Strategy Matters

Now, maybe more than ever

2008-11-01T09:12:00.000-07:00

Most people think about strategic planning as a way to plot growth. It certainly can be that: When you know your business well, your market, and your competitors, you are in a good position to make the growth choices that move you most effectively toward your aspirations.

But rigorous strategic planning is also a critically important tool in helping you to survive in tough times. When resources are scarce, choices matter more than ever. When you know your business well, understand what is going on in your markets, and are aware of what your competitors are doing, you can make the choices that will allow you to use the resources you do have to meet needs that continue to exist as other also make tough choices.

In taking this position, we are not advocating cock-eyed optimism. Instead, we are suggesting that rigorous strategic planning can help you take a good hard look at your business and begin to think about it differently. For example, think about what machinery you have among your assets instead of what the machinery usually does; think about what your various personnel know, not what they usually do. If you think about your current resources as inputs with flexible uses, you may be able to redeploy them to create new outputs.

For example, consider the nightmare that is the current mortgage market. If you are a mortgage broker, the credit freeze may have idled your usual business. On the other hand, the various federal rescue plans call for a lot of work relating to re-underwriting and re-negotiating a lot of mortgages. Although there may be little opportunity for “brokering” as part of this activity, chances are good there are people on your staff who are very knowledgeable about mortgages and their documentation. If a lending institution has to re-work a lot of loans in a short period, they may not have enough trained staff to do it. Perhaps you can provide an outsourcing service or create an employee leasing program to help them meet their needs.

Or perhaps you are a car dealer. An analyst was quoted Friday as wondering “how many people are just going to hold on to their vehicles until they fall apart.” All those vehicles will have to be taken care of if they are going to last that long. Although owners of older cars often go to local mechanics, they don’t have to. If a car dealer can re-orient its thinking and make servicing cars over long periods a real priority, it might be able to generate revenue, while also retaining both customers and staff. Some re-training to focus on the problems that affect older cars might be required. Management might have to learn how to outsource some aspects of the business if they don’t have staff trained do some of the more complex kinds of repairs for older cars. These relatively small changes may, however, create a loyal customer base that will be useful to have when the economy turns around. It may also create a staff business process that is ready to support continuing customer relationships as owners generally begin to purchase new cars expecting to drive them for long periods instead of leasing them, expecting to give them back in 3 years.

We do not pretend that these are tried-and-successful strategies. Very few new strategic directions are. But these ideas are reasonable things to think about. Negotiating new arrangements might take some time; some new skills may have to be added to your organization; and new ways of business might also require giving up some aspects of your business’s self image. But new approaches might also forestall some firings and bankruptcies.

What are you thinking about? Do you know enough about your business – your customers’ current needs, potential customers you have ignored or under-served, your competitors, your vendors, your employees’ skill sets – to know what you might have to sell in this environment and where your natural buyers may be? If you don’t, now is the time to learn. You have a history; you have hard assets and skills. These are your inputs. By letting go of the habits you usually take to thinking about them – and about the outputs you expect them to produce – you may fine novel ways to use them that could save your business for the long run.

Teach Your Children Well

2008-10-21T09:00:00.000-07:00

A number of colleagues have commented over the past several weeks about the ways in which raising children has suddenly changed. A headline on the New York Times website several weekends ago captured the issue in a nutshell: Cutting back on expenses, parents say “no” and children say, "Huh?”. Perhaps even most startling, especially among families who thought they were immune to economic shifts, were reports that the Sumner Redstone family, large owners of two very large and historically successful businesses, had to sell 20% of their holdings in the midst of last week’s market slide to meet debt covenants.

The current state of the economy has created a wonderful opportunity – and a need – to address with our children the realities of economic limits. For many of them, that has been little but a vague abstraction until now.

For most of our children’s lifetimes, our culture has been filled with pictures of celebrity and great wealth. Even for those who are a little more intellectually or financially inclined, lessons have often focused on the value of debt and its importance in building wealth.

The lessons suddenly being taught to all of us by the current economic situation are decidedly more punitive.

Unfortunately, the harsh realities of the moment are likely lead more to resentment than to learning unless we take proactive steps to help our children develop a better understanding of practical economics.

Talk about budgets. Whether they are going to run a business in the future, or simply manage their lives on some finite amount of income, your children will at some point to have to understand one important issue: To sustain any given set of expenditures, income from some source is going to have to equal or exceed them.

Give them a fixed allowance to manage. If your resources have been reduced in this environment, you may have to – or decide you want to – reduce your children’s income proportionately. They probably won’t like it; but they will learn more if you take the time to explain to them why you are making the changes, and help them think through their own new budgets.

Find a few items in your budget that will have particular meaning to your children, and discuss them: Which of your costs (like housing) are fixed? Which (like vacations) can be adjusted as circumstances change? What does their schooling cost? How much income does the family have to have to pay for big items like tuition with after-tax dollars?

Do not ignore debt – its uses, its costs, and the fact that it almost always carries real (contractual) conditions. Where do loans come from? Why do some loans cost more than other loans? What kind of rules come with the money when it is loaned to the borrower? Why do almost all vendors charge interest if bills are not paid within a certain amount of time?

It’s hard. Much of your energy is probably going to figuring out how to adjust to all of the changes and impending changes in the world. You probably want to try to protect your children from them. You can’t. But you can involve them and help them learn what they need to know to be wiser stewards of all that you have tried to create for them.

The art and science of business decision making

2007-10-20T10:07:00.000-07:00

As is perhaps obvious to our regular readers, we have recently been spending a lot of time thinking about intergenerational issues. Among the issues that have demanded our attention is the management of a business when more than one generation is involved.

The assumption of power by one generation from its predecessor is the stuff of Sophocles, Freud, and the family across the street. It is also one of the most critical transition issues that faces any business which hopes to succeed beyond the life of its founder. If the transition is managed well, the business can thrive through it and into the future. If it is not managed well, both the transition period and the future can be extremely difficult.

The transition comes to every business, but it can be especially complex in a successful family business, where parent-child issues may mix with educational issues to make decision making, and all of the communications surrounding it, more than a little tumultuous.

As we have mentioned before, one of the best things a successful family business can do to support its future is to insist that the children who want to be involved in the business get outside training and experience. Not only does this approach encourage the development of real competencies, but the perspective it provides on the greater economic environment can be invaluable to the business as it moves into an ever-changing future.

However, this same education and other outside experience can create, or exacerbate, tensions between the generations. Not only are the two generations likely to have different perspectives based in their different experiences – for example, the older may value the importance of face-to-face network building for marketing purposes, while the younger may be more interested in internet-based viral marketing – but these perspectives may also be accompanied by fundamental differences in the ways the two generations approach decision making.

The founder has probably been very successful making pragmatic decisions, based on his or her own perceptions and a nearly intuitive assessment process. The younger generation, on the other hand, has probably learned analytical tools based on theories that are completely unfamiliar to the entrepreneur.

Conversations in which one party argues from experience and instinct while the other argues from analysis based in assumptions and relationships that may be counter-intuitive can be frustrating. However, well conducted, these conversations can be among the most creative and productive that any business has.

The great motivating process in science has long been the inductive development of theories that can then be deductively tested and refined. The same can be done in business: an idea that “feels” like a good one to the intuitive participants can be tested and re-worked so that implementation can be more successful than anyone might have imagined. Careful discussion and testing can also avert an implementation that might be less effective than hoped.

The critical issue in these discussions is to remember that intuition and reason, experience and analysis should be viewed as additive, not mutually exclusive. While we could argue that the onus for ensuring this kind of productive discussion falls on the younger generation as a simple matter of respect, we could equally argue that the greater experience of the older generation makes it their responsibility.

However, our own experience suggests that these conversations are most useful when all parties take seriously their responsibility to contribute, understand, and appreciate all perspectives in the decision making process. When everyone remembers that both generations are able to focus on the shared goal of the long-term good of the business, the process of testing intuition with analysis, and theory with practical reality, the conclusions can be far more robust and chances of success, much higher.

Letting children fail

2007-10-13T10:51:00.000-07:00

The very funny pilot of ABC’s new dramedy “Dirty Sexy Money” was chock full of storylines to be but had a single triumphal moment: the pink suitcase parade of the patriarch’s younger daughter as she defiantly set off on her own. She was depressed by the knowledge that her father had bought her yet one more illusory success, and she believed she could not have a life unless her successes and failures were her own.

Early into the second episode of the season, we learned that she aspires to a freedom she doesn’t really understand. As her avowedly self-indulgent twin reminded her, she may have run away from home, but she was living in an expensive hotel suite financed by her father.

How does a successful parent help his or her children not only aspire to successful independence, but also to understand what that means?

In our last post we talked about helping children identify and develop the skills they will need to success. The program we suggested was hardly simple, but it lacked one crucial element: creating the opportunity for each child to succeed also means allowing each child to fail.

Let’s clarify a little: We are not suggesting that failure is inherently good. Successes –particularly successes that are acknowledged and applauded – are necessary for the development of self-confidence and independence.

But children who come from successful families often think success is a given, and are like the small child who hears the word “hot” and thinks it means ‘hot like a summer day when you can go swimming.’ Not until she puts her finger on the stove and discovers the real pain of that kind of heat does she understand that “hot” is something different from a general atmosphere.

Worse, children who grow up in very successful families may not understand that the way they behave has real impact on the people and world around them. If they are treated by others simply because of who they are, they learn very little about the effect they can have, and how manage their relationships to achieve positive results.

But perhaps most importantly, since we all do fail at something eventually, none of us can really develop self confidence until we have also experienced a failure and both survived and recovered from it. Choices made to avoid failure are very different from choices made to achieve success – and very few of us learn to do the latter until we have proven to ourselves that we can, indeed, ‘pick ourselves up, wipe ourselves off, and start all over again.’

The failures don’t have to be big or dire. But they do have to be real.

We have one client who gave each of his children an annual sum to pay for their college years. When one son ran out of money before paying his third quarter tuition, he had to get a job and make weekly payments on the market-rate loan his father offered as an alternative to dropping out. He paid off the outstanding loan when he got the next year’s allowance, and developed a budget that ensured he could pay all of the year’s expenses. This son had a much different relationship with money from then on and, interestingly, so did his brothers.

To have impact, not all failures have to happen. But they have to be really possible – and to matter to the child.

Another client was most concerned that her children learn about the effort that goes into achievement and the relationship between accomplishment and rewards. Her youngest child was a good but lazy swimmer, preferring to play in the pool to actual swimming. The child also wanted to go on a special outing with her scout troop at the end of the summer. Our client promised her daughter that she could go on the outing if she had been able to swim an entire mile by the end of the first session of her swimming camp. The child was a determined little girl and by the end of the camp session had not only completed the mile but was invited to join the swim team. She never became a star athlete, but she did go on her coveted outing, and she always remembered that she had earned her place on the camp’s team.

No parent can make any child succeed. At best, parents’ efforts, money, reputation can help. At worst, though, those same things can deprive the child of any real desire or drive. By allowing the child both to savor the rewards of achievement and to experience and survive failure, a parent can help a child to learn to move through the world with confidence and independence.

It’s not in the genes

2007-10-02T14:38:00.000-07:00

Family traditions are not passed on genetically. Some kinds of motor skills and information processing are affected by biology, but whether and how a child develops them and learns to apply them are very much affected by the factors of upbringing. Too often families with successful elders limit the development of the children by assuming that they will follow the “family path” and that the children will have both the necessary skills and the necessary interest to do so successfully.

Nature does not always respond as we might hope to our assumptions. Therefore, the long-term success of any family enterprise is better served if each child is allowed to – perhaps even required to – discover his or her own skills and interests. Each can then get the training and the experience needed to develop those skills. The child can then work at the family’s business if and when qualified, or be provided assistance in finding productive ways to use other skills and interests.

This proposal is importantly two sided: If a child is interested in the business in which the family is involved, the family must set an early expectation that the development of those skills necessary to be successful in the business is the investment the child must make before getting help into the business. If the child does not have an interest in the business, there must be a similarly clear expectation that the child is required to identify other interests and will be supported in developing skills relevant to competently pursuing those interests.

The kinds of help and support parents may provide a child who wants to pursue a new path are likely to be different from the help they can offer a child who follows the family traditions. Nevertheless, this help and support can be crucial if the child is to pursue new interests seriously. They should also carry the same requirement of investment from the child as does help with an enterprise the family knows.

The children of successful parents who share their parents’ interests and skills have ready role models for their pursuits, and a strong mentor relationship may even develop between the generations. However, children of successful and often busy parents who do not share the parents’ interests and skills may have neither role models nor the bases for commanding the parents’ attention.

It is, therefore, the parents’ active participation in helping the child whose interest differ from family traditions that allows such a child to value those talents and develop them successfully. All too often a child who is not thus encouraged by family elders will try to build a life on imitating whatever parental characteristics are most visible to him or her – even when they are stepping stones to self-destruction.

In our experience, it is as big a mistake not to attend closely to the development of a child who is not suited to following the family path as it is to demand that such a child pursue the family’s traditional ventures. We have seen as many family disasters arise from the underdevelopment of children not actively involved in the family enterprise as we have seen business disasters from the involvement of insufficiently trained children in the business – and family disasters are ultimately as bad for business as business disasters are for the welfare of the family.

Is it strategy yet?

2007-05-11T09:21:00.000-07:00

Do you remember the wonderful old TV commercial for instant chicken noodle soup? The one in which the adorable little kid, with the big shining eyes, says to the mom, “Is it soup yet?” I suppose we were meant to be reminded that soup was so delicious that it was hard for the kid to wait even the 10 minutes it had to cook. But did it ever really become soup? The list of ingredients on the package reminds us that it was nothing more than a stew of chicken flavored chemicals – barely a distant cousin to the kind of chicken soup that came from Granny’s kitchen where the chicken was allowed to stew all day in a pot with celery, onions, and carrots!

Strategic planning is all too often approached as if it were instant soup: We know we need a plan so let’s sit down and write one up.

The resulting document may be a list of important action items, a statement of intentions, or a description of the way the organization hopes it is seen by outsiders. But it is rarely a useful Strategic Plan, steeped in the deeply held values of the organization.

In a very early post, we noted that virtually every organization has a strategy, even if the organization has never articulated it. It is the implicit commitments that drive all of its members actions, and choices, and processes. It may or may not be productive; it may or may not take best advantage of the organization’s resources; it may or may not help it accomplish what it means to accomplish. But it’s there, underlying everything that happens.

The reason to undertake a formal strategic review and planning process is to bring all of these implicit guides to light, to examine them, and to make deliberate choices about which to keep and which to change.
The choice to engage in such a process often comes about because there is a sense that things could be better – a sense that some change may be needed if the organization is going to be its very best.

No change comes to any organization over night. There is no button to push, no rule to be written, that will enable it to be essentially different on Wednesday than it was on Tuesday – or even in July than it was in June.

Like any complex organism, an organization generally maintains an equilibrium – a set of habits that allow it to function with a minimum of effort. Aspects of this equilibrium state will often be immediately apparent to outsiders: Some people in the organization will almost always allow others to speak before they say anything; some may insist on having final control of certain kinds of assignments; almost everyone will use references and a jargon that will be completely understood by others in the organization but indecipherable or misunderstood by anyone who doesn’t live there.

Many of these habits will be completely hidden to the people in the organization. Their invisibility can make it difficult for the people who share them to examine them and assess their value. Even when the habits have ceased to be useful, and even get in the way of achieving the organization’s goals, they are just part of the air the organization breathes. In effect, when a hot idea threatens the comfortable intellectual climate of the organization, certain behaviors will kick in to cool it down and protect the equilibrium.

We all know the story about the frog and the boiling water: if you drop a frog into the water when it’s boiling, the frog will leap out. If you put the frog in the pot when the water is cool, however, the frog will heat with the water and never notice the changes.
Creating a real plan for an organization – a plan that is imbued by the best of the organization’s values and ideals, and permeates the organization’s culture and daily activities – is a lot like making a really good frog soup: It needs to be done in a way that doesn’t feel abrupt and allows all of the flavors to steep and mingle.

Although the plan itself is a useful outcome of the process, the learning that takes place during the process often has far greater permanent value. And if there were such a thing as Instant Learning, no one would ever make the same mistake twice!

If you mean it, write it down -- carefully

2007-03-16T20:07:00.000-07:00

If you watch television, read a newspaper, or even only occasionally pass a magazine rack, you have probably heard something about the recent Anna Nicole Smith trial in Florida. Although the issues there were where Ms. Smith should be buried and who had the right to decide, the lesson we should all learn from it is an important one:

If there is something you want to do or have done after you die – or if there is someone specific you want to make those decisions on your behalf – record it now, in a legally binding document.
This is an especially important issue for anyone whose primary asset is an operating business. In many cases, lack of clear and consistent legal direction has not only ruined a business but deprived a family from the income they need to maintain their lifestyle. It can also result in family battles that make the Smith case look tame.

Where have you written who is to be in charge if you can’t be? Do all of your documents say the same thing? Do all of your estate plans support the directions given in those documents?
Let’s look at the sad case of John and Janet Jones to see how important these questions can be. He founded, and they own, a very successful company.

The good news is that they have kept up with changing technology and have been very adept at meeting the changing needs of their historical customers while also continuing to develop new customers. The better news is that they have been able to develop a second generation of managers. When Janet retired from running the administrative aspects of the business, they hired a very professional CFO who is not only extremely competent but well liked and trusted by the family. In addition, the Jones’ daughter Genevieve is an extremely skilled and creative executive who has learned the business – from both the operating and marketing perspective – inside and out.

The bad news is that John has always assumed that he would be around to oversee the installation of Genevieve as CEO. He has also always assumed his family knew, and would act on, his intentions so that his simple will was written with an eye to making sure everyone is provided for equally.

When John’s car was hit by a drunk driver and he died as a result of the accident, the family and the business were thrown into turmoil. Since all of the company stock was in John’s name, the ownership of the company became part of John’s estate. Because John wanted to make sure that his estate would be overseen by someone younger than he who was a competent administrator and also who had time to handles estate matters while Genevieve ran the business, he had named his older son Jim as executor.

John had not taken into account that, though Jim was an excellent accountant with an excellent job, he lacked creativity and day-to-day operating skills. Jim and Genevieve had also been rivals since Jim had noticed that his little sister was the “apple of Dad’s eye” at the dinner table and in the business. During the long probate process, Jim had final say on all decisions and overruled Genevieve on many of her best ideas. The firm, which had always been so progressive, began to fall behind and lose customers.

When the probate was finally settled, the firm’s stock was finally distributed to John’s heirs: Jim, Genevieve and their younger brother Jared each receive one-third of the voting stock in the company, while Janet received 100% of the non-voting 8 ½% cumulative preferred stock. Although Genevieve tried to run the company well, her brothers out-voted her on nearly every important decision. Revenues declined, Janet’s income declined, and soon there was nothing left to reinvest in the company’s operations. In less than 5 years the family was forced to sell the company, John and Janet’s life work, for a fire sale price.

Good planning and the execution of supporting documents could have avoided the long probate, ensured Genevieve had the control needed to run the company effectively, and provided good cash inheritances for each of John’s children not working in the company, and Janet who has shared in the creation and development of the asset.

We do not advocate that anyone try to exercise inhibitory control from beyond the grave. However, the failure to structure an effective transition that will allow an operating asset to continue to function effectively after the owner’s death or disability almost always creates the opportunity for significant damage both to the asset and to the family it is intended to support.

The value of Boards

2007-02-16T13:58:00.000-08:00

If you read our postings carefully, you might be inclined to accuse us of having a world view that could be summed up as “On the one hand . . . . and on the other. . . .” You would be right, but we wouldn’t really take it as a criticism. As we have said in several contexts, strategic planning is often about finding balance in complex situations – and you can’t do that unless you look carefully at one side and then the other, and the other, and the other, etc.

In an earlier posting we talked about the value of multiple perspectives in planning. We talked about inviting executive teams to bring their expertise and the perspectives of their constituencies to the process of planning and problem solving. This kind of active executive participation in the process of planning is one way to invite multiple views.

But when an organization is facing significant long-term issues or just very thorny near-term issues, even active executive participation in the planning process may not be enough. The executives are generally responsible for decisions that have been made in the past, and which they may feel they have to defend. In addition, the employee executives often have long experience with the organization or the industry it is part of, and may not have the kind of perspective that comes from being a less familiar “outsider.”

The Board can provide a different set of perspectives. The independence of Board members should allow them to speak openly to the organization’s senior executives and to each other. In addition, their expertise, developed in a variety of venues, should allow them to see the issues facing the organization differently from the way they are viewed by its own executives.

Whether the Board is structured as a Board of Directors with legal responsibility for the organization or as a less formal Board of Advisors, its greatest value to the organization will achieved if each member is willing to engage actively in policy discussions and bring to the discussion the full measure of his or her expertise. Each member will, of course, also need to bear in mind that his or her own experience may not be entirely germane to the organization’s situation. For example, it is generally not helpful if a financial executive from a for-profit organization insists that the profit implications of an option under discussion by a non-profit organization are the only important implications. However, it is no more useful for that Board member to refrain from insisting that sound financial analysis be taken it into account as alternatives are considered.

Similarly, in building a Board, it is important to include members who will bring a wide array of knowledge, experiences, and perspectives. A Board entirely comprised of people with similar experiences – whether those similar experiences are in finance, or marketing, or law, or anything else – will generally fail even to see (much less know how to assess) issues that may be readily apparent to someone with a different set of experiences and expertise.
No matter what an organization’s activities and goals may be, neither its executive staff nor its Board hold a monopoly on astute perceptions and good ideas. To make a plan that comes close to achieving strategic balance among the many issues faced by the organization, it is critical to make the most of all of the insights available to a broad variety of the organization’s experienced, committed constituents.

Not good for the business . . . not good for the family

2006-10-05T10:35:00.000-07:00

In our last entry, we addressed the issue of making non-economic family needs explicit in the decision making process. We did not, however, intend to advocate for their priority. This time let’s think about some of the dangers of putting “family considerations” first, implicitly or explicitly.

Most decisions to “put the family first,” above “strictly economic” criteria, are based on a belief that the fundamental role of family is to support its members in ways that are not strictly economic. Among the families we have worked with, that belief generally assumes an ongoing level of economic resources that allows the family to provide much of the other support. For that reason, decisions that ignore their economic consequences can be devastating.

This is particularly true when the family’s primary asset is an operating business. In most cases, the value of the business to the family is made up of two things: (1) the stream of cash it currently produces for the family and its members, and (2) the value of the business in the future, either as a generator of cash if the family continues to run it or as a source of assets for reinvestment if the family decides to sell it.

Family first decisions often appear reasonable if only its current cash value to the family is considered. But some of the same decisions can damage, or even destroy, the important long-term value of the asset.

Take for example the case of a family that decided that every child was entitled to a job in the business. Each child who wanted a job was given one, and none was subjected to the same hiring criteria or evaluation process that applied to non-family employees. This strategy was a less than successful for both the children and the business. The child who was qualified to work in the business never had the opportunity to test himself objectively and to develop a real understanding of his own skills or leadership capabilities. The children who were not qualified never discovered what talents they did have and found themselves uncomfortably isolated among their colleagues. Their presence in jobs for which they were not qualified also discouraged highly qualified employees from staying at the company.

Apathy and costs increased; quality and profits declined; and a real leadership vacuum developed. Everyone in the family had a title and a salary, but it became increasing clear that the business was entirely dependent on the skills and relationships of the founder. The family’s entire economic infrastructure was at risk if she died, became disabled, or simply decided to retire. The owner realized this risk but couldn’t identify its cause. In order to protect the family, she decided the time was right to sell the business. She was surprised when the bids she received were not much higher than current earnings, despite the premium prices that prevailed throughout its industry.

Since this was neither the family legacy nor the financial inheritance the owner intended to leave, she sought help. After some study, she decided that the right choice for the family was to run the business as well as the business could be run – with the right personnel and the right procedures, uniformly applied – and to help each of her children find training and experience appropriate to their individual skills. She would tell you that she learned the hard way a very important lesson: what’s good for the business is what’s best for the family.

He ain’t heavy; he’s my family

2006-09-22T09:31:00.000-07:00

We have a supplier who owns and runs a small business. The business is located on a nice lot on a block of what used to be a by-way that ran from one sleepy beach town to another. Fifty years and two airport improvements later, that unmortgaged piece of property is in the middle of a block on the main road through the fastest growing part of a wealthy cosmopolitan county. The business does well enough: it covers its expenses and supports the family. Selling the land the business sits on, however, would ensure that no one in the family ever again have to get up and go to work in the morning.

Why do they keep operating their little low-margin, high-effort business? “This gives Dad something to do with his time” is the answer the current CEO gives when asked. Should we hold this up as an example of bad strategic planning? We don’t think so. In fact, we think it is an unusually good example of planning for a family business.

Standard business theory tells us that every asset should be used to produce its highest economic value. In this case, that would generally mean the family would sell the land and close the business. Or they would at least borrow against the land and invest the resulting funds in assets that produce a higher economic return. In this case, however, the value of giving the founding patriarch a purpose for his days has a higher value to the family than the land has.

Over time the family has done a little investing. Using the land as collateral, they have bought nice homes in the neighborhood and a family vacation home in the mountains. They have also purchased “some stocks and bonds.” They clearly have not, however, made any significant effort to diversify their assets. Why not?

The economically approved answer might be that the continuing development of the neighborhood around the land suggests that the return on the land will improve over time and/or that there is a tax advantage to holding the land until after the father has died. But, in this case – and, often, in the context of a family business – the family’s non-economic needs constitute a type of return the family has determined to be important.

That doesn’t mean that the family has ignored economic returns in favor of their non-economic needs. They have specifically catalogued and considered both the costs – direct cash costs and opportunity costs – and the risks of keeping the business running. Based on that information, they have consciously balanced family needs against alternative economic possibilities.

Weighing family needs against potential economic returns has to be done carefully. It can often be complex and require both objectivity and expertise that the family has to hire outsiders to bring to the discussion. Nevertheless, we believe that the family’s non-economic needs and goals should be recognized as legitimate needs and goals of the owning family and should be made explicit in the discussion of the strategy for a family-owned business.

An organization’s economics – not just for bean counters anymore

2006-09-05T15:59:00.000-07:00

Over the long holiday weekend I spent some delightful time with a very creative eight-year-old friend of mine. Although his main interests have shifted from Thomas the Tank Engine to the Power Rangers to the Bionicles, he has never lost his love of story telling. Given half a chance, he has always been willing to tell any story to anyone who will listen. He has now reached a new stage: Presented with a handful of story elements – a couple of characters and a setting – he will make up and tell his own story about them. This weekend he fell in love with and built a small universe around the characters in the back-to-school ad currently being aired by Target.

His rapture with those characters gave me some real insight into why the task of identifying any organization’s inputs and outputs is a job that must be tackled by some multi-faceted team of people whose various perspectives will represent all of the perspective of an organization’s various stakeholders.

For those of you who haven’t seen it, the Target ad is a very clever presentation of various characters going back to school, with the characters made up of back-to-school supplies (like protractors, rulers, erasers and such). The characters bounce and dance and generally behave just like children who are excited to be going on a new adventure. And to my eight-year-old friend they are children who are excited to be going on a new adventure. He was so engaged in the narrative of what these characters were doing he didn’t even notice that they weren’t “human” at all.

We all do it . . . . .We take so many cues from the context that we don’t see the thing in itself. And we lose perspective on what the thing could do if it is different from what it does do.

This loss of perspective is why we think it is a mistake to allow any one department organization tackle the definition of the organization’s inputs and returns alone. The financial types will think mostly about the hard dollar costs and returns of any project. They may also assess opportunity costs, and costs of capital and other costs that may not be visible to non-financial types . . . . But will they think about issues like generating interest among a new market segment, or the costs of reducing services in such a way that a traditionally loyal market segment walks away? These are the day-to-day province of the marketing department whose job is to understand the organization’s customers and it is their job to bring that perspective to the organization’s understanding of its inputs and returns.

Organizations and their activities are generally complex, interrelated systems that most of us see most clearly from a single perspective. If we are to think well about the economics of our organizations, we have to do it creatively. We have to throw away the every-day definitions and assumptions we attach to the things we work with every day, and view our organizations with new eyes. This is an important reason to work in interdisciplinary teams: We will each start from our own assumptions and, if we work well, we will invite our colleagues to use their everyday perspectives to challenge those assumptions.

The second time my eight-year-old friend and I saw the Target ad, I told him what a protractor was and asked him what he thought the protractor boy would do at school. He thought awhile and said, “I don’t know; maybe he will use that [protractor] thing on his body to make a whole big circle so he and his friends can throw it around like a handball.” Indeed . . . . a new dimension to the children’s new adventure!

Is Profit the only measure that matters?

2006-08-08T18:05:00.000-07:00

The short answer is No. Notwithstanding the example we offered at the beginning of our last entry, Profit is not the only measure that matters. And organizations – even business that are nominally “for profit” – may choose, from time to time, to take a path other than the one that will lead to the largest economic profit.

The more important answer to this question, however, is that Profit – along with its economic sister, Loss – is a singularly important issue that should be weighed, calibrated, and addressed in the Strategy process, even by “nonprofit” organizations.

If you are thinking about Strategy in the context of a nonprofit organization, you are perhaps recoiling at this idea and ready to shout, “NO, that’s not why we exist!” To be sure, the issue of Profit is made more complex for organizations that are not driven primarily by economic profits. Nevertheless, we believe it is an issue that must be considered in the development of an effective Strategy for any organization.

What we are really talking about here is the centrality of any organization’s economic infrastructure – the balance of the resources that are used as its “inputs” with the resources that are generated by returns for its “outputs.”

Where an organization buys resources (i.e. supplies and labor) to make something to sell for money, its economics often seem relatively clear and hard to ignore. Where an organization uses donated resources to make or provide something that is given away, the economics are often less apparent and easier to ignore.

Nevertheless, the need for balance remains if the organization is to sustain itself and continue to achieve its goals over time.

This balancing act can feel as chaotic as the juggling clown on a bicycle looks. But, like the clown, it depends on some real discipline – in this case, specificity in identifying costs, articulating desired returns, and examining the ways they interact.

In our next few entries, we will look more closely at the kinds of “costs” and “returns” common to several different types of organizations. We can’t tell you in the abstract what the “right” balances may be for your organization, but we hope to help you frame the questions that will enable you to recognize what may be the pivotal tradeoffs that have to be faced by your organization if you are to keep your pins in the air.

What is Strategy and why does it matter?

2006-07-27T18:03:00.000-07:00

Suppose a company can produce and distribute 10 dozen boxes of Product A for a profit of $50,000. Suppose it can also make and sell 4 items of Product B for $50,000 profit. And suppose they know that if they try to do all of both, their profit will decline to $75,000 because they will have to hire incremental labor and buy incremental inventory. . . . .

How does the company decide what to do?

Deep in our hearts, almost every one of us who survived ninth grade algebra believes there is some mathematical formula that should answer this question, if only we could figure what that formula is.

But there is no formula. If we tried to impose one, it would have to assume that all labor was interchangeable Xs and all supplies were interchangeable Ys – or, at least that there were finite numbers of kinds of labor and supplies to be plugged into the formula.

This fantastical formula would also have to assume that all time is the same – that what works now will work equally well next week, next year, a decade from now. Although such an assumption might have been reasonable the day fire was discovered or the wheel was invented, how many of you are reading this on a computer you owned a decade ago or over an internet connection through an ISP you used 5 years ago?

Not all labor is the same; there is a practically infinite range of potential supplies; time is in perpetual motion; and we haven’t even mentioned the notoriously fickle nature of consumer behavior.

So, instead of a formula, we have Strategy.

Strategy is not a fixed solution, mathematically computed or not. Instead it is a set of dynamic guidelines that provide the context for a disciplined review of the many factors that affect any organization. It provides a context and process that allows the organization’s managers to make thoughtful decisions about immediate actions, long-term goals, and the terrain to be navigated between them.

Many entrepreneurs think Strategy is nothing more than fuzzy-headed abstract thinking, and that Strategy has little to do with the on-the-ground choices and activities that make an organization succeed. We disagree. Every organization has a Strategy, whether it thinks about it, talks about it, names it, or not. Left to fate, Strategy often turns out to be the mess you’re stuck with when everything that can go wrong has.

Used well, Strategy is the fulcrum on which is balanced every difficult decision a management team has to make. It is also the safe deposit box from which alternatives can be drawn and action taken when time brings its inevitable surprises.

This blog will focus on the practical activities that make up Strategy – its development, its implementation, and its day-to-day implications – for several types of organizations. We hope you will add your thoughts and examples.

2006-07-04T11:45:00.000-07:00

Welcome to the Strategic Support Services, Inc. blog. We hope to create interesting discussions about some of the strategic management issues that affect owner-managed, family-owned, and non-profit organizations. Look for our first real post shortly.