Know Thy Competitor

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From the Ask Tom mailbag –

Question:
In your recent workshop, you mentioned that timespan and levels of work could help us understand our strategic platform and compete more effectively against our competitors. Can you elaborate?

Response:
Timespan and levels of work can easily be applied to your strategic platform. Levels of work helps us understand the complexity inside our business model and the moves we make to resolve our challenges, solve our problems and make our decisions.

The future is uncertain and ambiguous. The further in the future, the more uncertain. Yet, in the face of that future ambiguity, we still have to make decisions today. The near term impacts of our decisions may be markedly different from long term impacts. The more complex our business model, the more we have to look into that future to make our strategy more effective.

The strategy we employ contemplates a time frame. That framework can be discreetly segmented into levels that help us understand our strategy in the midst of our competitors. It is often difficult to see ourselves, sometimes much easier to see our competitors. If we can effectively analyze our competitors, there is a good bet that we contain very similar characteristics. If we want to beat our competitors, we have change our strategy. But how?

Levels of work provides some guidance.

  • S-I – Product or service strategy. Timespan – 1 day to 3 months.
  • S-II – Process or method strategy. Timespan – 3 months to 12 months.
  • S-III – System strategy. Timespan – 1 year to 2 years.
  • S-IV – Multi-system integration strategy. Timespan – 2 years to 5 years.
  • S-V – Market (responsive) strategy. Timespan – 5 years to 10 years.

S-I – Product or service strategy. Timespan – 1 day to 3 months.
Most companies start out this way. The startup entrepreneur has an idea that people might want to buy this or that product or service. If it’s a great idea (lots of people might want it) a business is born. People buy it because it is useful or they like it. If this startup business is the only company with this product or service, they make money. People may even be willing to put up with a bit of wonkiness, limited availability or cumbersome utility because it’s the only product or service that does what it does.

If enough people buy it, the company attracts attention. First competitors simply copy it, and now there are two companies with a relatively identical product or service (as perceived by the customer). Look around. Your product may not be so unique, few are in this internet age. And, if it is unique, it won’t be for long.

What do you do if you wake up one morning and find your product or service is one of a handful of look-a-likes. Move up to the next level. Move from a product or service strategy to a process or method strategy. It is no longer enough to just have a product because several others have an identical offering. What does process allow you to do? Faster, better, cheaper. Other companies may have an identical product, but if you have a process, your offering may be at a lower price, a little less wonky, more available in more places.

S-II – Process or method strategy. Timespan – 3 months to 12 months.
It’s doesn’t take rocket science to understand that your company can sell more of an identical product or service if you drop your price. But don’t think you can drop your price and stay in business if you are simply eroding your margins. Process and methods allow you to make moves related to pricing, crank out more finished product, with faster output. This S-II strategy will beat your competition.

What do you do if you wake up one morning and find your competitors not only met your price point, but undercut it by another couple of points, on sale at an even lower price. You assume they must be buying off your customer, eroding their margins and will soon price themselves into bankruptcy. Though shalt not kid thyself. While you were figuring out how to make it better, faster, cheaper, so was your competitor.

S-III – System strategy. Timespan – 1 year to 2 years.
How do you beat a cheaper price? At some point, even with brilliant process and method, there is no margin left. There is no more race to the bottom, because everyone is there already. But some things happened on the way to the forum. As volume pushed higher, that small decimal defect became a larger number, a substitute material didn’t hold up as well, the cheap paint flaked off. Customers, used to an expected standard become finicky, think twice before they purchase. They don’t need a third widget to go with the two broken ones they already own. How do you stand out?

Offer a warranty. With a warranty, you can even push your price point back up. A warranty removes the risk in the purchase. But warranty claims can eat your lunch. Product replacement, warranty service can be expensive. Do NOT offer a warranty unless you have a system that builds in consistency and predictability. If your competitor tries to match your warranty and they don’t have a system, you win.

Of course, your competitors are not stupid. They can figure out your system, sooner or later, and copy it, so they can offer the warranty as well. How do you beat your competitor who has figured out your materials, your sequence, your tooling.

S-IV – Multi-system integration strategy. Timespan – 2 years to 5 years.
At this point, the selection of your product or service over your competitor’s has little to do with the product or service. All the product or service offerings are identical, quality is high and predictable. The customer’s choice now has more to do with the support systems that surround your core system (because all the core systems are the same).

Your logistics system becomes more important, your customer service system, return policy, store location, response time system. And this is where scalability lives. A company may become profitable at S-III – System strategy, but can only scale at S-IV – Multi-system integration. The competitors are fewer, but the fight is fierce. The big difference between a single system MRP (Materials Resource Planning) and a multi-system ERP (Enterprise Resource Planning) is integration.

S-V – Market (responsive) strategy. Timespan – 5 years to 10 years.
And, here is a huge sea change. Everything discussed so far looks inside the organization and the way it works. These are all internal systems with an internal focus. When all your competitors have fully integrated systems, how do you win? You can no longer depend on an internal focus, you now must look outside, looking at your external systems. Those external systems take the form of market systems, regulatory systems, finance systems, labor systems, technology systems. These external systems are not under your control, yet your success now depends on your ability to navigate them.

Look at your competitors to determine your current strategic platform, based on levels of work. Beat your competitor by moving to the next level.

Killing a Neighboring Function

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“And operations does it absolutely perfect, every single time?” I asked.

Roberto exhaled like he was going to speak, but stopped. “Okay, you got me. I know it’s a trick question.”

“If operations does it absolutely perfect, every single time, then you have no need for Quality Control?” I smiled.

“We measure reject rates, but they have been pretty good, in fact, on a down trend,” Roberto replied.

“But your customer service call counts remain high. What’s up with that?” I wanted to know.

“That’s where we really put our energy. We get very high marks on our customer service. We put resources where we need them.”

“So, is there a correlation between low reject rate and high volume of customer service?”

“If you ask our department managers, they are very proud of their statistics. In fact, our customer service manager just asked for more budget because they are doing such a good job.” Robert’s turn to smile.

“There’s a connection,” I said. “When you look at integration inside a company, you can’t look at a high performing single function. You may find that a high performing single function is killing its neighboring function. And, you may find a problem in one function by looking at what’s happening in another function. You can get profitable by focusing on a single system, but you can’t scale until you look at all the functions together. It’s about total system throughput.”

It’s Not Your People

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It’s your structure. Peter Schutz (1930-2017), former CEO at Porsche quipped, “the successful companies are those that get extraordinary results from ordinary people.” It’s not your people, it’s your structure.

Structure is the way you think about your company. That includes your business model, who you think your customers are, how you think they use your product or service, why you think they use your company vs a competitor. It’s your structure.

Organizational structure is way we define the working relationships between people. The first level is every person playing their role. The second level is the way those roles work together. It’s your systems. The way we think about roles and the way those roles work together determines the effectiveness of the organization.

Every company has people. Every company thinks their people are special (and they are). It’s the structure that determines the company’s success. Extraordinary results from ordinary people. It’s your structure.

Democratic Decision Making

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“Alright, let’s take a vote,” Ralph directed. I was sitting in the back of the room. I watched the hands go up in favor of Ralph’s plan. There was no dissent. Meeting adjourned.

Ralph was proud, no opposition, he picked up his stuff and strutted out of the room. And that’s when the truth came out. It started as a whisper, a snide remark, and then the piling on began. As it turned out, no one was in favor of Ralph’s plan.

“What do you mean?” Ralph said as I settled into his office.

“I don’t think your plan has a chance for success,” I replied. “As you left the room, I got to thinking, wondering if your plan had covered all the bases, in fact, if it was even the right decision.”

“But, everyone voted,” Ralph protested.

I nodded. “Do you think voting is the best way to make a decision?”

“Hey, it’s how we elect a president?”

I smiled and repeated, “Do you think voting is the best way to make a decision?”

“Well, do you have a better way?” Ralph challenged.

“I was just looking at your four alternatives. You know, there were two things that were absolute deal killers and the one you picked doesn’t meet the criteria.”

“What do you mean?”

“Think about it this way, Ralph. Put up a big chart on the wall and make a quick list of all the things that absolutely, positively have to be a part of the solution. Deal killers. Then make a list of all the things that are not absolute, but would be really nice to have. Now you have two lists, absolutes and desirables.

“Take your four alternatives and put them up against the criteria and see how things shake out.”

Ralph didn’t say a word. His eyes got wide. I could see him mentally checking his quick list. “I think I need to bring the team back in the room. I think they voted for a mistake.”

Appropriate Timespan of Goals

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From the Ask Tom mailbag –

Question:
I would like to roll out a goal-setting program for my team. Management by objectives (MBO) is a process where everyone in the company is required to set annual goals. I think it will go a long way toward results based performance.

Response:
The big failure of MBO is the focus on annual goals. If you look at the sequence below, you can see that MBO is appropriate for only a small slice of your workforce, and some of the most important goals and objectives are beyond two years.

Goals Framework and Timespan

  • S-V business unit president – longest timespan goals – five years to ten years
  • S-IV executive manager, VP – longest timespan goals – two years to five years
  • S-III manager – longest timespan goals – 12 months to two years
  • S-II supervisor – longest timespan goals – three months to 12 months
  • S-I technician, production – longest timespan goals – one day to three months

Goals and objectives should cascade through the organization starting with the longest timespan goals first, most often from the CEO. Each successive layer should have shorter timespan goals that support the goals from the layer above. You can also see, based on timespan, that longer timespan goals are more strategic (conceptual) in nature, and that as timespan falls below 3-4 years, those goals become more tactical, below 1-2 years, exclusively tactical.

While we have a general orientation toward marking our lives in annual timeframes, goals and objectives require a more specific orientation in the timespan of each role.

Leading Indicator

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“They missed it again,” Isla complained. “The goal was very clear. Sometimes, the team gets close, but last month, dramatically disappointing.”

“We’re already two weeks into this month,” I nodded. “You’re the manager, what are you going to do?”

“The team better brace themselves for another speech,” she replied.

“And, how are you going to build this speech?” I asked.

“It’s pretty easy, I’m going to copy the speech from two months ago. Better get in gear, chin up, pay attention, focus.”

I waited. “Focus on what?” I finally said.

“The goal, of course. They know what the number should be,” insisted Isla.

“And, the goal comes at the end of the month, you don’t get your reports for two weeks. Isn’t it a little late by then?”

“I suppose I could get my reports out earlier,” Isla floated.

“Right now, you have a monthly number in mind, but by the time you get to the end of the month, no amount of effort will save you. And, yet, one week into each month, don’t you already know how the month will turn out?”

“You mean, like intuition?” Isla looked puzzled.

“Okay, let’s call it intuition. During the first week of each month, what is going on that gets your attention?” I wanted to know.

“You’re right. The number of sales appointments are always light during the first week, barely better the second week, improving by the third week, then crammed on the last week, right before we miss the target at the end of the month,” Isla’s eyes became distant, imagining the numbers in her head.

“So, in addition to measuring completed contracts at the end of the month,” I probed. “What would happen if you tracked sales appointments each week, while there is still time to impact closings at the end of the month?”

Don’t Judge People

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From the Ask Tom mailbag –

Question:
It’s been at least four years since you spoke to my TEC group. I was chatting with one of my members yesterday and he asked me if I knew whether there was a profiling tool available that indicates a person’s capability related to stratum level?

Response:
I had the same question in 2002. The answer was and still is, no. There are some consultants who propose to have a profiling solution, but I would question its validity. Anecdotally, most profiling tools have about a .66 correlation with reality. You might say, well, that’s not too shabby until you understand the flipping a coin has a .50 correlation. So, even if there were a psychometric assessment, its validity would likely not be any better than the others.

I don’t judge people. I’m not very good at it. So, let me propose a much cleaner method. Focus on the work. I don’t judge people, but I do judge the work. Work is decision making and problem solving. Focus there.
Problem Solving Methodology

  • S-I – Trial and Error, substituting a single variable at a time until something works.
  • S-II – Cumulative diagnostics, experience, best practice. Solving a problem by connecting to a best practice.
  • S-III – Cause and effect, if-then, required for a single serial system or a single critical path, root cause analysis.
  • S-IV – Multi-system analysis, how one system impacts its neighboring system, based on outputs and inputs, or capacity mis-match.

Look at problem solving required in the work. Then look at the candidate. Is this person any good at solving problems at that level. If they are, that is a clue. Design a project with embedded problem solving, see how they do.

Don’t overthink this level-of-work stuff. It’s not that difficult.

Scalability

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From the Ask Tom mailbag –

Question:
We have worked very hard to refine our core process. We believe we have the highest quality in our product offering and simultaneously have driven out extraneous costs. So, our customers enjoy a high quality product at the most competitive price. In spite of that, while sales growth is steady, our profitability suffers. Our gross margin is good, but by the time we get to the bottom line, the net is not so good. We have tried to cut SG&A, but that seems to make the net even worse. The more we try to take our company to the next level, the more frustrated we become.

Response:
You are in that No Man’s Land dilemma, too big to be small (amongst your competitors) and too small to be big (among those companies who have the biggest market share).

This is a classic integration issue. You describe your refined core process, which is clearly a step up to S-III. Your core system is well-honed, but scalability is elusive. Your core system creates your gross profit, right where it needs to be, but it sits among other systems that drag down the net profit. Companies at S-III have great products, but scalability only happens at S-IV.

  • S-I – Product
  • S-II – Process
  • S-III – Core system (sequenced processes, critical path)
  • S-IV – Integrated systems (multiple critical paths)

Your core system is critical, it is the product that your customers want, but it is now surrounded by other systems. Not only do these systems have to be effective and efficient, but they also have to be integrated together, and that is the challenge at S-IV.

Most core systems exist in a defined operation function, and are surrounded by a marketing function, sales function, project (or account) management, quality control, research and development, sustaining engineering, human resources, facilities and finance. You may have a strong core function in ops, but your company will never scale without the integration of all those internal systems.

Tactical vs Strategic

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From the Ask Tom mailbag –

Question:
You seem to challenge the name of our annual planning exercise that we call Strategic Planning. We are clear that exercise is conducted away from the office, off-site, so we are not dragged into the minutiae of the day to day. We do our best to be strategic.

Response:
One reason I know that most Strategic Planning Meetings are not strategic is by a quick examination of the action item list that emerges from the meeting. Rarely is there a single action, goal, objective with a due date further out than 12 months. There is nothing wrong with tactical plans, we need them, but don’t mistake a strategic session just because that is what it’s called.

Looking at Elliott’s framework –

  • S-I – 1 day to 3 months – Tactical
  • S-II – 3 months to 12 months – Tactical
  • S-III – 12 months to 24 months – Tactical
  • S-IV – 2 years to 5 years – Transition from Tactical to Strategic
  • S-V – 5 years to 10 years – Strategic

Some would push back that there is no point in planning 5 years out because so much will change by the time we get there. Exactly.

Tactical planning is short term (up to two years) where things are knowable and we can call them by name. Strategic planning is long term where things are NOT knowable, where there is uncertainty and ambiguity. Yet, in the face of that uncertainty, we still have to make a decision today. Foolhardy to make a tactical move without a longer term strategy.

The biggest problem is in the language of strategy. When things are uncertain and ambiguous, we can only speak in terms of concepts. And, we don’t practice speaking conceptually very often. Most CEOs and managers, given a problem to solve, want to fix it. Fixing is tactical, so before we even have the conversation, we have to rethink the discussion.

Five years from now, we will have customers, we just might not know who they are. We will have facilities, but perhaps not our current facilities. We will have employees, but we don’t know who they are, how many or what they may be doing. We still have to think about markets, infrastructure and human capital even when we don’t know what that might look like in the future. Four years from now, your five year plan will be your one year plan.

Out of Integrity

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“When we hired Lucas, we were clear about our values,” Alex described. “He’s been here for two weeks and we already caught him.”

“Can you be a bit more specific?” I asked.

“One of our values, integrity,” Alex replied. “We found him skipping the product testing step in quality control. Not on every unit, but he was only testing one in five.”

“How did you find that out?” I wanted to know.

“Easy. We have a reject rate of 20 percent. I know, I know, that’s high, but we had some raw materials out of spec lately, so our reject rate is higher than normal. Lucas’ reject rate was only 4 percent.”

“What did Lucas say?”

“He was proud. Said he thought a lower reject rate was good. Something about sampling. Pointed to his bonus on output. On that, he was right, his output was 16 percent higher than anyone else. But now we have to go back and re-test the entire batch.”

“The entire batch?”

“Yes, his lot output was mixed in with the other lots, so we don’t know which is which,” Alex answered.

“I have three questions for you,” I said.

  • How is your bonus system out of integrity with your quality standards?
  • How is your measurement of output out of integrity with the raw materials problem?
  • How does your management system blame an employee attempting to do his best, when this is really a management issue at a higher level?