruption ripples across the globe creating uncertainty in the capital markets.

Last week, Janurary 18  Borders Group Inc appeared as the latest casualty.   Borders Hires Restructuring Lawyers  story reported by the WSJ, corporate management’s decision to suspend book order payments and hire restructuring lawyers.  Top c-suite executives resignations soon followed.  At this point, it appears collapse is their only alternative.   But a year ago, on the 27th of January, their CEO resigned. The interim CEO announced in April a turnaround plan, that in retrospect  failed to keep them afloat.

Is the Border’s case a failure of strategy, leadership or execution?  A full analysis isn’t necessary to realize the price paid by delaying responses to industry disruptors .

I wouldn’t have paid much attention to this story, or been that drawn into the analysis had I not sat with Chicago Booth alumni last Friday and focused exclusively on this issue of business model disruptors.  The Border’s story was coincidental, and though none of us had direct facts or details, we recognized that the leadership team could not have merely been asleep or unaware that trouble was looming.

McKinsey recently published a survey on the value of corporate strategy. Their findings were not surprising and merely confirmed the Booth and Kellogg  discussion participants experiences.

Strategy is hard

Defining the nature of your business proves to be challenging. Borders first and foremost was a bookseller. Their mega-store concept, in  itself an industry disruptor, enjoyed great success until a competitor introduced further industry disruptors. Why were they incapable of applying lessons of their own mega-store disruptive history?  Why couldn’t they switch-up to an online platform and seize the opportunity for more same site sales and avoid square footage overhead?  I leave the case write-up to others.

I wonder whether disruption is inevitable and if so, what if anything can a company facing similar game-changing disruptions do?

It was precisely this question that the monthly discussion of Chicago Booth Alumni considered last Friday.  To frame the short conversation, attendees reviewed in advance three articles with strategic advice and  listed at the end of this post.

Unlike the predictability and regularity of a ticking mechanical clock, the future rarely repeats or duplicates the past.  Our circumstances are always shifting. Some subtly, occurring  as imperceptibly  as the orbital passage of the earth around the sun.  Business disruptors succeed because they are rarely taken seriously by industry insiders early enough.

A single customer may wander; but consumers rarely act en mass abruptly taking their business to an emergent competitor. In reality, the best customers stay loyal  and provide an ongoing revenue stream. This renders the company blind to the departure and slowly increasing exodus of marginal customers who strengthen competitors into a massive menacing iceberg. The small top , poses no visible threat and is thus dismissed as inconsequential.

Most successful business leaders  monitor and report business metrics which they also review with interested stakeholders , e.g. senior management, share-holders,  boards of directors. Rarely do these metrics display the full organization’s capabilities and/or its resilience to withstand disruptive threats.

Clayton Christensen studies corporations facing change  and found management rarely focused on changes in demand as they occur in their marketplace. Resilient companies insure existing resources can successfully meet the evolving needs of their customers.  Their review process is not retrospective, but focuses on the future by assessing what steps in their process and values will  propel, not impede their ability to  innovate.  This choice compromises their ability to win.  In a race with a motorboat, paddling faster, or cutting dead weight won’t help you win; but an innovation in your paddle or changing the contours of the boat might.

Strategic suggestions

Disruptions in your market and Business model are rarely welcomed or predictable.  Several tactical strategies make it possible to bounce back or even advance your market position.We discussed three.

  1. James Ogilvy, writing for Strategy +Business, offered metaphors from philosophy to illustrate how easily management and leadership miss critical cues. He suggests that to avert disaster, create a culture of resiliency, one in which  emboldened employees both speak and act early.  No one predicts the future but present operating decision processes can prepare an organization to be more responsive, helping lay plans for changes no one yet understands, measures or foresees.

2. Constantinos C. Markides and Daniel Oyon writing for MIT Sloan raised five key questions from reviewing ideas presented by Clayton Christenson, Michael Porter and others who have studied the challenges  that impede innovation.  Management  who asks themselves these questions will be in a better place to both assess the potential damage caused by a disruption to its business or industry;and correspondingly, respond to the new competitive threat.

The questions don’t produce the plan of next actions. Instead they form the basis to revisit strategy, which is especially helpful to companies who recognize their current products, services or basic business model is time limited.  The process requires great strength to create something new while managing existing revenue opportunities. Pursuing both tasks simultaneously is fraught with challenges and incongruities;  and thus often proves successful when there is a restructuring of the organization that is equally focused on committing to the new change.

3. A third set of insights appeared in another article from Strategy and Business (How to Win). Authors Leinwand and Mainardi posit that companies who possess execution skills and formulate strategy based on existing capabilities are more successful game changers.  These companies are always outward facing and their strategic focus starts and ends with their customers.  This article written  in 2008 before Facebook and other social media tools proved themselves relevant, prophesized why inexpensive interaction with customers remains a great prescription.  In theory, a prudent strategic approach builds a coherent portfolio of ideas, skills and competencies that mutually reinforce the organization’s overall capabilities.  It’s a theory becasue it proves very challenging to execute.  [note, an older article by Christenson and Ovendov in HBR 2000, outline how to assess and find your core capabilities.]

Closing discussion take-aways

Discussion participants summarized their thoughts at closing as follows:

  • Where are the lessons on how to create culture transformations?  The prescription needs more meaningful or effective details.
  • Organizations and their leadership are not as dumb as they seem; rather blaming inertia, or more specifically its absence, inevitably rolls up into a leadership problem.
  • If you can stop the bleeding, act sooner and change the management team it may help, but critically it is management that needs to change what it does and  navigate a better course.
  • “Viewing your death”, an Ogilve tip, is only as helpful as your perceptions of future and the significance posed by outside possibilities when painted into a future scenario.
  • Remember who your ultimate customers are, not your board, not your leadership. Instead, any change or redirection in your business should be based on the shifting nature of your customers .
  • Keep track of your fundamentals, the organization capabilities.
  • Be wary of the situational leadership conundrum…their path to the top shaped how they read the signposts and drive the organization forward.
  • Best to take a long-term look, overcome the protective instincts that may ultimately undermine your ability to move the product along a more realistic and vibrant future.
  • CEOs are ultimately responsible for strategy and any changes have to come from the top.

The best insurance an organization can carry is regular consideration of outsider’s perspectives,  reality checks on their planning.  In theory, a board of directors consists of people whose own context and operating environment is in sharp contrast to your industry and culture.  The more divergent their views of the future, the greater the value of their contribution to your survival and success.

Source Readings

These  articles  were the basis of the Chicago Booth Alumni Discussion January 21, 2011

What Strategists Can Learn from Sartre
http://www.strategy-business.com/article/03405
By James Ogilvy, Strategy +Business, Winter 2003
Strategic thinking can benefit from philosophy. In this reflective piece, the author explained why in an uncertain world where competitive advantage is insecure, setting strategy must become an existential exercise.

How to Win by Changing the Game
http://www.strategy-business.com/article/08401
By Cesare Mainardi, Paul Leinwand, and Steffen Lauster,
Strategy +Business, Winter 2008
This was the magazine’s first major piece on capabilities-driven strategy, laying the groundwork for Leinwand and Mainardi’s book The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Press, 2010).

What to Do Against Disruptive Business Models (When and How to Play Two Games at Once)

http://sloanreview.mit.edu/the-magazine/articles/2010/summer/51413/what-to-do-against-disruptive-business-models/
By Constantinos C. Markides and Daniel Oyon,  June 26, 2010
Fighting against a disruptive business model by rolling out a second business model is one option for companies to consider. But to make that work, you need to avoid the trap of getting stuck in the middle.