The bullet is coming. It is coming straight at your company. Everyone can see it. Meetings are set-up  and action plans are conceived to prevent the bullet from hitting. There are endless presentations about the bullets velocity, force and trajectory.  Till the last minute everyone stands and stares at the approaching bullet. People are even bored by talking about the bullet. Then it hits.

Is your company seeing the bullet and is still not acting, just talking? Digital technology will disrupt your business, too, eventually. Lets explore some real case studies and explore this phenomenon.

Doom Loop Patterns

Lets look at four actual, real life cases of companies that have been caught in the doom loop of strategic ineptitude. Three of those cases are first hand accounts from my work as a consultant, the first one is taken from Chris Ertel and Lisa K. Solomon in their 2014 book “Moments of Impact“.

Case 1: We are prepared!

Encyclopedia Britannica (EB) ruled the market. Its printed copies costing about 1500 to 2000$ per bundle, its content of the highest quality and its profit margins excellent.

EB saw the bullet of digitalization already in 1985. A young upstart company called Microsoft wanted to partner with EB in order to distribute EB’s content on CD. Put EB did not want to cheapen its product and decided to go alone on the path of digitalization.

EB was on the forefront of the digitalization: In 1989 it delivered the first EB on CD, in 1994 it launched Britannica online 1.0 – month before the release of the pioneer web browser Netscape. EB, a proactive first mover, appeared to be prepared for the digital revolution! In 1990 EB enjoyed record sales, albeit from conventional, printed business.

If only they had not left the pricing unchanged. All EB products cost the same, the price of the printed copy. In 1993 Microsoft entered the low end of the market with “Encarta” for 99$ . EB served the low end of the market since 1989 with a digital product, too. But prices where set at 895$. Not surprisingly, EB’s sales tumbled to about a half of its 1990 levels by 1996. Today, EB is just a minor player in a totally transformed encyclopedia market.

What happened? EB’s strong, about 2000 person sales force earned a hefty commission of about 500 to 600$ for every bundle sold. EB would not cut down on their and the companies margin. They ignored the sharing economy (Wikipedia) and new competitors (Microsoft) – to be swept away by the digital revolution. They failed to disrupt themselves – so the market did disrupt them.

EB saw the bullet coming for 11 years before 1996, when the bullet hit. They were prepared in so many ways, but they got their strategy wrong in two central points: Pricing and Sharing. While the error to underestimate the Share Economy (wikipedia) is excusable, as it would need a prophetic visionary talent for EB’s management to foresee this, the pricing error is just blatantly naive. It was wishful thinking and an unwillingness to revolutionize its sales structures, to compromise on revenue and margin in the short term in order to prosper in the long term.

Case 2: We are a global player!

A successful fashion retailer (lets call it “FR”) grew phenomenally, doubling revenues by organic growth within 5 years, tripling it in this time frame by acquiring another successful retailer.

The bullet has been clearly identified: Online Sales has been eating market share. Vertical fashion retailers (selling just their branded merchandise in their stores, e.g. Zara) were gaining more and more market share, multi label stores were loosing market share.

Meetings were convened. It was decided to get more into vertical retailing, more into eCommerce while continuing to expand the number of stores in Europe. Reasonable actions- on the surface – for every threat there is a counter move. So the Retail Expansion team opened about  100 stores where opened per year,  the eCommerce team got going increasing the assortment range and thereby revenue, the already well performing wholesale team was enjoying more success every year.

In 2015 the bullet hit. Profit targets, have not been met quarter by quarter. Revenue still increased slightly, but market capitalization fell by 80% within 6 month as investors lost confidence.

What has happened? It turned out that all measures have been done half heartedly.

  • The retail team has never been ready for to add more stores, as the average store has not been profitable enough to ever consider continuing to expand. The golden rule to “scale excellence – do not scale mediocrity” has been ignored. If you scale more loss making stores, you add revenue but you also add losses
  • ECommerce continued to soldier on in its limited silo with no integration to the rest of the business at all. On top of that, no financial investment at all was undertaken. Its hard to grow something without planting any seeds.
  • Wholesale’s success led into a dead end in the market. As more multi label stores went out of business and vertical retailers gaining markt share, fashion brands were moving out of the multilabel market and opening their own mono label stores. But FR was increasing its sales in this declining market, thereby gaining market share in a very threatened, even in some cases dying, market.

There was no strategy, just bullet points on power point presentations. Good enough to please investors and the supervisory board – not good enough to win in the market.

The bullet was seen, action were devised. People talked a lot about the profits not being sufficient so much, that people got bored on that subject. The bullet hit and next to nobody – except investors – were surprised.

The company thought globalization is the answer: Multiplying the number of stores in different locations, as others have done successfully before them. But the new game is not going from One to N Stores – with Digitalization it is – as Peter Thiel describes it – to go from Zero to One: To create new products and services is more important than ever, more important than scaling existing products.

Globalization – scaling from 1 to N – was the mantra of the 90’s and early 2000. With digitalization the new mantra is going from Zero to One. 

Case 3: We are excellent!

As i entered the Headquarter of a well reputed, multi-billion Euro European consumer good company (lets call it CG) in 2009, i saw a lot of trophies won by the company for its excellence in products, its business achievement and press awards. One glass Shrine has been devoted solely to supply chain awards, stressing the “Lean Supply Chain excellence” along with photos of the award ceremony.

A good company, with a solid business for decades, formerly family owned, strong cooperate ethics and responsibility, with engaged and well treated employees. Growth has been steady for years. I have been hired to help shaping the strategy for the next 5 to 10 years. The main challenges for the company was the rise of Ecommerce, low end competitors nibbling at the market share and strong international competitors.

As we went through the motions to analyze business performance, interviewing personell, researching the market, we also went visiting stores. Stores are located in prime, central urban locations with a rent per square meter that couldn’t be higher anywhere else. As usual, the stores looked excellent, the personell trained, engaged and service oriented. But a look into the basement or back rooms of the stores was shocking: Boxes over boxes of merchandise in a degree of disorder which contradicts the excellent appearance of the store area. How is a store associate ever supposed to find merchandise in this mess?

Before the visits we already found evidence of this disorder. While skimming through the numbers, we found that inventories at stores are unusually high, extremely high. Sure, CG products were expensive, but not just the financial value, the quantity of the store inventory was staggering, too. Consequently, inventory turns where low.

CG had a real problem there, with too much inventory, too much wastage, too many personell hours spend in stores to find merchandise, too much costly space used in prime urban locations.

We reported our findings to the board, without holding back any hard truth: There was no “Lean supply chain excellence” at all. This was one of the most convoluted, messy supply chain our team had ever seen in Retail. We knew we would step on the toes of some board members, but we took that risk in order to create a sense of urgency.

The board meekly accepted our damming verdict. Without fixing the supply chain, the company will not be able to match the profit levels competitors have, market valuation will fall and growth will be curtailed. Every board member saw the bullet. Yet, until this day they didn’t act on it.

What happened? It turned out that years ago central warehouses have been dismantled in an attempt to go all out for cross docking, i.e. resupplying stores more directly from manufactures, just aggregating deliveries for transport reasons but not holding any stock in a central warehouse. This project was successfully delivered – on the surface. It was even awarded numerous “supply chain awards”, but failed disastrously beneath the surface. The warehouses were demolished – only to be replaced by thousands of small back rooms in prime urban real estate with next to no inventory control.

Everbody in management saw that this failure, this bullet will curtail the potential of the business in all aspects. Yet three aspects conspire to make this deficiency a to this date permanent arrangement:

  • Insularity & Talk about the past:  This is our way to do things. The past, with central warehouses, was even worse. So this somewhat superfluous inventory level in the stores might be even an improvement over the past. It has never been better!
  • Data cherry picking: Overall inventory levels have risen significantly, yes. But has that not more to do with a slowing of the market, the company going for higher ends of the market, the assortment broadening? Sure, the supply chain is deficient – but is it really this bad?
  • Short termism: At the time, the company lived through an upheaval of the shareholder structure, which required the board to hit targets quarter by quarter, leaving neither the financial space for a major re-vamp of the supply chain nor allowing the focus necessary to bring the discipline to the organization to make the cross docking work.

Since then CG survives but is all but stagnant: No retailer can ever allow such loose control over its inventory without forgoing any inherent positive business potential – which CG has, to this date. But without addressing this root deficiency all will come to naught.

Case 4: We have a mission!

“Our mission is to feed the world.” That is a proxy for the bold, inspiring statement of an European agricultural conglomerate (lets call it AC), that tilled fields for crops like wheat and soya in central and eastern Europe. Within 8 years the company enjoyed spectacular success: Revenue and market evaluation multiplied by 20. The company was named “best company of the year” in a Top 100 ranking of Germans renowned “Mittelstand”, above world class companies like Kuka Robotics, Beiersdorf (“Nivea”) etc.

The world is crazy for resources. Given todays monetary policy, money is cheap and investors are looking for assets that will provide security. There has been a scramble for agricultural land, esp. in eastern Europe where the land was cheap, the quality of the land high and the productivity per square meter not on West European levels. That was the wave AC was riding.

AC was a safe heaven for investors. Food will be needed even in time of crisis. And by modern agricultural techniques in underdeveloped areas, there has to be significant profit potential.

Fascinating potential, thats what i thought as i took on the assignment to help the board to shape the strategy. As i was doing my preliminary research, just looking at the financial data available to the public, the existential threat to the company became immediately obvious: It had to repay a bond worth hundreds of million euros within a year – while never being able to deliver any significant profits over the last 8 years.

A small series of interviews and more detailed research confirmed the fact: There was no silver bullet allowing to rapidly jump profit levels enough to calm down investors. Worse, there was no substance to be found in its balance sheet, as most real estate was not be found there. The need to act was immediately.

Turning around companies requires tough decisions: Revenue will drop, as non profitabel businesses units or activities are stopped or sold off. With that, expectations must be re-grounded, promises revoked, narratives and stories need to be re-told. All this requires trust in the acting persons, a capital which will be scarce after expectations have been disappointed. But there was no alternative if the company is too survive.

But there was no action after the initial analysis.

What happened? Again several factors conspired against any action:

  • Short termism: The company has been hyped so much, with so many promises being made, with so much capital being raised and spend, that any turn around in the narrative will have fatal consequences for some board members. So hanging on to survive the next quarter and hoping for the best, e.g. finding new sources to finance the gaping whole in the P&L, seemed a rather attractive tactic
  • Insularity: How can such a award winning, visionary company can go down? So many mega trends, e.g. the land grab in eastern Europe, vegan and biological foods, globalization of agricultural business can go wrong?
  • Politics: The governance of the company was filled with conflicts of interests. So much, that criminal investigations for fraud are ongoing.

The company has by now, 9 month after the analysis, defaulted.

The Strategy Doom Loop

In every of these cases strategy wasn’t clear and led to a fatal damage to the company.

Of course, strategy is nothing without execution. And execution wasn’t always optimal in some or a lot of business functions in the companies described above.  But still, even the best execution of a failed strategy doesn’t help. “To do the right things” beats “doing the wrong things right”.

To describe this break down in Strategy, Artel and Salomon quote Gabriel Garciá Márquez novel “Chronicle of a death foretold“:

Almost everyone in town knows that the Vicar brothers are going to kill Santiago Nasar for tarnishing their sisters reputation. The brothers boast about their plan to anyone who will listen. While almost nobody wants the murder to happen, and it is not clear that the brothers mean to go through with their plan, this slow motion tragedy winds its way forward with grim inevitability. When the brothers finally shoot Nasar, it is anticlimactic.

Afterwards, everybody wonders why nobody stopped it.

Near termism, politics  (7 Signs of Ethical Failure: Good and Bad organizational Politics) and the lack of capability to think strategically (Sources of Strategic Inaptitude)  create a mutually strengthening death spiral for a company. A break down of logic.

SDL.jpg

How to identify doom loops?

In the context of strategic discussions at board level Ertel and Salomon identify 5 indicators to identify doom loops:

  • “If” is used a lot – “If only we had…”, “If this initiative delivers…” etc.
  • Data cherry picking – Clutching to rare nuggets of data like crazy
  • Insularity – ignoring friendly dissent from insiders and outsiders
  • Much talk about the past – business was good and shall be good again
  • Spending a lot of time arguing who is to blame – and message the internal communication instead of solving the problem

In the context of projects, Edward Bourdon in his 2004 book “Death March“provides a similar break down of factors.

Returning to hope – breaking the doom loop

Breaking the Strategy Doom Loop requires a change of culture on board level. This change must be accompanied by a changing personal behaviors and trains of thought.

Alas, personal transformations of big ego CEO’s are rare. Usual CEO’s and top personell is replaced – if ownership structures are on top of things.

But there are other, less dramatic interventions possible, as described by Chris Ertel and Lisa Key Salomon in “Moments of impact”. A professionally arranged, orchestrated series of strategic conversations might break the vicious cycle. Key elements of of these strategic conversations need to be:

  1. Future orientation – no talk about the past or blaming
  2. Common purpose – a”Massive transformative purpose” as described in Exponential Organizations – a way forward for traditional companies? or in Joel Kurtzmans book “Common purpose” (see sources)
  3. An enabling environment that breaks existing habits – a special venue, external impulses to change, experiences made in preparation of the strategic conversation
  4. This has to be an orchestrated process of strategic conversations on multiple levels, not simply an annual event on top management level

Most importantly, boards need to dedicate time for the strategic process: Time to explore, time for synthesis, time for discussion, time to act, time to follow-up and time to learn.

In a volatile, unstable, complex and ambiguous world as created by the digital revolution, shifts occur at a very high pace and do not stop: If driving at 100 mph, better not to let go of the steering wheel and to be ready to adjust direction in real time.

Posted by frankthun

Management. Systems. Liberation

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s