Greg Kitzmiller01.01.04
Reading The Tea Leaves...
Reviewing three pitfalls that must be avoided during strategic planning.
By Greg Kitzmiller
While none of us pretend to read tea leaves (we may sell them but not read them) in preparing future strategy, we are accountable for preparing to meet the future. There are several pitfalls in strategic planning that must be avoided. These include miscalculating future sales, not reading the winds of change and failure to act.
Take the case of a restaurant that has recently gone of business because the owners owed investors and contractors millions of dollars. Even though break-even analysis may have been conducted, the forecasts may have been more of a dream than reality. Even the best market research programs cannot accurately predict future sales. Yet, can companies/business owners avoid getting into the worst possible situation of miscalculating future sales by many multiples?
Most people are simply too optimistic. As Lovallo and Kahneman wrote in their analysis of start-up ventures in the Harvard Business Review (HBR) (“Delusions of Success”, HBR, July 2003), about 80% failed to meet their targeted market share projections. One reason for this as given by these authors was that proposals for projects tend to be very positive since the proposal was designed to sell the idea. However there is a difference between showing positive projections to sell an idea to management or to a banker, and realistically taking into account factors that may occur in the marketplace. For example, one executive I formerly worked with liked to take the forecast in the best-thought through proposals and then arbitrarily cut that forecast in half. Often the worst crisis that created was the inability of a manufacturing facility to produce when demand was at or near the real forecast. We learned to run optional alternatives for production, so that we would know in advance what would need to happen when demand exceeded the forecast. This was a much better situation than having to worry about sales lagging forecast substantially.
Sometimes it helps to view the world as others may see it. Lovallo and Kahneman called this taking the “outside view.” They suggest selecting reference class—a situation similar to the one we are trying to forecast. Perhaps there is another product similar to ours where we can get good sales data. We want the information to be similar enough to make a good comparison but broad enough in order to make a good forecast. This is often done through what is called an expert panel. This might involve hiring a consultant to make a prediction separate from ours or convening a group of experts and asking each to make their own forecast. Thus, we eliminate some biases. This seems particularly helpful if we are venturing into an area that is unfamiliar to us. Seeing things as others see them gives us a more balanced approach.
We must read the winds of change. There is an old saying that if you continue to do what you have always done you will continue to get what you have always gotten. But the saying does not always ring true when outside conditions change. Many firms misread the enthusiasm of their earliest buyers for potential growth among the masses. One of the concepts taught in this case relates to product adoption cycle. The first to adopt a product are called innovators. These are companies or individuals that must have the latest craze on the market. The innovators are followed by early adopters. The early adopters don’t have to be first but they will gladly use a product after it’s been tried and word starts to spread about it. However, there are enough of these people to cause a good growth spurt in a product but not to create huge long-term demand. The health-food or natural products industry quite often sees this type of demand in very dedicated and committed shoppers. Yet, getting more mainstream users to use the product may require a totally different effort and type of marketing than getting the earliest users. Firms sometimes misread the earliest growth and assume it will continue and lead to even more growth.
Another factor in the winds of change often relates to the reaction of competition. We cannot assume we will be the only firm on the market with a product once growth occurs. In studying the product lifecycle we must remember that profits for a product peak during the growth stage because as growth occurs competitors enter a market, creating the need for a sometimes more expensive effort to grow market share, which may cause prices to drop. A former mentor of mine called reading the winds of change “leapfrogging the competition.” In other words, if our firm takes step “A,” then the competitor will take step “B,” and we should be prepared for a step “C,” not just meeting “B.”
Finally, too often executives simply fail to act. One of my very early bosses always said that a manager often resembles a pilot with a flight plan. Pilots file a plan that shows they want to go from one airport to another and what route they intend to take. While I’ve never flown a plane, I’ve been on enough of them to know that sometimes turbulence and bad weather can influence how they perform. As such, the pilot must work with air traffic controllers to change the plan to meet current conditions. The pilot arrives at the airport they had planned to but the path had to be adjusted along the way. Some executives fail to make necessary adjustments and wind up flying right into a storm, while other executives may file a flight plan but fail to take off! Some equate planning with doing, while others equate doing with planning. In other words, a plan on paper is worthless unless you are willing to take all steps to follow the plan and then make changes as needed, just as the pilots do when they fly around a storm.
Others think that just because they are operating the business they have a plan. Porter (“What is Strategy”, Michael Porter, HBR, Nov–Dec 1996) refers to “operational effectiveness.” He claims that some managers feel that just because they can perform activities better than their competitors that they will succeed. This is operational effectiveness—doing something better than others. But this must be combined with good strategy. Good strategy means that different activities be performed or that they be performed in different ways
Problems can be overcome by balancing natural optimism, accounting for changes in the market and taking appropriate action. Failing to do so creates forecasts that will disappoint or plans that don’t change the forecast when it should be changed.NW