Do you know the difference between good strategy and bad strategy? (Part III – failing to face the problem)

Hallmark of a bad strategy: failing to face the problem

This post follows on from the previous two posts.  In the first post (of this series) I listed the 4 hallmarks of a bad strategy.  In the second post I expanded out one of these hallmarks – fluff.  This third post deals with the second hall mark of bad strategy: failure to face the core problem/s – what I call the ‘elephant in the room’.

What does Richard Rumelt say about strategy?

In his book Good Strategy Bad Strategy, Richard Rumelt (“RR”) writes:

“A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge.  If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy.  And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.”

International Harvester: a great example of bad strategy

According to RR, International Harvester was once the 4th largest corporation in the USA.  In 1977 the board brought in a new CEO (Archie McCardell) to turn around the sleepy company.  With the help of his team of financial and strategic planners (including consulting companies), by 1979,  Archie had put together a “Corporate Strategic Plan”.

This plan was simply a lumping together of 5 separate strategic plans – one for each of the operating divisions (agricultural equipment, truck making, industrial equipment, gas turbines, components).   The “strategy” was to increase market share in each market and cut costs in each of the divisions thus grow revenues and profits.

The Corporate Strategic Plan was full of detail.  RR says “Looking within the agricultural equipment group, for example, there was information and discussion about each segment.  The overall intent was to strengthen the dealer/distributor network, and to reduce manufacturing costs…”  Despite this detail, this thinking, the plan was classic bad strategy.   Why?

RR writes, “The problem with all this was that it ignored the elephant in the elevator.”  What was that elephant? The elephant was Harvester’s “grossly inefficient work organisation”.   And this was not a problem that was going to be fixed by pushing managers to grow market share nor by buying equipment.  Why?  Because the inefficiency lay in the ‘work rules’ – how work was organised and done.  Furthermore, Harvester had the worst labour relations in American history.

What do you have if you fail to identify and address the key business problem/s?

According to RR, “If you fail to identify and analyse the obstacles, you don’t have a strategy.  Instead, you have either a stretch goal, a budget, or a list of thing you wish would happen.”

So how did thing turn out at Harvester?  Profits improved for a year or two simply through cutting admin overhead.  Then the company went through a six month strike.  After the strike ended Harvester began to collapse.  According to RR, “During the whole 1979 – 85 period, it lost more than $3 billion, closed 35 of its 42 plants, and shed 85,000 workers…….The company sold off its various businesses…..It is, today, a leading maker of heavy trucks and engines.”

What does this have to do with customer-centricity, customer experience, customer loyalty?

Everything.   Let’s just talk a look at one big challenge.

Imagine that you are major bank, or mobile operator or gas/electricity supplier what is one of your biggest challenges in making the transition to being customer-centric?  What if I said, the biggest challenge is there is really nothing to differentiate the players (from one another) in these industries and so they rely on “Bad Profits” to hit their revenue and profit numbers.

Frederick Reichheld (“the loyalty guru”) coined the terms “Good Profits” and “Bad Profits”.  If you take a look at any business you can break down the profits into “Good Profits” and “Bad Profit”.  When you create genuine value for a customer (through the eyes of the customer) then your reward is in the form of Good Profits and you do not have to devise loyalty programs and worry about customer retention and loyalty.  An outstanding example is Apple.  Other examples include SouthWest Airlines, Starbucks, USAA, Zane’s Cycles and Zappos.  In the UK, John Lewis, Waitrose and Richer Sounds spring to my mind.

When you make profits at the expense of your customers these profits are called Bad Profits.  How do you make Bad Profits? Generally, you have access to information, expertise and resources that the customer does not have and you use those to ‘manipulate’ the customer to benefit you at his/her expense.   Specific practices associated with “Bad Profits” include but are not limited to: deliberately difficult for customers to pick the right product; websites adding in extra items that the customer has not selected and forcing the customer to delete these from the shopping basket; disguising the true cost (to the customer) through underhand charges that are not visible to the customer; making it hard for the customer to know and manage his plan so that she is hit with unexpected charges; selling worthless products eg. PPI;  making it hard for the customer to cancel – make them go through lots of hoops etc.

The point to get is that banks, telecoms operators and utilities have collectively spent a fortune on CRM systems and other Customer initiatives over the last ten years and they really have little to show for it.  How has the customer service needle moved?  What about customer loyalty – genuine customer loyalty?     I’d assert that, looking at the situation through the customer’s eyes, very little has changed which makes customers love the players in these industries more than they used to.  Why?  Because the core business challenge of overhauling the business model (and associated practices) has not been addressed.  Does that sound like the Harvester example?  Buy in new equipment (CRM systems), extend the distribution network (website, mobile, social media..), reduce costs (call-centre outsourcing / offshoring, replace humans with self-service, hide contact numbers…).  Please note that I am only using banks, telcos and utilities as examples – they are not the only ones that engage in practices that deliver Bad Profits and get in the way of authentic customer-centricity.

Another big challenge: the whole field of CRM, customer service, customer experience, customer-centricity, data driven marketing is blind to the difference that makes a difference.  As such this key challenge is not even recognised and it is then the psychological mechanisms of denial, suppression and repression make sure that there is no permission to point out this elephant in the room.  What is this elephant that I am talking about?  I invite you to have a go at figuring it out.  For my part, I will share this with you in a follow up post.   I thank you for listening to my speaking.

Posted on March 1, 2012, in Case Studies, CRM, Customer Experience, Customer Philosophy, Customer Strategy and tagged , , , , , , , . Bookmark the permalink. 2 Comments.

  1. Enjoying this series Maz

    A couple of observations.

    If a strategy is a way of overcoming a problem then the issue International Harvester had was not one of poor strategy, more one of missing the issue, or am I missing something?

    Secondly it does strike me that we spend millions on CRM systems and Big Analytics and and and, but all of this is a solution looking for a problem. they are only strategic investments if they are clearly fixing an issue or a problem.

    So isn’t the fundamental issue not one of bad strategy, more one of bad problem identification

    James

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  2. Hello James

    The job of the strategist is to take the objective (that is to say the outcome that has to be achieved), get a good grip of reality (the situation as it is), identify the obstacles (Napolean identified heat as an obstacle and had trees planted along the main routes many years before he began his military campaigns) and then come up with courses of action. Once there the job of the strategist is to choose the optimal course of action.

    So the failure to identify and deal with the Elephant in the room (the main challenge, the main obstacle) was the failure of the strategist/s. At least, that is the way that I and RR are thinking of it. It is not necessarily the correct way – there are no correct ways, must points of view that either work in ther real world or not.

    On your second point, you and I are 100% in alignment. I call it ‘silver bullet + faddism’ – a little like rainforest people dancing to bring out rain or ancestors sacrificing life to appease the gods.

    As to your final question: perhaps the most appropriate way to think about it and speak of it is for me to say it is both provided you look at it the situation with the right eyes.

    Thanks for a stimulating conversation. You have forced me to think and learn – I value the contribution you make to my living. Be well, I look forward to our next encounter.

    At your service and with my love
    Maz

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