World Class Strategy Execution – World Class Headaches – Part 2
This article is the fourth in a series on what causes a firm’s value to increase and is Part 2.
In Part 1 of this article, I hopefully gave you justification to consider why world class strategy execution is vitally important and how it can help grow the market value of your firm. In Part 2, I will give you a glimpse of what some leading firms do to practice world class strategy execution. Let’s consider first though the disaster in strategy execution at Encyclopedia Britannica (EB) that unfolded from 1983 until it was sold in 1996.
In 1983 EB’s executives and its large direct door-to-door commissioned sales force harbored an outdated, fifty year old mental model of their business. They felt that the best thing two parents could do for their children was to give them a set of encyclopedias. They sold for $1500-2000 per set through the door-to-door selling organization. The cost of goods sold per set was $250 and the total cost structure relative to the price of a set allowed the door-to-door sales force to earn nice commissions. These executives felt that computers were toys and with only 4% of families owning personal computers in 1983, the growth would be way too slow to warrant change to their approach.
In 1993 Bill Gates of Microsoft had a different idea, after having approached EB in 1985 to license their content. He bought the content from the near defunct Funk and Wagnall’s and digitized the content in a product called Encarta. Initially Encarta was sold through computer retailers as software for $49. But soon it was given away “free” in its Microsoft Works suite of software that came pre-loaded in new IBM personal computers.
In 1990 EB had revenues of $650 million. By 1996 it had just $325 million in revenues and sold out to Swiss financier Jacob Safra. What happened, especially since EB developed a CD-ROM version ahead of any other firm using its Compton’s brand in 1989?
Recall in Part 1, we discussed the four kinds of barriers that plaque strategy execution. The EB example shows that all four – subject matter, process, structure and culture barriers - were prevalent and killers.
What can your firm do to prevent this kind of happening? Here is what has worked well in a number of firms:
Measure your firm’s true “market rhythm”
Your Market Rhythm is about 4 to 5 times as fast as how often your best customers buy your products and services. In 1998 Neiman-Marcus estimated their best customers bought once a month. This made their Market Rhythm every four to five days! This is the true underlying pulse in your business that you must be connected with. EB’s best customers bought once a year with the Annual Update, thus their Market Rhythm was every 2.6 months. Compare this with the slow death of EB from 1985 to 1996.
Install an Initiative Management Process
Install an executive process to manage just the strategic initiatives outside of the on-going work of your firm. Recall that most of the four kinds of barriers mostly reside in the on-going work. The goal is that something must come out of this initiative management process at the market rhythm timing. So at Neiman Marcus, a new product or service, idea, piece of information about the market or competitor, etc. had to arrive to the leadership team every four or five days from the process. This almost guarantees that you will not be blindsided.
At Neiman Marcus any of the four kinds of barriers that got in the way of their Market Rhythm goal were purged. This requires a firm to be brutally honest with itself. EB got bogged down in the inertia caused by the powerful sales force - a formula for disaster.
Practice a “survival of the fittest” mentality
When the barriers start coming down, and egos, faulty mental models and power plays stop ruling the day, it is fairly easy to see what kinds of initiatives will win coming out of the Initiative Management Process and also what needs to be quickly abandoned. These winning initiatives represent the new direction of your firm. As an EB employee said, “anyone who messed with the goose that laid the golden egg would have been shot”. EB delayed the reality of a new direction and paid dearly for it.
Change your goals and objectives to align to the “winning” direction of your firm
Your team must now alter your goals and objectives to align with the direction defined by the winning initiatives. The Balanced Scorecard (www.balancedscorecard.org) is a good tool for this.
Align compensation to the “winning” direction of your firm
The behavior you reward is the behavior you will get. Compensation must be aligned with the direction defined by the winning initiatives. EB still wanted to provide nice compensation for its loyal, and powerful but outdated sales force. This allocation of compensation signaled the old was not going to be changed.
Great project management is a valuable skill most everyone can learn (www.pmi.org). Once the first five aspects of the recipe are in place, great project management will help finalize world class strategy execution skills.
Next up: The Process Revolution and a Profitable Revenue Growth Roadmap