Tuesday, April 21, 2015

How "Bringing Science to the Art of Strategy" Could Have Saved My Company Millions

                From 2005 to 2012, I served as Assistant Controller for a small plywood company (for our purposes here, PlyCo). As PlyCo’s business was directly related to the health of the housing market, we experienced many fiscal swings during my tenure. Adding to the uncertainty, PlyCo also attempted to transition the business model from one of (relatively simple) wholesaling to one of (vastly more complicated) manufacturing. In this venture, PlyCo would certainly have benefited from implementing sound strategic reasoning. Unfortunately, the business executives at the time were self-proclaimed “fly by the seat of your pants” leaders, instead of deft and studious strategists. The article “Bringing Science to the Art of Strategy” by A.G. Lafley, Roger L. Martin, Jan W. Rivkin, and Nicolaj Siggelkow illustrates the value of bringing tangible “measureables” into strategic groundwork – a concept I feel would have been well advisable to the processes of my former employer.
                Move from Issues to Choice. The primary goal of PlyCo during my tenure was to open a plywood manufacturing plant. However, the primary asset of PlyCo was a relationship they held with a global cabinet manufacturer who used the company as a primary supplier. PlyCo garnered this relationship through very thin profit margins and guaranteed inventory management. Also of note is that this relationship was entirely informal – though they used PlyCo exclusively, no agreement was in writing. In analysis performed during the planning phase, it was determined that a plywood mill would hurt initial margin control on the products sold to this customer, as well as increasing exposure costs when external purchases would be needed to fill in the gaps of the inventory PlyCo promised to maintain. Furthermore, all loaning institutions discounted the value of the agreement since there was no legal binds keeping the arrangement in place. With this information, PlyCo should have laid out their options: discontinue plans to open a manufacturing facility and continue profiting through wholesale operations, or contractually bind the customer to a purchasing arrangement which would bring stability to fiscal planning and provide financing options. Instead, PlyCo management moved forward on the mill with the idea that they would “make it work” – a decision with dire consequences.
                Generate Strategic Possibilities. With the two options laid out as stated above, PlyCo could have considered the realm of possibilities which existed within these choices. For instance, if the decision was made to discontinue the manufacturing initiative, where could capital and resources be otherwise implemented to improve upon the wholesale efforts of the company? Or if PlyCo approached the customer with legitimizing the relationship between the two companies, an effort could have been made to forecast the number of duplicate efforts which could be eliminated between the two companies, thus making both entities more profitable. To lay out the specific options beforehand would have provided this insight and clarity during the planning phase.
                Specify the Conditions for Success. During this phase, PlyCo would have quantified the realities of both options outlined above. For instance, what resources would the company have remaining to apply towards the wholesaling business? Would these investments provide return, or would this just be spending for spending’s sake? Is there a detriment to placing a ceiling upon the company that it will never expand beyond the wholesaling business? Or if PlyCo chose to approach the customer with a legal agreement, could we accurately quantify the amount of extraneous expenses that could eliminated? Would there additional expenses we were not considering? Would too much proprietary information become accessible to the customer, thus reducing our value as a supplier? With the hard numbers available for each option, they would become much more readily comparable for strategic planning.
                Identify the Barriers to Choice. The authors describe an exercise in which strategic planners identify the largest barrier by deciding which of the unknown factors they would guarantee if given the option. In this example, let us say that factor is the customer legally agreeing to a set purchase quantity moving into the future. PlyCo management would need to assess the reality of this agreement, or how enforceable such an agreement becomes. What are the terms of this agreement and what happens once they expire? Through this analysis, a certain degree of discount would get placed upon the option of legally binding a relationship with the customer – a factor which would not have become apparent during the more idealistic phases of our planning.
                Design Tests for the Barrier Conditions. In this phase, PlyCo would investigate the concerns regarding the agreement barrier described above. For example, are there other instances of customer/manufacturer agreements as being proposed here? What was the evolution of these agreements? Were there unforeseen detriments to the manufacturer in these instances? What happens when the market shifts? Through this type of analysis, PlyCo would have achieved a better understanding of their bearing in the relationship in the future, and whether such an agreement would create a sound foundation on which to support the decision to beginning such a venture.
                In conclusion, the “Bringing Science to the Art of Strategy” article provides sound insight into the mechanism of strategic planning. The steps detailed in the article would place reigns upon the typically visionary personality of corporate leadership, and instill firm scientific analysis to the process of strategic planning.

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