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Planning for the Plans to Change
The kid looked out of place. He wore a hooded sweatshirt, dirty jeans, and T-shirt with something pithy written across his chest. He was slouched over in deep thought, so I couldn’t read what the shirt said. The wrinkled clothes, dark circles under his eyes, and apparent lack of self-awareness made me think that he hadn’t slept in days. I figured he was a courier or bike messenger.
We were all in a small waiting room; my business partner, the kid who hadn’t slept in days, and me. The posh office was the headquarters of Accel Partners, a multibillion-dollar venture capital firm in downtown Palo Alto. They’d funded start-ups like Macromedia, Rhapsody, and Veritas Software. We were there to pitch our own start-up, an online tax preparation company called TaxNet. We’d had a successful first year, had more than 120,000 customers, and now needed funding for product development and aggressive marketing. We were making the rounds in Silicon Valley, up and down Sand Hill Road in the hope of getting $20 million to fulfill our strategic plan.
As we waited, the kid leaned back in his chair, and I could see that his T-shirt read CODE MONKEY. Aha, I thought. He wasn’t a courier, he was a programmer, and he was there to pitch a business just like we were. He was the competition.
“Do you have a company?” I asked him.
“A company? No, not really,” he answered, never looking up or making eye contact. Then he thought for a moment and said, “Well, sort of…I guess.”
Before I could probe any further, Andy walked into the room. Andy was an analyst with Accel, and Tom and I stood up to shake his hand; the kid did not.
“We’ll be ready for you guys in a few minutes,” Andy told us. Then he turned to the kid and said, “Come on in.”
Later in the day, Tom and I learned that Accel had approved the funding of the kid’s “sort of company” and he had been there to sign the paperwork and get $12 million for a minority share of his start-up. I remember Andy trying to explain the business model to us. It didn’t really make sense to me. When I asked how it made money, Andy said it didn’t. It seemed absurd, that Accel would take a minority position in a company with no revenue stream. It also made me think that we had a much better idea than the kid who hadn’t slept in days.
I didn’t know it at the time, but I had just witnessed a historic moment in the history of Silicon Valley. Today, Accel’s $12 million investment is worth billions, and the “sort of company” is better known as Facebook, while the kid is now a multibillionaire, better known as Mark Zuckerberg. Today, whenever I see an interview with him or a mention of him in the press, I think back to that day and then ask myself this question: How did Zucker-berg get from the waiting room where I met him to a place on the world stage where his idea is used as a means of communication between friends and family while at the same time it’s being used to engineer the nonviolent overthrow of oppressive government regimes? Or, more simply: How did Facebook evolve so successfully?
The story of Facebook is well known. Hell, it was turned into an Oscar-winning screenplay. So there’s no need to recount it all. What is especially interesting and does bear attention here is the methodology that Zuckerberg used to drive the evolution of his business model. You see, Facebook didn’t just appear fully formed in his mind one day; and, contrary to popular belief, he didn’t steal the idea for it. He followed an evolutionary process to build the site, a practical way to manage the day-to-day operations of his business that was combined with a deeply theoretical and strategic understanding of social networking. From the beginning, Zuck-erberg was involved in the development of new tactics and new features, writing code, identifying problems, and then developing innovative solutions for solving them. He still is. Put simply, he is very tactical. At the same time, he was theorizing about social networking and developing a particular hypothesis about it. He is also very strategic. It’s those two qualities that allow him to intelligently make continued modifications to his business model, both tactical and strategic, that are incredibly effective.
Today, the business environment is changing so quickly that such a form of adaptive management is needed to keep up with it. Product life cycles that were once measured in decades are now being measured in years, even months. The average iPhone app stays on the bestseller list for a few weeks, then becomes obsolete. Technologies are being developed that constantly create new business models and in the process destroy old ones. Things are happening so fast that by the time your CEO signs off on his strategic plan, it’s out of date and in some cases even archaic. Businesses must make the strategic planning process part of the implementation process, so that business plans can adapt to the environment, the way Facebook does. If they don’t, they’ll end up as a footnote in the history of failed business models.
The history book of business contains a long chapter on companies that failed to adapt as the world changed around them. Take a case in point. Growing up in the suburbs of Boston, I once had aspirations to work at the Polaroid Corporation. For decades it owned the instant photography business, and it was known as one of the best employers in Massachusetts. Then, in the 1990s, something happened: digital photography. At first digital cameras were very expensive and the quality of their photos was less than stellar, so they didn’t appear to be a serious threat. But as the decade wore on they got cheaper and better, and Polaroid’s sales began to stagnate. In 1995, the company hired a new CEO to devise a strategy for the problem. In the next three years he cut costs, reduced the staff by more than three thousand employees, and managed to roll out more than sixty new products. But despite all this, instead of adapting to the new technology, the company stayed focused on its existing model. “Some people think photography is going to go away as everything in our industry becomes digitized,” the new CEO said. “But I disagree. I think analog photography will endure, because it still satisfies many users, and digital imaging businesses will grow up around it, creating a much bigger, faster-growing market.” So, while other companies developed new digital cameras, Polaroid created a low-priced analog camera called the One Step and products for specific segments, such as the Barbie Instant Camera. It didn’t work, and the company filed for bankruptcy in 2001.
In the last few years, the chapter on failed business models has expanded to include names such as Circuit City, General Motors, and Blockbuster. Each of these companies hung on to an obsolete model and so failed to develop a new plan—a Plan B—that was best suited to the new world. In hindsight, it looks as though they just made some bad predictions and some bad decisions, and we might conclude that the companies must have been run by fools. But that’s not the answer. Fools were not running the companies. It was the process they used that was foolish, not the people operating it. It’s a process that was developed in a simpler time, when things didn’t happen so quickly and companies had years to make adjustments. Those companies were working from a plan that was obsolete and didn’t develop the management mechanisms that would have allowed for modification. Employees rigidly stuck to Plan A because that’s what they’d been taught to do. Now, however, the old-school strategic planning process is dead and a new one is needed. The road to Hell, as they say, is paved with good intentions.
A few years ago I traveled the country promoting my first book, Borrowing Brilliance, about innovation and creative thinking. While on tour, I visited with hunreds of business executives and was invited to speak at places like Google, Boeing, Clorox, General Electric, Microsoft, and the U.S. Naval Postgraduate School in Monterey, California. I met with representatives of more than fifty different organizations, big and small, and had many interesting conversations with many interesting people. And in those conversations, I kept hearing the same thing over and over: “We’ve got a lot of good ideas; we just don’t have the time to implement them.” It was a strange experience for me, hearing the same thing from each person, even though each came from a different marketplace. I instinctively knew that this was the seed of my next book. I had to get to the bottom of it. My speeches led to consulting work, and it was in the course of that work that I realized that something was terribly wrong with the strategic planning process, and it appeared to be wrong in lots of different places.
For the next few years I became a student of strategic thinking. I read The Art of War by Sun Tzu and On War by Carl von Clausewitz. I visited the U.S. Army Command and General Staff College at Fort Leavenworth. At the Pentagon, I spoke with military theorists and learned how they thought about strategy and tactics. I studied the works of Michael Porter, the Harvard professor who wrote the seminal book Competitive Advantage. I interviewed dozens of Fortune 500 executives and dozens of entrepreneurs. I continued to watch Zuckerberg and saw how Facebook evolved into a global phenomenon.
I also went back to the history books and looked at the incredible success of the Apollo program, which had landed a man on the moon, and wondered how its developer, NASA, could produce the space shuttle program, which by most accounts was a strategic failure. What went wrong? I wondered. I was a former aerospace scientist and had worked on the space shuttle and the International Space Station earlier in my career. And, of course, I reflected on my own, far less dramatic, successes and failures as an entrepreneur and in my newfound pursuits of rock climbing and mountaineering, which provided metaphorical insights.
Through this research I identified two key reasons why the prevailing approach to business planning is so flawed. First, leaders and companies are using a top-down methodology to formulate and implement their strategies. Little consideration is given to tactics. Yet when plans fail, they fail on a tactical level. And second, they don’t provide a mechanism for making modifications in the field or on the fly. Instead, line managers appear to be blindly and rigidly sticking to the corporate plans as dictated to them, even when the tactics aren’t working. Why? I wondered. The answer lay, I realized, in the history and associated legacies of strategic planning.
The concept of strategic development was first popularized by Alfred Chandler, in a 1960s book called Strategy and Structure. He defined corporate strategy as a set of goals and objectives, a plan of action to achieve those goals, and the resources needed to implement the plan. Others built on his work, most notably the management guru Peter Drucker, who introduced the concept of management by objectives (MBO), which became popular in the 1970s and 1980s and is still used today. By the end of the 1980s and into the 1990s, Michael Porter became the leading strategic thinker with his series of books. He introduced the concept of five forces that drive strategy and the concept of generic strategies, further popularizing the idea of top-down thinking.
It was all good stuff, and it worked well in practice until the world started changing so quickly. When things move slowly, a top-down process works well because a leader can make annual adjustments to the plan. The top-down approach works poorly, though, when things happen quickly. Either no adjustments are made, or, if they are, they’re made with no regard to how they align with the company’s overarching strategy. Thus companies end up with business models that are obsolete or incoherent. Face-book has evolved so successfully, in large part, because Zuckerberg is both the CEO and the person making the tactical adjustments. The same is true for Steve Jobs over at Apple. And it was true at Microsoft when Bill Gates was there.
So the solution to this problem lies in a new way of managing your business. It’s a process called “adaptive management.” What some business leaders, including Zuckerberg and Jobs, have been doing with great success, I propose we all begin doing by adopting a series of principles and developing a series of processes that will enable our businesses to be adaptive as well. If evolution is the problem, adaptation is the answer and what this book is about. It’s how we get from Plan A to Plan B.The Principles of Adaptive Management
The premise of this book is that success lies in Plan B, the evolutionary descendant of your original plan, which is arrived at through a fusion of strategic planning and tactical execution. Adaptive management is the process of making real-time modifications to the original plan so that it survives and thrives as the business environment demands. Because things happen so quickly these days and we can’t accurately predict how the world will unfold, we have to devise plans that are constructed with the idea that they are made to evolve; that they must be fluid, not written in concrete.
The process of adaptive management is based on the scientific method, in which we develop a clear hypothesis about our business and how we should be developing it, then use that to construct a game plan that aligns our strategy and tactics and articulates clear objectives and metrics so that we can test the hypothesis as we execute and identify the ways in which we should be making changes. This approach allows us to revise plans in real time and give our line managers the ability to improvise intelligently when the forecast is wrong. There are eleven principles of adaptive management that allow us to do so, and the rest of this book is about this process and these eleven key principles.
The first is The Principle of Problems. It tells us that a business model is the solution to a hierarchy of problems. The more problems you need to solve, the more complex your plan must be. Your strategy should be based on a primary problem and your hypothesis for solving it. For Wal-Mart, keeping low prices low is the problem and its business model is designed to solve it. For Polaroid, instant photography was the problem and analog film was the solution. And for H&R Block, preparing your taxes so that you get the maximum refund is the problem and a staff of a hundred thousand tax preparers is the solution.
The second principle is a corollary of the first. It’s called The Principle of Solutions. Tactics are the things we do to solve our problems. The principle says that the effectiveness of these tactics will naturally degrade over time, so adaptive management is the constant search for new and improved solutions to our problems, new and improved tactics. Each tactic, in turn, will create a new set of problems and thus create a new set of solutions. For example, if direct mail is the solution (tactic) to your sales problem, this creates a whole new set of problems: What list should we mail to, what offer should we make, what package should we send, when should we send it?
The Principle of Force says that we need to choose our competitors carefully and compete in a place where we have superior forces. For example, in the beginning, Facebook chose to compete only at colleges and not to battle with Myspace as an open social network until it had the firepower to do so.
The fourth is The Principle of Concurrent Thinking. Which comes first, strategy or tactics? Should the development of a plan be a top-down process (strategy first) or a bottom-up process (tactics first)? The answer to this age-old question is that it should be both. Concurrent thinking is the ability to perceive things from the top down (strategically) and, at the same time, see how things fit together from the bottom up (tactically). That’s how we create strategic alignment, a fusion of strategy and tactics.
The fifth is The Principle of Cascading Objectives. We must turn our strategy into a set of specific objectives and metrics associated with them. Since our model comprises a hierarchy of problems, our objectives will conform to that hierarchy. I refer to this as “cascading objectives.” Robert E. Lee’s objective of taking Little Round Top at Gettysburg cascaded from the objective of breaking the Union line at Cemetery Ridge since Little Round Top provided a sniper vantage point that could protect the Union line.
The sixth, The Principle of Paper Plans, states that the plan itself is worthless. The act of planning is important, not the plan, because it educates you and your field managers and allows you to make intelligent adjustments during the implementation. In today’s world, paper plans become obsolete the moment you print them.
The seventh is The Principle of Multiple Futures. It’s impossible to predict the future in the long term, because business operates in a chaotic environment in which there are multiple competitors and multiple customers, all interacting in ways that are impossible to quantify. So instead of trying to predict a single outcome, the adaptive manager considers multiple scenarios, which allows him to construct an inventory of solutions and gives him the insight and intelligence to make real-time adjustments to his plan. It’s because of multiple futures that we have the need for adaptive management in the first place.
The eighth, The Principle of Doubt, says that suspicion is the driver of the evolution of a business model and adaptive managers need to doubt their own forecasts and business models. That’s the only way we can ensure intelligent adjustments. Intel president Andy Grove put it best when he said, “Only the paranoid survive.” Don’t be fooled by the power of positive thinking; it needs to be tempered with negative thinking.
The ninth is The Principle of Correlation and Causation. A strategy must be based on a hypothesis for solving a problem. The hypothesis is based on cause and effect. In other words, we develop tactics that drive a certain effect. We use correlation to measure the results, but we need to be careful because we can be misled by lurking variables and faulty data. Correlation doesn’t always mean causation.
The tenth one, The Principle of Alterations, tells us that there are two subprinciples that a business model uses to evolve from Plan A to Plan B. The first is The Principle of Strategic Alterations, and it’s being followed when we use our existing tactics to solve a new problem. Arm & Hammer recommending using baking soda to absorb refrigerator odors is a form of strategic evolution. The second is The Principle of Tactical Alterations, and it’s being followed when we come up with a new tactic to solve an existing problem, like Gillette adding more blades to its razors.
The eleventh principle is The Principle of Strategic Debate. Most large organizations demand blind adherence to the corporate mission statement and corporate plan. This kills the ability to evolve by creating corporate rigidity. Instead, adaptive managers encourage dissension and debate, which in turn creates a culture intent on improvement.
Adaptive management is both a way of thinking—a psychology—and a way of doing—a series of processes and procedures. “Everyone’s got a plan,” Mike Tyson once said, “until they get punched in the face.” Our goal is to make smart decisions even after we’ve been hit in the face. No doubt Facebook has been punched a few times and had to make adjustments to its model. Later, we’ll explore how the kid who hadn’t slept in days rolled with these punches, counterpunched, and was able to come out on top by making modifications to his original plan.
But first it’s important to stress that the need to adapt doesn’t mean that having a well-constructed original plan isn’t important. Having the right type of Plan A is critical, because, if crafted appropriately, it provides the seeds of evolutionary growth. This is the subject of our first chapter.
© 2011 David Kord Murray