Ed Bogle is a leading authority on strategy. In this episode, Bogle discusses the process of turning a strategic plan into a process for innovative renewal.
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Transcript:
Linda Ruhland
Ed, what is strategic renewal?
Ed Bogle
Strategic renewal is the process that becomes adaptive and internal to the organization so that periodically you are reviewing your base strategies and how effectively they are permeating the organization. Typically, that involves discussing what we call the “rearview mirror” and the “windshield.” Most clients do it quarterly unless you get some sort of disruptive event. Major clients leave. Or you’ve gotten some changes in the industry: a law, downturn in the economy, or whatever those external variables are. At that point you can declare a kind of strategic meeting whenever you need it. But it centers around the rearview mirror, which is what happened to us and why. And then the windshield, which is what’s out in the future. We spend a proportionate amount of time to the size of the rearview mirror vs. the size of the windshield. History does not typically repeat itself in businesses. That’s been compounded by the rapid-fire changes we can experience in industries, a lot of which is external, not internal. We look at the rearview mirror (what happened to us and why); we’ll spend 15-20 percent of our time on that. Then we go deeper into “What’s out in front of us? What’s going on?” We bring in input from all corners of the organization, customers themselves, and alliance partners in that renewal process. It’s designed to keep us ahead of the game. What it entails typically is there are several parts to it. There’s input from the resources around the organization. Like I said, alliance partners, suppliers, even joint-venture partners; whatever you’ve got. We get input from them about “What are you seeing in your future? What’s changing on you? How have we performed in the last quarter?” Often times, we do a quick customer survey. We really want to understand our customers because our business is wrapped around how we create value for customers. That drives our profits, our growth, revenue models, everything else. Value creation is the cornerstone of all strategy, but also in the renewal process. For example, a lot of what occurs to companies is you’re rocking right along and as long as the balance sheet and P&L statement look pretty good, customers are buying, and things are going well, we don’t have a tendency to ask the questions about the future. As an organization, we talk about permanent white water and that thinks are constantly changing. Sometimes those changes are so subtle and minor that we don’t pick them up. If you can build out a model where you’re asking customers, you’re meeting periodically with employees, and getting that input.
We had a customer in the automotive sector called remanufacturing. What they did was remanufacture car parts, engines, drivetrains, transmission, and sold them into the market. It was a Ford Company type of process. They were independent of Ford, but they were a Ford-authorized remanufacturer. The Ford-authorized remanufacturing program was going away. They were going to replace it with the best of the best in engines, the best of the best in drivetrains, transmissions. It resulted in a major shift in how they dealt with the suppliers in the remanufacturing sector. We immediately saw that. We made an acquisition of the best engine remanufacturer in the country. We were the best in the world at transmissions. We ended up getting the primary work for Ford Motor Company and ultimately for the other two big US manufacturers. We caught it early in an interestingly quiet conversation. We looped it out to “What does that mean to us in the future?” We laid out, “If it goes this way or if it goes that way, what’s our response going to be?” It kept them in the game and ahead of the game, as a matter of fact. Incidentally, that company became the world’s largest remanufacturer of automobile parts and ultimately expanded into other areas—the electronics world, especially. And they got into foreign manufacturing. Then, they sold the company for big multiples.
Ruhland
You took what could have been an extreme crisis and turned it into a strategic advantage.
Bogle
Yeah. And that gave them the future that was just phenomenal.
Ruhland
You mentioned “permanent white water” earlier. Therefore, the renewal process is something that should be done quarterly if not more often because of it.
Bogle
It’s a constant updating process, typically. We have either very small, short meetings or written input between the quarterly meetings where they’re discussing things. It strange, but some of the stuff that will come from salespeople, that will come from shop-floor people, that will come from managers of divisions or departments and their people, they’ll catch some early stuff, or they’ll say, “We need to invent our future, here.” You’ll get some suggestions. You’ve got to have the right culture to do this. But you’ll get suggestions from people about “We would be much better positioned if we did this for our customers.” The secret to this is that we invite that input. It’s a safe haven for them. They’re not going to be told, “That’s the stupidest idea I’ve ever heard.” No, all ideas are good. They don’t all get implemented. But we recognize the input and ideas. Some of the great ideas come from the furthest corners of the organization. And, oddly enough, from the customers, themselves.
Ruhland
What this becomes, in essence, is a container for new ideas and observations that then can be processed through the organization.
Bogle
Yes, that’s exactly what it is. On the financial side of it, profits are like breathing. Without them we cease to exist. So, there is a focus on profits in all of this. Again, the basic fundamental is the higher the value we create for our target customers, the greater the margins will be. Once you start getting into the world where everybody is catching up to you and you’re now becoming a commodity, that’s when you take the next level of innovation, for sure. Try to stay ahead of that. That’s what this renewal process is designed to do: stay ahead of the innovation curve. You are looked at by your clients and customers, “These guys are the innovators. I want to do business with them because they’ll have the next great idea.”
On the financial side, what we do in essence is maintain a three-year rolling horizon. We detail 12 months and at the end of each quarter we drop off one quarter, or three months of the detail, and add on the next three months. So, it’s always a horizon in front of us. One of the fallacies that has occurred in a lot of companies was, “Well, we do the annual budget.” Then, in October and November they have only a couple months of horizon. We don’t do that. At end of each quarter, we also add one quarter’s worth of high-level financials to the endgame so that we always have 12 months running and two years’ worth of financials behind that. We are always tying the strategy back to the financials very carefully. Our CFOs love this.
Ruhland
Really important because otherwise a good idea isn’t very executable if you don’t have the resources to do it.
Bogle
And usually, the scarcest thing in any company is resources. Two resources: people and dollars. This has a little bit of capital planning aspect to it. We can look at our cash flows. We can look at our future and see where things are going. Again, it’s tied back to the strategy. The importance of that is no longer is it just a pure budget exercise. It’s an exercise of tying the strategy and our human performance back to the financials.
Ruhland
Who is actively participating in this renewal process?
Bogle
We like everybody in the organization to have an input portal and understand that they are part of this organization. “You are a part of our brand. We need you to help us find the ideas and the things we can change that are going to improve our value to the customer and our profit performance.” So, the “we” is pretty much the whole organization. One of the cores of this whole strategic management process is that we’re continually driving value to our customers up while we’re driving out cost. Value up, costs down: That’s a continuous equation. It’s also a rocky road with a lot of boulders. It’s permanent white water, so we’ve got to stick our oars in the water and get around some of the boulders. But it’s a continuous process that’s going to give you the ultimate success in market. If you’ve got the highest value at the lowest price, guess who wins? Now, it’s not always the case that the lowest price producer has the best quality product. You always fight those things. That’s a part of the strategy and it’s a part of valuing and looking at your customer.
Ruhland
Unexpected, unpredictable crises are better handled in an environment where people have their eyes and ears open rather than being focused on what their initiative was a year ago.
Bogle
People come to work every day, whether it’s on a manufacturing floor or processing documents, to a repetitive process. That’s their job description. With a lot of companies, that’s where it stops. “You come in here and produce this stuff.” What they don’t understand, and they are not invited to, is the whole level of “What is your role in providing for the value to customers and cost containment internally? What ideas do you have?” We build cultures where it’s very safe and very important that those things are brought to the table and discussed. Some companies even built an internal process where it was valued for people to speak up. But you’ve got to build the culture behind it. You’ve got to create a safe environment because a lot of people won’t speak up. They don’t think they know, or they don’t think its valued. Sometimes that subtle little “and” will make a difference. Those conversations are going on inside of departments where there’s good leadership, and the leaders are not intimidating or beating on the table about stuff. Instead, they are inviting participation in thinking about our business differently. But they need then to be tied to the strategy. They need to understand our value to the customer and their role in helping us fulfill that value proposition. Now that sounds like a stretch. But often times you have subtle shifts in how they look. A very large retailing firm that was a client, their operation was the operations department. The president of that company, a very dynamic leader, shifted the whole culture quite a bit because he wanted the people to give him input and tell him what needed to be changed. Low and behold, several great ideas shifted the company. One in particular, the new title of operations became the senior vice president of customer delight. Now, it was an internal title, not external. But what they meant, and what they pushed down into the organization, was that operations-side people are here to delight our customers. What are our customer requirements? What delights them? Things like on-time, full shelves, return policies…operations dealt with all of them. But it was driven out of “What was fast? What was cheap and economical?” We shifted that to “What was valued?” That aided greatly in customer retention and significantly changed the way they viewed their operating departments. They went on to be emulated by a lot of people because it also led to a lot of financial success. It’s complex, but it’s not difficult.
Ruhland
Many companies are short-staffed today, which means that the people working there are very busy and possibly overworked. From that kind of reality, how can people grasp a bigger picture of the future?
Bogle
I see what you are saying, but once it permeates the organization, and you adjust to that kind of culture, you have the ultimate weapon in the marketplace. You’re going to continually improve your product. Your people are going to be focused on value. They’re going to be focused on cost reduction over time. It takes a while to do that. If everything was simple and overnight, and we could flip a magic switch, whoopee! Now, a question that I do get a lot is, “How the Hell do people who are so busy find time to give input?” That’s why it can be a little slow to roll out. You’re changing their involvement, commitment, and ability to ride for the brand. But it takes the integration of the culture, leadership, and everybody else. That doesn’t happen overnight. However, once you have that, you will have the continuous value creation, value improvement, the renewal process. You will have people committed to doing it. Pretty soon it takes on a life of its own. Once you have it, you shouldn’t have to go back to the annual strategy planning process. That’s one of the biggest mistakes that companies make in strategy. We have an annual process that’s an outlier. It’s not part of our day-to-day. And it’s a torture chamber. We go through all these scenarios, planning exercises, and they hit the first pass of the financials. Revenues are too low, and expenses are too high. They start beating it down and beating it down. Pretty soon, by the time they get to the December board meeting, when the board will approve the financial plan for the next year, it’s no longer driven by strategy. It’s about “Oh, what the Hell numbers do you want me to hit?”
Ruhland
Just to reiterate, strategic renewal is a discipline that should happen with frequency, that involves everybody, and it’s extremely important to have a culture that supports the ideas that come along.
Bogle
Leadership and culture.
Ruhland
Leadership and culture, okay.
Bogle
This is a process that has to be led. It’s not managed, it’s led. This is an invitation for your organization to come in, grab hold of the strategy and participate with it. Some of the best ideas come from the customers themselves and people lower in the organization. You’re going to be missing opportunity if you don’t have a process that brings that stuff forward. If they just show up every day and check off the boxes. “Okay, I got my job done. I can go home and get my check at the end of the week…” You’re probably not going to last very long.
Ruhland
If somebody has not done a strategic renewal process in the way you describe whether it be quarterly or even semiannually. Would you recommend they take it on themselves or is there a better way to go about initiating it within their organization. Might it be a different process for every company out there?
Bogle
It’s not a plug and play. It has a framework to it. In fact, the strategic plan ends up on one page. We’re not going to get rid of the white water, the never-ending change out in front of us. What we’ll have is an organization that probably will be the best in the industry or among competitors at renewing or building the company going forward. We will have the best responses. We will innovate quicker. Innovation becomes almost compulsive when people are involved in that. The process works.
Ruhland
In summary, even if things are going well or better than before, there’s no reason not to do this.
Bogle
There’s the old adage that we hear all the time, “Stay awake, it’s all going to change!”
Ruhland
From what you are describing to me then, the only way to stay ahead of the market and lead your sector of the market is to adopt a process like this because this is the way you innovate as a formula.
Bogle
Yeah, the simple one-sentence answer is that what you’re doing is creating a constant review of “Where are we?” People come to work and if overworked or really stressed, they won’t want to play with that. I guarantee that you can find time for your people to participate. Ultimately, you become more innovative than your competitors. You’re inventing what people want in the future. The beauty of involving these people, guess how less strenuous execution becomes. If we do this right, the resistance to change is gone. Not totally, but it’s much reduced.