Musings on Strategic Investigation, Performance Improvement, and Rhetoric

So-What (SWOT) Analysis



One thing that makes my palms sweat when reviewing a business plan or strategy document is a SWOT analysis.  Reading one of those two-by-two tables makes me think that my generally very smart, commercial, rational clients, have decided to illustrate what they learned at primary school, or have accidentally inserted a no-idea-is-stupid whiteboard printout from the start of a brainstorming session.

I'm not saying that SWOT doesn't have its place at the beginning of the strategy development process; it does, especially if you start with the "O".

O, for opportunity, forces you to take a moment to look around and speculate where the future pools of profit might be, which is especially useful for bringing out those areas that you're currently not doing anything about.

S(trengths) helps you realise where your sources of competitive advantage might lie.

W(eaknesses) forces you to be realistic about what may need improving, and traits that might put you at a disadvantage.

T(hreats) forces you to look at those things coming over the horizon that might sink you below the water line.

This forced lookaround for factors that may be important is, in my experience, the entire benefit of SWOT.  But it's only of value if you go on to test properly which ones are true and material.  Unfortunately, most plans that I see stop with the SWOT output, and bung the list unqualified into the document.  This is worse than useless; it's foolhardy, because it can set in train a series of actions that are based on barely-substantiated speculation.

From the long list of strengths, weaknesses, opportunities and threats that emerge in the SWOT analysis, how do you know which are actually true as opposed to speculation? Which are material and will affect the entire future of your business, and which are pretty much irrelevant?  Which ones should you deliberately not do something about, for example the weakness in high-end products that would kill your cost advantage if you addressed it?  How do you know which opportunities are the ones to put time and money into, and which are the ones to deprioritise?

If you recognise SWOT's limitations, and treat it as a start point, from which you do some testing with facts, then you can create something valuable from this motley list of brainstormed hypotheses.

Start with the opportunities and ask some standard commercial questions.  How big are they? How well positioned are we to exploit them versus everyone else?  How much does it cost to start exploiting each of them?  How sustainable is the profit stream that comes from each?  Which of them is the most valuable use of a dollar of investment or an hour of management time?  If the business case of any one of them stacks up, what do we do next to get there?

Do the same kind of reality check and so-what test with the strengths, weaknesses and threats.  And you will end up with a short list of credible opportunities and actions, which I promise will pay back the additional time a hundred-fold.

You'll also have fewer business plan readers with sweaty palms asking "so what?".


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
Comments (1)

You Can't Take Vision to the Bank

She sat, watching him in the manner of a scientist: assuming nothing, discarding emotion, seeking only to observe and to understand.

A description of Dagny Taggart, “Atlas Shrugged”, by Ayn Rand

Earlier this year I worked with two companies that couldn’t be more different.

Company one is one of the most respected names in the FTSE, and operates in a classic recession-proof sector.  Company two is an unknown business in an unfashionable declining sub-segment of the telecoms sector.

Company one’s management team is smart and sharp, and would be intimidating if they weren’t such pleasant people.  The Directors have a cadre of direct reports who, to my initial and ongoing bemusement, make sure that everything that reaches the Directors is high level, conceptual and visual.  When working with us, one tried to insist that our presentations contained less data and more pictures – pictures for God’s sake!  But, the thing is, these people weren’t acting dysfunctionally – in every meeting with us, the company Directors dwelt and debated on the concepts and vision, and seemed to skip very quickly over all of our data and analysis.

Company two’s management team is one of the most uninspirational I’ve ever met.  The top two Directors could pass as the two main characters in Peep Show.  But these guys love their numbers.  Every question we asked them in our work with them was answered with numbers, supported by a flood of analysis.  The business is managed using a set of KPIs that would have a quantitative analyst in paroxysms of delight.  Everything is tested, everything is monitored.

Company one has had flat sales in a growing market, and so seen its share decline pretty much continually for the last ten years.  But it now has a striking vision of industry leadership for the future, which might work.  You never know.

Company two has grown revenue and profit more than 20% annually in the time since the management team came on board.  This isn’t from harvesting – new services launched in the last three years now make up about 25% of profit.   Company two’s vision – I’m quoting exactly here – “we’ll try a bunch of things and see what the numbers tell us”.

I think I’ve made my point.  Vision can be appealing, numbers count.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
Comments (2)

Don't Swallow Your Own Snake Oil


Business people need to be scientific in how look at their companies, their markets and how they make decisions. If they don't, they may be lucky and thrive for a while, but they will ultimately and inevitably end up in ruin.

I want to be clear what I mean by the term “science” here. I don’t mean biology, chemistry, physics or any other examples from the school curriculum that restrict our thinking and, if I'm honest, put us off the subject. What I mean by science (in as unpretentious a way as possible) is a method and mindset of trying to find the truth of a situation or issue or problem; and caring first and foremost about finding the truth, irrespective of what that truth turns out to be.

It’s not about making an argument or proving a point. As soon as you start looking to defend a position or prove a point, then you're not a scientist, no matter what your qualifications or credentials. Mr Dawkins, looking to prove that God doesn't exist, isn’t a scientist. His antagonists, creationists trying to find evidence that He does exist, aren’t scientists either. Neither is anyone who selects information to justify themselves, rather than seeking information and testing the quality of their thinking to challenge themselves.

Therefore, you see true science exhibited more often in arenas where people need to get results, regardless of rationale or excuses, such as sport or gardening or medicine or the judge in the court room; and you see it less often where people need to be right, such as politics, interest groups, sales or the barrister in the courtroom.

Science, and the scientific method, is partly a thinking skill. It involves breaking down a problem into clear discrete component parts with an analytical knife; using crystal clear thinking to hang those parts together; making your assumptions and gaps in your knowledge explicit; using facts to test those assumptions and your draft conclusion; changing the conclusion according to what the facts say; and then challenging that new one in turn. You repeat this in a relentless process until you've got an answer with which you're satisfied. But the method isn’t something I want to go into any more here, because for most people the method isn’t the main issue.

The main issue is mindset. This mindset is about deliberately challenging your knowledge in the search for the truth of a situation and, crucially, being happy to change your view as the balance of facts dictates. It is not about collecting facts to make an argument or prove a point. This latter path is an aspect of rhetoric, which is a noble art, but it isn’t science. And unfortunately this point-proving seems to be a stronger instinct in the way our minds work than the discomfort of challenging our thinking and conclusions.

I'll give you an example of how easy it is to slip into the rhetor's mindset. I run training sessions for management consultants in the principles and practice of the consulting method, which is basically the scientific method. Everyone typically learns the scientific techniques to get to the heart of problems and crack difficult issues in a rigorous, objective and credible way. That is until I split the learners into teams and ask them, as an exercise, to give me the case for retaining or abolishing the royalty. I give the teams names: "Royalists" and "Republicans". As soon as they're given those positions my students turn from objective scientists into aggressive rhetors, searching for evidence that backs up their position. One team searches for the massive cost to the taxpayer of the royal family, while the other searches equally hard for the vital tourism income they bring to the country. They can't help themselves in this one-sided self-justifying behaviour. And I see this same behavior in myself and others every day.

Now let me come around to what all this means for business. First of all, of course there's a time for rhetoric and making an argument: whenever you're persuading someone in a sale, raising finance, or recruiting a super-star graduate. But if you want to know the truth about an issue, and make the best decision for yourself and your own business, you need the scientist’s mindset. You need to be humble about your pre-conceived notions, be open to challenge, and be prepared for the discomfort of receiving and doing the challenging. As soon as you stop doing that, and start building a fortress of facts to support your rhetoric, you're on the road to ruin, with self-justification, post-rationalisation and excuses all the way down.

So I'll leave you with a couple of questions to ask yourself about whatever issue you're facing. Are you being a scientist and trying to find the truth about whatever issue that concerns you, or are you selecting facts to make yourself feel better and prove a point? Are you trying to make the patient healthier, or are you trying to sell yourself some snake oil?

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
Comments

What makes a market leader? (7/7)

In the last three posts in this series, we covered the common and unique characteristics of market leading companies in our research that enabled them to make breakthroughs in performance and cope with rapid growth without losing momentum or focus. In this final post of the series, we describe the characteristic shared by only the market leaders that stayed ahead – the ability to stay uncomfortable.

Participants highlighted two big areas of concern once they were ahead of the field.

The first concern was being exposed to changes in customer demand: with a large share of the market, you inevitably rise and fall with it.

The second concern was complacency: once ahead, companies faced temptations to concentrate on reaping the financial benefits of their strong position, and to stick with winning ways. But the dangers of this “defend and reap” attitude were considered by leaders to be enormous: from outside due to targeting and copying by competitors, and from inside due to the departure of ambitious people lacking new challenges. Indeed one PLC leader attributed its slow demise to the spawning of competitors from within the company.

The most consistent solution that successful leaders gave to both big concerns was to stay uncomfortable and deliberately take the business to the next challenge.

Staying uncomfortable

This wasn’t about asking for more of the same, which is demanding without being challenging at all. It was about challenging where and how the company did business. To achieve this was difficult and needed discipline, and as with previous themes, different organisations achieved it in different ways. For example:

Raising the stakes by increasing the size of the arena the company played in, for example one payroll services company designed its next generation of further services to address the broader challenge of improving the workplace and the productivity of clients’ employees

Moving a local business into dominant positions in new geographical areas

Incorporating a challenge of “Is it brave? Is it original?” in relation to all market-facing and planning activity

Sustaining the challenge by splitting the business into smaller, more focused components every time it became too unwieldy

Establishing restless, constant change as a deliberate policy driven from the top


There was no common individual solution, other than the underlying requirement to stay on the edge of management’s comfort zone.

The common theme however was deliberately to raise the bar rather than to look back and focus on defending an established position, even though this often meant losing key members of the original senior team, who weren’t willing to get back on the tightrope.


So, in summary, we have now covered the common characteristics of market leading companies from Latitude research that were missing in their more mediocre counterparts.

First, relentless focus on a cause based on a combination of passion for that cause and a firm grip of market and commercial reality.

Second, tough action to get the right team in place, based on the right attitude, even at the expense of talented or experienced team members who aren’t up for the challenge.

Third, creation of breathing space so that management can concentrate on important actions for the business and are not continually distracted by urgent firefighting.

Fourth, clear, tangible behaviour boundaries, inside which there is room to perform, but the crossing of which is simply not tolerated.

Fifth, and finally, the continuing challenge from the senior team to keep the business on the edge of its comfort zone in terms of where and how it does business.

These aren’t rationalised steps to success. Rather they are a series of characteristics that should look obvious to experienced managers of high-performing businesses. By presenting them here, our hope is that they provide a nudge to make a decision that the manager already knows he should be making anyway.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

What makes a market leader? (6/7)

In our last two posts we covered the most critical actions that market leaders from our research took in order to achieve a performance breakthrough. In this and the next post, we will describe the two characteristics that determined whether these same companies continued to thrive, or if they saw their leadership positions fall away.

CEOs of companies that made performance breakthroughs described an interesting challenge that will be familiar to anyone from a fast-growth company. With a breakthrough in performance, came rapid growth and an influx of talented people. The challenge facing a CEO in this situation was how to maintain direction and momentum, and avoid dilution or chaos, whilst giving new people space to act with minimal needless constraint. In our research, we expected strategic planning to be the answer to this problem. But every company we talked to, good and bad, used strategic planning, and this didn’t distinguish the higher performers

The answer to this challenge from the CEOs of successful, sustained market leaders was to employ very clear behavioural boundaries. If people stayed within these boundaries they were given responsibility and room to perform. Stepping outside them, i.e. behaving in a way that was not acceptable to the company’s culture was never tolerated.

A clear “our way” of behaving with uncompromising boundaries

Leaders were very clear that the setting of behavioural boundaries was the key that enabled them to get the most out of people, to generate growth in their team and their business, but at the same time maintaining clear focus and discipline. This delegation of responsibility with clear conditions meant that senior people had space to look forward and focus on important decisions, rather than becoming caught in an operational bottleneck; it also meant that capable junior people took responsibility for solving their own problems and as a result developed and stayed with the business.

There was no universally applicable code of behaviour that distinguished the successful from the unsuccessful companies – there were no magic behaviours. Indeed, behaviour codes were very different in equally successful companies: the absolute requirement to “mix it” in the locker room style of one leading computer games company was essential for people in that business; but this would have been totally unacceptable in the conservative environment of a market leading recruitment consultancy that emphasised respect and professionalism as an essential part of its behaviour code. What was common to the successful companies was that the behaviour code was very clear, very simple, was right for them and was something that the CEO could describe with countless real examples of good and bad. To give a common example, whereas a follower might state “integrity” as a defining value (as did about three-quarters of our sample), a leader would say “we keep our promises”. Simple.

There was also no common pattern to how successful companies in our study came up with these behaviour codes in the first place. There was no magic exercise. Some went through very inclusive approaches, some pushed things down from a strong and inspirational leadership team, for others it was just obvious and there was no discovery exercise at all. What was universally consistent in the leaders was the strength of dissemination of the behaviour code – in particular how the “way of behaving” wove its way into the day-to-day expressions and language of the business.

Of course, there is another side to the behaviour boundary coin – for our leading companies not behaving appropriately was fatal. CEOs described this in very dispassionate terms – “if they don’t behave our way then they’re out” – as simple as that.

In our next and final post of this series, we cover the final characteristic of market leading companies, and probably the most important factor in staying on top – the ability to stay uncomfortable.



Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

What makes a market leader? (5/7)

In our last post, we covered the first action market leaders from our research took to make a performance improvement - tough decisions to get the right team in place. In this post, we cover the second activity required to make a breakthrough: creation of breathing space.

Every company that made a breakthrough found a way to create breathing space so that management could get away from piles of day-to-day matters and take time to reflect properly on the business. The leaders emphasised how criticalit was for their senior people to be able to spend time thinking about important, but non-urgent issues without distractions and the need to engage in permanent fire-fighting.

Dominant external factors that stole managers’ attention and intruded upon proper breathing space were cash flow pressures and customer servicing demands.

Deliberate and successful means of dealing with the distraction of cash flow issues were varied. The two most prevalent that didn’t rely on rich parents were, firstly, tough internal decisions to take the costs of the business below ongoing revenues; and secondly focusing deliberately on generating continual rather than one-off revenue streams, which could mean taking a lower margin to buy revenue continuity.

Customer servicing demands were also an unhealthily large day-to-day management distraction for companies struggling to break through. When entering into relationships with clients, leaders consciously took care not to overstretch themselves. For example one leader limited the number of new clients it engaged with every year because the additional servicing needs of new clients could affect performance with existing clients. Another leader used a series of financial and non-financial pre-contract tests upon which it needed to be satisfied before accepting new business.

Though finance and customer service were the biggest external assailants of breathing space, most problems were essentially self-inflicted. As one MD said: "we were the arsonists as well as the firefighters".

MDs of successful companies talked of ways of achieving breathing space that were simply means of ring-fencing time for managers to take their attention beyond the day-to-day. These included simplifying management structures so that responsibilities were clear; giving managers enough time and ownership to work out how to achieve their objectives before interfering; hiring personal assistants; and taking regular team away days. It was always simple stuff that gave managers room and a separate time to work on the important as opposed to the urgent.

Creation of breathing space was the second critical step that our breakthrough performers took. After breakthrough to leadership positions, our market leaders faced some new challenges that required new disciplines to address them. We'll cover these two disciplines in our next two posts.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

What makes a market leader? (4/7)

In this fourth post of the series we cover the most critical and painful step taken by all the market leaders in our research - getting the right team in place.

Every company that made a breakthrough in performance ascribed it to making significant changes to the team, at the top level and at the level below it. This did not necessarily mean wholesale changes, and all companies emphasised the importance of retaining experience, but it did mean changes in important management positions.

A typical story involved losing one or two senior people who were strong, talented individuals who nevertheless caused problems in the team. For smaller companies this was often the original entrepreneurs, for bigger organisations it was senior directors and managers.

In many circumstances CEOs perceived a high level of risk in losing an individual, such as the fact that they were high performers or that losing them might mean losing other people that respected them or worked for them.

However, although the decision was always a tough one, it was invariably seen as an obvious one. In fact the biggest regret that successful companies had was not making changes to the team more quickly.

And this is not wisdom in retrospect. Everyone we spoke to who made changes to the team said that at the time they knew what they should do but delayed taking the painful step.

In contrast to some established theories we did not see a clear pattern of “first who, then what”. The new team did make changes but never to the cause. All of the companies who made a breakthrough had the same basic and underlying cause before and after the team was in place. The changes that came with the new team were primarily in the culture and capability of the business. Changes to the product or service on offer were about focusing and refinement rather than fundamental redirection.

Finally, the right team did not always mean a completely balanced team. We saw a clear pattern among the leaders of skewing attitudes and skills of senior people towards what was distinctive about each company. For example, one successful software business deliberately skewed its team towards developers and away from marketers. And in many cases it was deliberately left to the support people to supply the capabilities to balance their leaders’ skill gaps and deficiencies. The common and essential precondition for the team was its alignment to the cause.

In our next post, the other major action market leaders took to make a performance breakthrough - creation of breathing space.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

What makes a market leader? (3/7)

In this series we cover the characteristics of market leading companies, actions and practices that distinguish them from their more mediocre counterparts. This is determined from direct research with CEOs of more than 100 companies.

In this post we look in more detail at the first of these characteristics: relentless focus on the cause.

The most striking common characteristic that distinguished the leaders in our research was their almost religious focus on the purpose of the company, or the "cause". The cause was something the leaders were passionate about, what they knew they were good at and it was always simple, specific and easily described.

This wasn’t a blind following of faith. These leaders were very sensitive to and aware of customer needs, and many researched and responded to customer needs very actively, but only within the confines of the cause. The commitment didn’t waver but was informed by rational testing and ego-free listening. We like to make a comparison here with the (now maligned theory of the) two sides of the brain. A person (read business) is only able to fulfill her potential if she uses the full capability of her brain (read senior team): she needs to engage both the right (passionate, creative) side and the left (analytic, rational) side. Right-only may deliver short term buzz but is unsustainable and leads to disaster; left only leads to sustainable mediocrity, which is probably worse.

One popular management theory is that success comes from listening closely to the needs of one tightly-defined customer group and designing an offer that serves those needs. Our findings were very different on two counts. First, the successful companies started by establishing what they stood for, then found who valued it, and what they valued about it. Secondly, though some leaders had one tightly defined customer group, many others had a variety of customers that differed greatly from one another.

In explaining their propositions, leaders described what was distinctive and beneficial, rather than what was better. Indeed, comparison with and paranoia about competitors was more the preoccupation of the followers. Leaders were conscious of competitors but only as a prompt to keep their thinking “edgy” and to look for the next challenge. No leader described itself unprompted as “best” or “world class”.

Every market leader surveyed had made mistakes and strayed from their cause at some stage. Reasons were always understandable (providing add-on services for a special customer, pet projects of vital people), but straying was always regretted no matter what the reason; leaders learned the lesson quickly and got back on track.

There was no common pattern of how leaders came to define their cause and focus upon it in the first place. This varied from building on personal hobbies and previous experience, through packaging for general use a successful one-off service that the company came across by chance, to more formal market analyses. However, even the leaders that had performed a sophisticated analysis used the emotional (what turns us on) when deciding where to look, before the scientific testing (what is the opportunity and does the business case stack up).

A final word on what focus really means - leaders could tell they were genuinely focused when they were turning away attractive, profitable opportunities – discarding the unattractive is easy; the challenge is turning away attractive business that is outside the focus.

In our next post, we cover the big step people took to make a breakthrough in performance: tough action to get the right team in place.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

What makes a market leader? (2/7)

In this seven-post series, based on direct research with more than 100 companies, we review five distinctive characteristics of market leading companies and the common steps they took to get to leadership positions. In this post, we summarise these five characteristics and share some unexpected findings.

All the market leading companies shared an enduring theme that existed at the time they made breakthroughs to leadership and remained thereafter - "Relentless focus on the cause"

Relentless focus on the cause

“Focus” is a cliché that is often taken to mean the dedication of services to one tightly-defined customer group; but for our survey leaders, focus was about what we call “the cause” – the essential function of the company, what it is good at and excited about; literally what the company is for. For Metro, it is digestible news for urbanites; for Innocent, it is tasty, healthy drinks. It needs to be something for which the company has a passion but at the same time can challenge and justify rationally and commercially in the cold light of day.

We think of the cause like the (now maligned) description of the two sides of the brain. It needs a passionate, creative (right) side and a rational, analytic (left) side. Without the rational, the company is destined for disaster, even if it enjoys a flurry of success; without the passion, it is destined for mediocrity.

Leaders have relentless focus on this cause, in that they will sacrifice anything which is irrelevant to it. Every one of them could point to profitable business that they turned away because it wasn't part of the cause.


When asked about the time they made a breakthrough to leadership, our market-leading CEOs described two strong themes: "tough action to get the right team in place" and "creation of breathing space.

Tough action to get the right team in place

When asked for the most memorable action they took just before a major performance breakthrough, one answer came through consistently: "we changed the team". No company in our sample made a sustained breakthrough in performance without changing at least one member of its senior team. In fact, the change was generally two or three people from the senior team, often the CEO himself, and an equivalent proportion from the level below. The team changes had two further common characteristics. First, changes were based on attitude (are we in it together) and not aptitude (are you experienced); second, every CEO regretted not making the change earlier.

Creation of breathing space

The second action successful companies took to make a performance breakthrough, was to find a way to remove the day-to-day financial and time pressure so that management was not continually fire fighting. This was one area where there was a distinctive difference between smaller companies, where lack of breathing space was commonly about cash and customer servicing, and larger ones, where it was commonly about complexity of systems and reporting. In the vast majority of cases, however, lack of breathing space had been self-imposed.

Once companies had made a performance breakthrough, two characteristics were shared by those who sustained it: "clear, uncompromising behaviour boundaries" and "staying uncomfortable".

Clear, uncompromising behaviour boundaries

With a breakthrough in performance, comes growth and an influx of talented new people. To retain control of the business, but still give a larger group of people room to perform, our market leaders employed very clear behaviour boundaries – inside the behavioural boundary people were given room to develop, perform and make decisions, but stepping outside the boundary was, literally, not tolerated.

Staying uncomfortable

Our successful, sustained market leaders perceived their greatest single threat to be complacency. They were conscious of the competitive danger of standing still, but also of the need to provide interest and challenges to their talented middle management. CEOs took it as a personal mission to put their team back on the tightrope and keep challenging the business.

So there we have it, five common characteristics of market leading companies, that we will expand on in turn in the remaining five posts of this series.

Before we finish this post however, it is worth looking at at some findings of the study that we didn't expect, and which are inconsistent with some received wisdom.

1. Listening to customers was vital but it followed, not led, the cause - none of our market leaders worked up their cause by starting with a big customer research exercise. They all took great pains to test market demand for their services, but they only tested the things they were already passionate about
2. Rationality went hand-in-hand with faith. In fact, rationality seemed to be much more dominant in the companies that had always been followers or had seen leadership slip away
3. Leaders were easily understood, sometimes so simple that we thought we'd missed something; followers were more hazy and complex
4. All the leaders made big mistakes along the way and readily acknowledged that they would likely continue making mistakes
5. Everyone performed strategic planning, but leaders went about it in a consistently different way, by being challenging about the future rather than the classic share growth approach adopted by followers
6. MDs of successful companies came across as much less egotistic than their less successful counterparts. We actually counted the mentions of "I" in early interviews, until the pattern became obvious of humility of the leading company CEOs versus almost defensive egotism in the followers.

In our next post, more on the common thread of all of our market leading companies - "relentless focus on the cause".


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

What makes a market leader? (1/7)

Market leaders make a lot more money than followers. The average return on investment for a company with five per cent market share is 10%, with twenty per cent share this grows to 27%, at forty per cent share RoI is almost 40% (source: PIMS survey of 3,000 US businesses). The personal and career benefits of creating or running a market leading company are equally clear, and go without saying.

Given the attractiveness of market leadership, a number of questions come to mind:

Are there any consistent characteristics that distinguish market leaders from followers?

What do leaders typically do to break through and become the obvious provider in their market?

What big problems do leaders need to overcome along the way?

Once they become leaders, what new problems do they face and what do they do about them?

In this 7-post series, we will answer these questions, based on a two-year piece of direct insider-research with MDs and CEOs of more than 100 companies. Companies include impressive but rarely-covered household names such as Innocent, Expedia and Metro, and cover the full range of sizes, performance and stage of development.

Most of the market leaders we researched had moved from being followers to being leaders or had started from scratch to become the leader in their sector. We therefore captured the changes needed to make the transition. We also covered the other side of the coin: companies that had not managed to make the leap and companies that had seen their previous leadership position start to fall away. The characteristics which distinguished these various groups one from another gave us confidence that the leaders had not simply been lucky.

The output of this research challenges established views about what it takes to succeed, and lays out what is central to success, and what is peripheral. In this series we outline the findings, which dispel some management myths and uncover some surprising new themes.

In our next post: the five common characteristics present in all market leaders that were missing in followers.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

How we regularly make poor strategic decisions without even realising, and what to do about it (4/4)

In the first three posts of this four post series we described ten "cognitive traps": ways in which we think that can cause us to make damaging decisions without realising it.

The good news is that there are some decent tools to challenge these traps. We explain our two favourite approaches below, as lessons from science and sport.

1. A lesson from science – treat your beliefs as a hypothesis to be challenged

True science is not about test-tubes, double-blind tests and professors with moon-shaped glasses and speech impediments. It is about starting with a premise that you believe may be true – a hypothesis – and challenging it to see if you are right, or more likely, where you are wrong. Under this definition, you are more likely to see science from a good plumber trying to work out why your central heating makes a knocking noise than you are from a PhD nutritionist with research sponsored by High5, trying to persuade you that High5 is better than Powerade. The plumber is the scientist, challenging his hypothesis in search of the truth; the nutritionist is no more than a fundamentalist seeking and selecting evidence to support his initial position. Unfortunately, when we get attached to our ideas, the cognitive traps make us act more like the nutritionist than the plumber.

This is why the true scientist needs to adopt a mindset of challenging the hypothesis with data, and to have no belief that the hypothesis is true until the challenges show it to be so. Some practitioners even go as far as setting up a formal challenge in the form of an antithesis, an alternative hypothesis that is posited as a more accurate or insightful version of reality. This approach isn’t confined to the material and commercial – the Catholic Church appoints a devil’s advocate to provide the rigour of challenging its most important decision, the legal system applies the rigours of having separate representatives of both sides of the case.

So, how to apply this? Treat your belief as a hypothesis and challenge it, if necessary with your own devil’s advocate, to whom you give the seniority and power to challenge your decisions. And honestly expect your hypothesis to change as the evidence emerges.

Applying this lesson from science stops us being blind to the evidence at hand, but it doesn’t help us predict a future that is much more random that we think it is, or stop us being over-confident in our ability to predict it. To prepare for this, we take a lesson from sport.

2. A lesson from sport – prepare for a range of scenarios

A lesson learned by those of us who have been on the wrong end of a drubbing on the sports field or, more seriously, have experienced military action, is that no plan survives contact with the enemy. Whether you are a batsman facing a spin bowler about to treat you to one of his box of tricks, or a tennis player trying to decide if your opponent is stretched enough for you to approach the net without being passed or lobbed, you have to be able to cope with a range of scenarios. It doesn’t mean that your core game plan needs to be dictated by the opponent and environment, but it does mean that you need to be prepared for the range of scenarios that might play out. If you can’t deal with the high ball, you can guarantee that a good opponent will be sending up bombs for you to panic under all afternoon.

In business, the normal corporate downside scenario is maybe a 5% or 10% decline versus base case, which isn’t really a scenario at all, but more of a smaller version of the base case. A more useful scenario is to work out how we would still thrive if sales fell by 30% or 50%, or how we would grow if competitive substitute product X gained critical mass. How would we deal with costs? Where would we still invest, or even increase investment? Which divisions would we let go? What resources would we try to acquire? What we are not doing here is trying to create a plan for every single situation that might come about. What we are doing is stretching our thinking, in order to understand those common things we need to do to thrive in whatever scenario might come about, and preparing ourselves to respond to the inevitable unpredictability.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

How we regularly make poor strategic decisions without even realising, and what to do about it (3/4)

In our first two posts in this series, we discussed how "cognitive traps" help us fool ourselves into thinking we're making rational decisions, when the opposite is true. We covered six common traps and their sometimes disastrous consequences. In this post we cover the final four of our ten traps.

Trap 7: “Overconfidence in calibration”

In this trap, people under-estimate the potential range of possible outcomes. In particular, people are often not sufficiently pessimistic with downside scenarios and/or attach too low a likelihood to major problems and pitfalls.

This issue is rife in business planning and financial projections. The more discrete and separate a business unit, the more visible is the variability; groups of partially-related businesses can appear easier to predict just because of the averaging of different under- and over-performing units. We often see business plans that overall are at or slightly below target, but consist of component businesses that show enormous variations from the original projections. For some reason, we as managers believe in our ability to perform within a tight range of projected expectations, despite this consistent evidence to the contrary.

Trap 8: “The fallacy of conjunction”

This is a trap in which people overestimate the likelihood that a series of highly likely events will all occur, and conversely underestimate the likelihood that at least one of a series of unlikely events will occur.

This leads management to believe that its mid-case scenario (which consists of all those highly likely events) is much more likely to happen that it actually is. The corollary is that it is reasonably likely that at least one of the many highly improbable, left-field, events will occur, and management will correspondingly be less likely to be ready for it.

We see this fallacy most often, again, in business planning, where a great deal of thought and preparation is given to the central scenario in the business plan, which from historic experience very rarely turns out to be true. It is why we at Latitude see business planning as a helpful process to prepare for possible futures, but see business plans as simply a means to this end.

Trap 9: “Failure of invariance”

This trap recognises that people are risk averse when prospects are positive but risk-seeking when they are negative. In a famous experiment, the vast majority of participants preferred a 100% chance of winning 500 pounds versus a 50% chance of winning 1,000 pounds. The same group preferred a 50% chance of losing 1,000 pounds versus a 100% chance of losing 500 pounds.

Companies approaching distress or who have experienced the initial failings of an investment seem to follow this risk-seeking tendency by trying ever more unlikely approaches to getting back their original money. It is almost always more rational and loss-minimising to write off sunk cost or a percent of equity, and to look at each decision on its own merits without the need to regain lost ground. Using share options as a reward mechanism can exacerbate this problem by actually making the risk-seeking rational for the individual manager, incentivising to act against the best interests of other stakeholders.

The other side of this coin, risk aversion when the company is ahead, is also very common and can lead to tremendous lost opportunity in new areas of business. This can be such a strong mindset in the team that created the company’s success that changing a winning team can sometimes be the only solution when seeking continued growth.

Trap 10: “Bystander apathy”

In this trap, people abdicate individual responsibility when they are in a crowd. Sometimes it is the apathy that stops anyone in a large crowd stopping a mugging; sometimes it is abdicating individual judgement to the perceived wisdom of the crowd. It seems that the risk of taking the contrarian path and being wrong is worse than being the anonymous lemming going over the cliff with all the others.

We see this in the various fads and booms that we fail to understand but cannot afford to miss out on. The recent “arbitrage” profits experienced in the world of private equity from ever growing P/E ratios is an example. Every Investment Director we spoke to when we surveyed them about this in 2006 knew that the P/E growth would need to stop at some stage, and admitted to stretching beyond managements’ business plans to make the investment case for purchase. But no-one felt they could afford not to keep investing. Everyone could see problems coming, and knew what would happen if they were left holding the baby when P/Es inevitably started shrinking, but to stop investing was to step out of the game.

There are numerous other cognitive traps, such as contamination effects from irrelevant data and scope neglect where we don’t minimise harm; but you probably already get the drift – people aren’t as rational as they think they are and they make irrational and potentially harmful decisions without realising it.

In our fourth and final post in this series, we suggest two ways of combating these cognitive traps, used for years in science and sport, in an attempt to throw some good sense and rationality back into the mix.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

How we regularly make poor strategic decisions without even realising, and what to do about it (2/4)

In the first post of this series, we explained how "cognitive traps" trick us into making irrational, and potentially harmful, decisions without realising it. We explained traps one and two, and their damaging business and financial consequences. We will cover ten such traps in this series, and conclude the series with some suggested methods of staying rational, and countering what seems an inevitability of falling into the traps.

In this post, we cover traps three to six, and their consequences.

Trap 3: “Availability bias”

This trap causes people to base decisions on information that is to hand, usually in their memories, versus the information that they actually need, like the car driver who loses his keys at night and only looks for them under lamp posts.

We see this at its most dangerous in Board or management workshops where the day is being run on the basis that all of the important knowledge is in the room. We have even heard facilitators use this we-have-everything-in-our-heads-already as a key premise for the entire strategy that emerges.

This cognitive trap also biases us to recency and proximity – we don’t look back far enough for similar patterns or warning signs, and we don’t look far afield enough for analogous evidence of failure or success.

Trap 4: “Confirmation bias”

This trap causes people look for evidence to prove what they believe to be true, rather than looking for evidence to challenge it: why Tories read the Telegraph and Socialists read the Guardian.

We see this bias at its most damaging in investment cases for acquisitions and in business cases for investment of money and time into new ventures or projects. Even when employing a third party professional to assess the acquisition, venture or project, the investor or business manager will actually ask for affirmation or substantiation – “I’m just looking for confirmation of my hypothesis” - rather than “Challenge me and tell me where I’m wrong”.

Trap 5: “The affect heuristic”

This trap causes people to allow their beliefs and value judgements to interfere with a rational assessment of costs and benefits.

We find this most dangerous at either of two extremes: on the one hand where the decision maker is very passionate about a subject, or on the other where he is once-bitten-twice-shy.

In the former case, whilst we find it critical that managers be passionate about their products or services, this passion can blind the person to reality, and can be impossible to address without introducing a very senior individual with authority to challenge assertions with information.

In the once-bitten-twice-shy case, we have seen private equity companies abandon entire sectors following one painful loss, and refuse to entertain the most solid business case that shares even the remotest common characteristics of historic loss-makers.

Trap 6: “The problem of induction”

Induction is the process of generating a general rule from a series of observations. In the absence of clear indisputable deductive relationships, induction can be all a person has to go on. The problem of induction is that the brain will look for neat patterns and will try to create a general rule even if it is based on insufficient information.

In acquisitions, people can over-estimate the performance and prospects of a company by seeing how satisfied its customers are. This creates an overly-positive pattern from what is essentially a self-selecting group: non-customers and disgruntled ex-customers need including for the full picture. Another example of poor induction is where management projects forward on the basis of a new product’s first year’s sales and forget to consider that this first year was a golden year, where everyone without the product bought one and would never need another.

A very common area where induction knows no bounds is in the practice of regression: correlating one factor against another to create what superficially appears to be a causal relationship. For example, it is possible to infer high price sensitivity when analysing price-volume relationships, and miss the over-riding effect of heavily marketed promotions that commonly coincide with lower prices. I was humbled to the limitations of correlation when an analyst working for me at my former company determined an almost 100% correlation between pallet demand and GDP. We started to doubt the causality when the analyst realised that she had used the wrong source data and correlated UK pallet demand with Polish GDP numbers. Our confidence in the causality was damaged further when the correlation with the "correct" driver, UK GDP, was about 30% lower.

In our next post, four more cognitive traps, after which we will conclude the series with some suggested counter-measures.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments

How we regularly make poor strategic decisions without even realising, and what to do about it (1/4)

The shocking financial consequences of how we think

Niall Ferguson’s best-selling and televised “Ascent of Money” covers beautifully the evolution of the financial system from ancient Mesopotamia to today. It is a superb book that relates the crucial role of financial tools in the growth and decline of empires and dynasties. Ironically, in amongst this excellence, the chapter that resonates most strongly is the afterword. This is called, suitably and contemporaneously, The Descent of Money.

The theme of that chapter, and this post, is how our hard-wired thought processes cause us to make decisions with a mindset that was useful for our evolution, but that in business and finance is destructive and irrational. He lists a series of cognitive traps - ways in which we make poor decisions without realising it.

We at Latitude recognised every single one of these traps, both in ourselves and in the companies we support and review. We could also relate to the considerable damage that each one could cause if unchecked.

We illustrate some of these common traps in this post and the next two posts in this series. The terminology is complex, but the ideas are simple and you will recognise every one. Even becoming aware that they exist should help avoid their destructive consequences. In our fourth and final post of the series, we attempt to go one step further in helping to steer clear of trouble and distress by proposing two well-tested answers that have been used by science and sport from their outset.

Cognitive traps 1 & 2

Trap 1: “Extending the present”

In this trap, the individual assumes that the present is good guide to the future; much better than examination of previous experience illustrates.

We see this at its most common in business planning where future revenues and costs are based on the present, plus or minus a small percentage. The reliable rule that we apply to such plans is that they will usually be wrong, though the future profit out-turn may end up being more-or-less the same with good management and a little luck. The alternative to extending the present – acknowledging that we are much less knowledgeable about the future than we think we are - is a more uncomfortable state of affairs; but this more realistic mindset can lead us to adopt valuable approaches such as scenario planning, which make us much readier for when the unforeseen does happen.

Trap 2: “Hindsight bias”

Hindsight Bias is the trap that causes people to attach greater probabilities to events after they happened than they did before they happened. Whereas in Extending the Present, people assume the present is a better guide to the future than it actually is, with Hindsight Bias, people over-rate the past as a reliable guide to the future.

When we attempt to learn lessons from the past, we must therefore make sure we cover the failures as well as the successes. For example, we can blithely look at many successful companies and conclude that they were much more focused in the services they offered than their more mediocre counterparts; that service or product focus is a pre-requisite for success in all market-leading companies. We could use this to conclude that we should rid ourselves of all products, services or skills except those that are part of this single core. However, if we look at the failures, we see that many of those companies were also very focused, but the successful ones were the minority that just happened to focus on the right thing. Looking at the full set of information, we would conclude that focus with no contingency plan is a high risk strategy, which more often than not will fail.

Hindsight Bias also leads us to project forward assuming that the models and mechanisms that worked in the past have a high probability of working in the future. We forget, or don’t realise, that what actually happened was the one of a myriad of possibilities that happened to be supported by the circumstances of the time. Stepping into the present, those myriad possibilities still exist and the chances of the future turning out as we project are much less likely than we think.

In our next post: four more common cognitive traps that help us cause destruction without even knowing we've done so.


Copyright Latitude 2009. All rights reserved.

Latitude Partners LLP
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk
Comments