Willie’s Blog Posts

Five Dangerous Catchphrases That Lead Organizations Astray

“Bad terminology is the enemy of good thinking.” – Warren Buffett

To solve a problem, we must identify its underlying cause. Flawed framing of the challenge can result in dire consequences.

Think about the framing blunder that led to the collapse of General Motors. In the 1980s GM had captured over 50% of the North American auto market and seemed unassailable. Complacency set in and product quality slipped. Toyota and Honda seized the opportunity with reliable cars at reasonable prices. GM’s volume went into a steep decline and profits plunged. The company defined its problem as a “cost disadvantage” and began a series of cost cuts in tandem with their continuing volume declines. Dissatisfied with the poor quality, customers deserted GM’s brands and the firm’s market share dropped to under 20%. The company eventually went broke and had to be rescued by the US government.

What brought GM down was not a cost problem as they hypothesized; it was a value problem. Their strategy was the equivalent of a patient suffering from liver disease but being treated for kidney failure instead.

The GM example shows how a single framing mistake in a high stakes game can lead to disaster. Just as pernicious is the adoption of a set of false catchphrases that get entrenched in an organization’s collective mindset and are applied unthinkingly in daily decision-making. At best, these can reduce an organization’s competitiveness. At worst, they can be fatal.

Here are five of the most dangerous framing errors I have observed:

1) “We must define our Value Proposition”

There is a big problem with this phrase.

A “Value Proposition” suffers from competitive neglect. It assumes you are operating in a vacuum. Customers have choices. The value of an offering depends on the alternatives customers can choose from.

Since customers are looking at you comparatively, you must respond comparatively. A “Value Proposition” does not rise to this challenge. The essential requirement is a Winning Proposition that answers this question: “What unique value will we offer our customers that gives them a compelling reason to choose us?” It is the margin of difference in customer value that is the essence of competitive advantage. Strategy is about winning, not just participating.

Unique value can be delivered in two ways: doing what no one else is doing, which competitors tend to copy over time; or doing what others are striving to do but doing it measurably better.  Here is the Winning Proposition for Google’s search business:

“We organize the world’s information and make it universally accessible and useful.”

Competitors are no doubt trying to excel at these same three things. But Google thrives by doing them better than anyone else. This provides a unique margin of difference to customers. Through their commitment to this Winning Proposition, Google has captured 90% of the search market, with profitability to match.

2) “We are in the B to C business”

Companies typically classify their business according to whether it is B to C (Business to Consumer) or B to B (Business to Business). While it is important for firms to define which customer segments they will serve, I suggest this language cultivates exactly the wrong mindset.

Success occurs outside the boundaries of an organization, not inside. Inside is where we mobilize the resources to compete effectively on the outside. The essential discipline is Outside-In thinking. These traditional phrases encourage the opposite – Inside-Out thinking. Reinforcing this bias, companies talk of designing their “Supply Chain.” When this kind of Inside-Out language becomes pervasive, organizations start losing intimate connections with their customers.

The direction in the flow of information has reversed. Data now floods outwards from buyers to suppliers. Customers leave their digital footprints on the likes of Facebook, Google and other media sources about their habits, attitudes and preferences.  To succeed, organizations must also reverse direction from make and sell to sense and respond processes.

Leaders are constantly urging their employees to be “customer centric”. But when their language contradicts this approach, the wrong thinking follows. As Jeff Bezos warned the employees at Amazon, “If we start to focus on ourselves, instead of focusing on our customers, that will be the beginning of the end.”

What is the right Outside-In language? I suggest two changes to begin with. Both emphasize that competitive initiatives must flow from customer preferences:

– Ditch the “Business-To-Customer” terminology and adopt a “Customer-To-Business” mantra instead.

– Start by mapping the customer’s “Consumption Chain” first and then convert that into an efficient “Supply Chain” afterward.

The call to action is not just customer centricity. It is customer empathy.

3) “Our sole purpose is to create shareholder value”

This mantra postulates that the primary responsibility of a corporation is fealty to the owners of the stock.

Legal issues aside, this is a confusing directive to employees. If you tell them their main task is to create shareholder value, what exactly are they supposed to do on Monday morning? It’s like a coach telling a tennis player to focus on the scoreboard rather than the ball.

This formulation also represents a false choice between investors and the other stakeholders for whom value creation is necessary for success. As such it misdirects executive behavior. 

To make my case, let me quote Sam Palmisano, the former CEO of IBM. Palmisano made it an article of faith that in any strategic discussions every executive in IBM must be able to offer clear answers to four questions:

  1. Why should customers choose to do business with us?
  2. Why should investors choose to give us their money?
  3. Why should employees choose to work for us?
  4. Why should communities welcome us in their midst?

Palmisano’s aim was to demonstrate that these stakeholders are interconnected, and that causation is involved:

  • Investors place their bets with companies that are gaining customers and dump the stock of companies that are losing customers. Think Apple vs. Nokia and Blackberry.
  • Happy employees are most likely to create happy customers. Think Southwest Airlines and Starbucks.
  • Companies that blight their communities will not only incur legal liabilities, but they will also pollute their own culture and fail to attract the best talent.

The US Chamber of Commerce has at last embraced a multi-stakeholder philosophy (but not without controversy). They said it is necessary because all these stakeholders are important. That’s true, but I think it misses the main point. Many things can be important but if they are not related to each other there is no synergy between them.

I think Palmisano got it right. The synergy between these stakeholders is profound. Creating value for shareholders involves managing a classic input/output process. Shareholder value is the outcome of generating value for the other three stakeholders. Indeed, shareholder value is impossible to attain without mobilizing those inputs.

4) “We are a Not-For-Profit organization”

This self-description is almost universal in the non-profit sector.

I have a great admiration for these organizations and have worked with many of them. But defining themselves in terms of what they are not, is to say the least, unhelpful. It’s like someone named Mary introducing herself to others by saying, “I’m not Cindy.”

The point is a serious one. This negative description is legalistic and internally focused. It does not engender any meaningful strategic dialogue or reveal a clear purpose.

At the start of my engagements with these organizations I ask them to change their language from, “We are a non-profit organization” to “We are a for-benefit organization.” This change in terminology instantly transforms their conversations into a strategic mode and impels them to confront these important questions:

– Who are the beneficiaries we seek to serve?

– What are these beneficiaries’ most important needs?

– How will we satisfy those needs in a superior way?

This change in framing produces an understanding that these organizations exist, not to avoid a profit, but to create superior value for the beneficiaries they seek to serve.

5) “Our business has become commoditized”

Competition is interactive, not static. Rivals copy each other. When industries mature and customer solutions aggregate around a small set of core benefits (e.g., airlines focusing on safety, timeliness and comfort), it becomes common for participants to throw up their hands and say, “We are now in a commodity business.”

This is nothing short of a copout. It says to employees, “We must now abandon the pursuit of value creation and compete on price.” It’s true that when all things are equal, price rules. Our task, therefore, is to make them unequal.

There is no such thing as a commodity. At either end of any transaction are human beings having an experience, whether you intend it or not!

Take the Chicago Board of Trade. It is a commodities exchange. This means that by law all the brokers sell the same things, whether they are soyabean futures, wheat futures or countless others. Broker commissions are largely the same. But some brokers are much more successful than others over long periods of time. Why? Simply because of better service, such as superior intelligence reports, rapid responsiveness, etc. – benefits that transcend the product itself. Those that see themselves as just selling commodities are the losers.

Amazon’s Winning Proposition for its online retail business is instructive.

“We make it easy for people to buy things by offering a wide range of products with great prices and fast delivery.”

Amazon doesn’t sell a single unique product. You can buy identical products from any mass merchandizer. They differentiate themselves through outstanding service. They were the first to introduce customer reviews for their products, offer the convenience of “one click” shopping, and they wowed their customers with Amazon Prime that provides 2-day free delivery for $119 a year regardless of the volume of purchases. With each innovation they have made it easier for people to buy things and customers have responded accordingly.

The way we frame a challenge determines not only how effectively we make daily decisions but also the big strategic ones that can make or break an organization. The power of framing is enhanced when we describe it in a picture, story or metaphor that endures in the hearts and minds of employees.

The chief executive in one of my seminars was asked what it was like to lead a large, complex organization.  He explained that a leader’s decisions are like turning the large wheel on a gear box. He moved to a flip chart and sketched a gearbox. Pointing at it, he said, “Every time I turn that big wheel just one notch, all the smaller wheels below will spin faster and faster. Those smaller wheels are you and your teams. My job is to turn that big wheel on just the right issues.” Then he paused and added, “The role of a gearbox is to transfer power. All of you also have your hands on a big wheel. And you too must turn that wheel on the right issues that align with mine. That will ensure we achieve unity of action on the few things that matter most.”

The image stuck, and this guiding principle has become known in the company as “The Parable of the Gearbox.”

Posted by Willie Pietersen at 5:21 PM

The Truth About Priorities: Five is Probably the Wrong Number

Things that matter most must never be at the mercy of things that matter least — Goethe

Strategy, above all, is about defining the right priorities. For a long time, I assumed, in line with conventional wisdom, that the optimal number of priorities is five. I now believe that I was wrong. Of course, this is not an exact science, but the evidence shows that a lower number is  likely to be much more effective.

The need to prioritize arises from the inescapable reality of limited resources. These resources fall into three categories:

– Material (money, physical assets)

– Temporal (time)

– Human (knowledge, creative energy, commitment)

The law of limited resources forces us into a zero-sum game. Every additional thing we do subtracts energy and effort from everything else.

During Apple’s dark days in 1996, I had dinner with an Apple executive. “What are the chances that Apple will recover from its decline?” I asked. The answer was stunning. “Zero,” he replied. “Apple is as good as dead. We are just awaiting the funeral.”

Steve Jobs returned to the company in 1997 and, against the odds, rescued Apple from its death spiral. Commentators mostly laud him for his innovative flair and aesthetic sensibilities. These no doubt played a role, but above all was Jobs’ ability to focus on very few things and exclude the rest.

The first thing Jobs did was reduce Apple’s bloated product line by 70%  –  to just two desktops and two portable computers. All Apple’s resources and the commitment of its people were focused on that limited range of activities. This convergence of energy was the springboard for the company’s spectacular success. Jobs understood the recipe for harnessing the power of focus: subtract first, then multiply.

The renowned military expert, Antoine Jomini, defined strategy as “The concentration of mass upon critical points.” It is all about leverage.The so-called Pareto Principle explains the logic as follows:

– There is invariably an imbalance between inputs and results

– The majority of inputs typically have little effect

– A small minority of inputs make a disproportionate difference to the outputs

– Identifying and leveraging these “vital few” is essential for success

The Pareto principle has come to be known as “the 80/20” rule. Here are some examples that illustrate this phenomenon:

– 20% of software code drives 80% of the usage

– 15% of the world population uses 80% of the energy

– 25% of the world population owns 80% of the wealth

– 28% of beer drinkers consume 80% of the beer

The key take-away is that there is no 50/50. To have the right priorities, we need to understand the few things that are most important. Then we have to achieve unity of action by keeping those main things the main things. That goes to the heart of functioning strategically.

In my strategy workshops up to now, I have emphasized, “No more than five” priorities. But I’ve noticed that participants fall prey to the “anchoring” effect and become fixated on reaching five. When they get to three or four, they begin to ask themselves the futile question “what more can we think of?” as they stretch to reach five. In doing so, the whole discipline of focus gets lost and it becomes a numbers game. Afterwards, few of them can recite all five without a “cheat sheet.”

Where does this orthodoxy of five priorities come from? One much quoted source is a 1956 article by psychologist George Miller called, “The magic of the number seven, plus or minus two.” This article purported to show that most people can remember about seven items in serial-order memory tasks. Take away two, and you are in safe territory with five!

But Nelson Cowan, Professor of Psychology at the University of Missouri, has pointed out the flaw in this logic. He argues that in Miller’s experiments, people were able to recall seven items simply because of “chunking” into smaller groupings. For example, a seven-digit phone number is more easily remembered as three chunks: 246-89-21. Cowan has studied what he calls “working memory” – “The small amount of information that can be … accessible in order to be used in ongoing mental tasks.” His conclusion? “Our focus of attention is limited. People can follow a maximum of four objects and sometimes fewer.”

There is strong evidence to support Cowan’s conclusion.

  • A survey of 1,800 global executives by Paul Leinwand and Cesare Mainardi found that as the executive team’s priority list grows, their company’s revenue growth declines relative to its peers. The reverse is also true. They found that organizations with a maximum of three priorities were most likely to achieve above average growth.
  • In an article in the Sloan Management Review, Donald and Charles Sull and James Yoder cite a large survey showing that in firms with five priorities, only one-quarter of the managers could list three of them.
  • Finally, in a study of 150 hospitals, Wharton professor Drew Carton found that when hospitals had more than four core values, no improvements were achieved for reducing heart attack readmissions or increasing return on assets.

All said, we have good reason to contest the efficacy of five priorities. They become a wish-list that few can remember, let alone act on. We vastly underestimate the amount of simplification, synthesis and repetition that is required for employees to buy into even a small set of ideas. The weight of evidence suggests that the degradation of working memory is not linear; it is exponential. Going beyond four prioirities risks a wipeout.

Robert Iger served as the CEO of The Walt Disney Company from 2005 to 2020. During his tenure, the company’s market capitalization increased from $48 billion to $257 billion. He tells the story in his book, The Ride of a Lifetime.

On the lead-up to his appointment, the board asked Iger to define his priorities for the future of the company. He started to make a list, but when he got to five, he realized, “I hadn’t prioritized any of them… My overall vision lacked clarity and inspiration … I quickly landed on three clear priorities. They have guided the company since the moment I was named CEO.”

Here, in summary, are the priorities Iger presented to the board:

1) We must devote most of our time and capital to the creation of high-quality branded content. Great brands will become even more powerful in guiding consumer behavior.

2) We must embrace technology to the fullest extent, first by using it to create higher quality products, and then to reach consumers in more modern, more relevant ways.

3) We must become a truly global company by penetrating certain markets, particularly the world’s most populous countries, like China and India. 

Iger goes on to say, “The future was about organizing the entire company’s mission, all of our businesses, and every one of our 130,000 employees around these three priorities.”

Note the stark clarity and memorability of Iger’s three priorities – content, technology, globalization. They fit together as an integrated story. He doesn’t just list them; he explains their strategic logic. Most important, he doesn’t smother them by adding to them.

Determining the “right” number of priorities is not a mathematical formula, it is a cognitive one based on the limits of working memory. People can more easily internalize and act on priorities when we can weave them together into a compelling story like Iger did. When we we stretch the list, we lose the story.

Let me illustrate the impact of focus with a personal gardening story. I had planted geraniums on the balcony outside my home office in the hope of beautifying my view. Despite giving them plenty of care and feeding, they looked pretty miserable. I’m no gardener, so I appealed to my wife, Laura, for help. She grabbed her gardening shears and cut away large parts of these ailing plants. “What on earth have you done?” I asked her, looking in dismay at the few stems that remained. “I have released the power of pruning,” she replied. “Just wait a week to see the benefit.” Sure enough, one week later I had a bountiful array of geraniums, much admired by my guests and a source of pleasure for me.

The geranium example illustrates a universal law. Whenever you remove the unproductive parts of any system, all its remaining life forces will be concentrated on the few things that matter most and that system will flourish, whether it is your garden or your business.

Posted by Willie Pietersen at 11:41 AM