Thursday, May 30, 2013

Plan for Failure to Achieve Success


Last week I pointed out that business success requires more than a good plan. I said that the end-to-beginning planning process, if done well, would identify all of the challenges that would need to be dealt with to be successful. Once identified, decisions must be made on how to address these obstacles to a plan’s successful implementation.

There are some that will tell you that what will make the difference in these situations are managers that are critical thinkers. Theoretically a critical thinker is someone who is presented with an argument and can determine if it is true, sometimes true, partially true or false. Other definitions can be more detailed but this is essentially the gist of critical thinking. This simple definition assumes that the thinker sets aside emotional issues and any form of bias.

This is where the real difficulty lies. To be successful in assessing potential challenges a manager must be completely objective. Let’s take a simple example. Suppose you have planned to increase revenues by 5% for the upcoming year. To achieve this you might:
           
1)   Increase rates by 5% and maintain current sales volume levels,
2)   Increase volumes by 5% with no rate increase,
3)   Increase some mix of rate and volume,
4)   Add new products,
5)   Add new customers.
6)   And so on.

Let’s say that the planning process has uncovered a potential challenge to the 5% revenue increase - a new competitor with similar products offering discounted rates in order to gain market share. You are now faced with determining which mix of actions will most likely work.

If your company is the market leader with a strong reputation and image you may decide that the competitor’s strategy of offering low rates will fail and you choose to increase rates by 5% with no other actions required. You make this decision because there is a history of companies using these strategies to gain market share in the past and they have all failed to have any impact on your ability to grow revenues.

It is not uncommon for managers to choose actions based on limited and biased information. In using this approach a manager may rely on past experience and his/her belief that the outcomes in the past will hold true for the future. Indeed projections based on history will work until they don’t work – then the outcome may have very negative consequences.

Some would say that a critical thinker would be able to assess the argument that customers would accept a 5% rate increase without reducing volume and determine if this claim true or not. Then the best option for achieving a 5% rate increase would be identified and this action would be taken. Problem solved.

Here is the problem; this argument can only be answered correctly if perfect information is available. In fact anyone can determine the correct answer if perfect information is available. Unfortunately, when it comes to projecting the future or human behavior there is no source that can provide perfect information.

Managers are forced to use history, intuition, biases and beliefs coupled with as much data as is available to make critical decisions. Over the years different mathematical projection techniques and gaming theories have been developed to help managers better predict outcomes but they still do not provide perfect information.

So what is a manager to do?

The end-to-beginning process can help identify challenges or obstacles in reaching a planned goal. Successfully addressing challenges requires developing a list of possible outcomes for each challenge and identifying the worst outcome. Once identified, a contingency plan should be developed that allows the overall objective to the plan to be achieved even if the worst possible outcome materializes. In our example, if the rate increase results in a volume decrease then a plan should be in place to expand the customer base that allows the overall 5% revenue increase. This is a contingency plan that is ready for implementation should the need present itself.

The problem with contingency plans is that they take time to implement and they may be overly optimistic with respect to providing needed results.

Rather than having a shelf full of contingency plans it is probably better to develop plans based on a certain degree of failure in addressing identified challenges. In our example it might mean implementing a 5% rate increase plus setting a volume increase of 3% and developing new products and customer segments for yet another 5%. In other words plan for failure to achieve success.



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