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Chapter 1

The Chemistry of Strategy

“Nothing great is created suddenly, any more than a bunch of grapes or a fig. If you tell me that you desire a fig, I answer you that there must be time. Let it first blossom, then bear fruit, then ripen.”

Epictetus

“…one or two atoms can convert a fuel to a poison, change a color, render an inedible substance edible, or replace a pungent odor with a fragrant one. That changing a single atom can have such consequences is the wonder of the chemical world.”

P. W. Atkins

My first strategic planning meeting in 1976 was a defining moment for me and my company. One of the joys of facilitating strategic planning is that I help create such defining moments for others. Sprinkled throughout this book are real company examples from such moments. Here’s an example of the power of visualizing a future.

In the first strategic planning meeting with a new market research client, I asked the CEO a follow-up question. “Why do you think customers can be so stupid?” We were elaborating on one of the key weaknesses the executive team had just identified. The weakness was that the market research firm’s customers didn’t do a good job of implementing, or in many cases, even listening to their recommendations. The CEO had complained: “They use us to find white space in the market, unsatisfied market needs they could exploit with new growth products. Then they drop the ball when it’s time to act on those insights. Think how much more valuable our research would be if we could find a way to have our recommendations truly implemented.”

The CFO then spoke up and asked the “dumb” question: “Why can’t we take responsibility for implementing the new product development phase? We already do half the work when we come up with our recommendations, which, by the way, we give away for free along with the research results.” Why, indeed?

The strategic planning team responded by creating a strategy, visualizing a future where their company was positioned as the Fortune 500 C-level executives’ “go to” source for innovation and growth, rather than merely market research. They strategically remixed the basic elements of their market research business to become that visualized company within five years. They had always had operational excellence. What they added now was strategic excellence.

Within a few years they became an industry leader, ultimately attracting the attention of a multi-billion-dollar market research firm seeking help to make the same transition globally. They are now implementing their strategy on a global stage as part of that multi-billion dollar organization.

Chapter focus

This chapter discusses how to build a strategy to create your desired future, based on asking and answering three basic questions. What do you want the future to look like? Why do you want that future? How do you get there? The most effective strategy leverages “strategic laws,” including the Drucker Phenomenon, the 80/20 Rule, the Experience Curve, the Law of Concentrations, the Law of Critical Mass, the Product Life Cycle, and the Risk/Reward Tradeoff.

The chemistry of strategy

The process of successfully growing an organization is like mixing chemicals together to create a reaction. Ask the typical executive to name the most valuable tool in the process of creating a chemical reaction, and they’ll offer such answers as the quantity of certain chemicals, the quality of the lab facility, the combination of two or more elements, and so on. That’s because we tend to be so rooted in tactical thinking that we miss the larger equation.

The reality is that the most important tool in creating the desired chemical reaction – or growing a company – is the formula that describes its “big picture” results. Without this, a CEO might just as well tell the executive team to grow the company blindfolded. The way to remove the blindfold is to first build a shared, team-supported visualization of where the company wants to be at a given point in the future. This shared visualization is at the heart of the chemistry of strategy – where elements in just the right proportions are applied at just the right time (as in a chemical reaction). This visualization provides a company with answers to the basic strategy issues of growth, sustainability, risk, and productivity.

There are three key elements in what I call the chemistry of strategy, all critical for effectively communicating a strategy throughout an organization beyond the executive team and for the purpose of actually achieving that shared vision.

In the chemistry of strategy, it is more important to be asking the right questions than to be worrying about the specific answers to those questions. In one of the first companies where I served as the turnaround CEO, I brought in venture capitalists. My liaison with the venture capital firm would randomly show up and drive me crazy with dozens of questions about what results we were aiming for, why we thought they were worth focusing on, and how we expected to accomplish them. With all the passion he exhibited in asking the questions, I never had the sense that he really listened to my answers. In retrospect, I came to appreciate that he knew that making sure that I had asked myself and my executive team these questions was more important than the details of the answers to these questions.

The primary formula for strategy is simple enough:

What do you want your company to look like in the future?

Why do you want it to look like that?

How do you get there?

Strategy is the collective set of answers to those questions of what, why, and how. Strategy answers the above three questions for next week, next month, next quarter, next year, five years, and beyond. For instance:

What executive team today, next year, and five years from today will lead you to that future? Reaching the future requires changing the status quo and implementing that change depends on sustained leadership. Leadership starts with a healthy executive team capable of not only setting the direction but also having the passion and competence to sustain the implementation to get there.

What focus do you want and need? What market and product focus will be sufficient to gain and sustain a competitive advantage through the power of the Experience Curve? (The Experience Curve is a strategic law that recognizes that for most activities, every time you complete an action, you learn how to reduce the cost of the next one.)

What growth do you want and need to achieve your visualization of the future? Growing the value of the organization is the number one challenge for C-level executives like the CEO and CFO.

What organizational changes will be required to reach and sustain your future?

What personnel chemistry will foster engagement, empowerment, and accountability? Strategy memos and PowerPoint presentations won’t implement your strategy, your people will.

What productivity gains will be required to sustain a competitive advantage? Every year you, your customers, and your competitors have twelve months to get smarter. A competitor that gets smarter faster than you do ends up winning.

What risks will you have to manage in the future? As you grow, you can and must handle opportunities with higher value. Along with the higher value comes a higher risk. The greater the risk you can effectively manage, the greater the long-term value you can create.

What systems will sustain implementation of your strategy?

What timeframes should you set for your expectations? Exploitation of current market and product positions could yield results within a few quarters. Exploration of markets with the potential to totally replace current ones could take years to make a measurable impact.

Strategic laws

A few “strategic laws” underlie the chemistry of strategy. Let’s take a minute to review these before we move ahead.

The Drucker Phenomenon states that doing the right things adequately will always produce better outcomes than doing the wrong things well.

The Experience Curve states that every time you repeat a transaction you learn how to do it better. For example, studies have shown that every time a manufacturer doubles their production of a specific part, productivity increases between 10 and 25 percent.

The Law of Concentrations states that every connection makes that connection point more attractive for future connections. For example, in social networking, the more followers you have, the more followers you are likely to attract. In business, since it’s easier and less risky to purchase from a known vendor, over time a company can find the majority of its revenue coming from a small number of very large customers, with the potential for catastrophic impact should one or two of them leave for any reason.

The Law of Critical Mass states that there is a point when business activity acquires self-sustaining viability. For example, being a market leader can enable you to be the “low cost” provider, provide you with better insight into emerging customer needs, and enable you to set the industry standards for price and features. (Strategically, having the lowest costs allows you to set the market price. None of your competitors can win a price war since you can discount prices below their ability to make a profit.)

The Pareto Principle, also known as the 80/20 Rule, states that 20 percent of something usually accounts for 80 percent of the results. For example, if you focus on the top 20 percent of your customers you can affect 80 percent of your revenue. This law is recursive; that is, even the 20 percent of the 20 percent (4 percent) is responsible for 80 percent of the 80 percent (64 percent).

The Product Life Cycle states that over time all products move through the four stages of introduction, growth, maturity, and decline. It enables you to estimate when you need to begin the introduction of a new product whose revenue will replace that of one soon moving from maturity to decline. The investment strategy required during the introduction stage would be wildly inappropriate for a product in its declining stage.

The Risk/Reward Tradeoff is an investment theory that correlates an increase in certain types of risk with greater return on an investment. (Lower-risk investments typically yield smaller returns.) For example, you may open a fancy new office in Portland to service the local market with an expectation that the monthly operating costs will be covered within six months by new Portland-area customers. Your greatest risk may be that you have to cover another year of monthly operating losses if it actually takes eighteen months or more to develop that business base.

Strategic processes

The chemistry of strategy also relies on a few simple processes that you will use repeatedly over time.

The qualifying of opportunities by asking and answering: Is it real? Can we do it? Can we win? and Is it worth it?

The repetition of asking and answering: What? Why? And How?

The strategic planning process of asking and answering of these questions:

Where are we now?

Where do we want to be in the future?

How do we change the status quo to get there?

The use of team meetings called “swarming” that keeps the team on track. Swarming is a productive team meeting used to quickly complete an assessment of where you are, reach agreement on the next steps, agree on personal accountability, and define the next actions to be completed.

In the next chapter, we will discuss what it takes to build a healthy leadership team. If you add up the total compensation of your executive leadership team, you may discover that, as at many other small companies, this is by far your most expensive asset. Improving the effectiveness of this team has an immediate impact on the effectiveness of the organization. Developing and implementing strategy, no matter how brilliant, is impossible without the right leadership.

CHAPTER SUMMARY

The Chemistry of Strategy

What are the major concepts in this chapter?

Building a strategy to create your future is based on asking and answering three basic questions. What do you want the future to look like? Why do you want that future? How do you get there?

There are “strategic laws,” or underlying principles, that your strategy should take advantage of and which affect your ability to implement. These include the Drucker Phenomenon, the Pareto Principle (aka 80/20 Rule), the Experience Curve, the Law of Concentrations, the Law of Critical Mass, the Product Life Cycle, and the Risk/Reward Tradeoff.

Why are these major concepts important?

The scientific approach of combining the elements of strategy while understanding the underlying strategic laws leads to a better future more quickly.

How can you apply these major concepts?

Utilize a productive team implementation process based on holding meetings to quickly complete an assessment of where you are, reach agreement on the next steps, agree on personal accountability, and define the next action to be completed.

Utilize a proven strategic planning process that takes place in the course of one- to two-day meetings and that asks and answers the strategic questions. Where are we now? Where do we want to be in the future? How do we change the status quo to get there?

Utilize the “strategic laws” when setting strategies for focus, growth, risk, and timeframes.