To reap order, you must sow chaos

You can't build without destroying

His name was Lou. He was born in Mineola, New York, in 1942.

At 51, he took charge of a big, famous company with a market capitalization of $29 billion.

What he did as a CEO may seem like a massive destruction. But nine years later, when he retired, the company's market cap reached $168 billion.

You can't build without destroying.

What we destroy determines what we gain.

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Disruption requires destruction

I haven’t heard of a retail chain that didn’t oversleep the e-commerce revolution. In the early 2010s, I attended a major retail conference in Europe. CEOs of large DIY chains were proclaiming their plans to launch internet trade.

It would sound like a bold plan if we forgot for a second that Amazon had been founded 17 years earlier.

These retailers knew e-commerce was inevitable. Yet, they were afraid of undermining their existing business models.

However, business is an obstacle race with collision courses. It’s both creation and destruction.

On the one hand, it is about efficiency, well-established processes, automation, and SOPs.

On the other hand, it is about reinvention, innovation, and ingenuity.

·       You can’t launch new products without killing some old ones.

·       You can’t build a new corporate culture without destroying the old one.

·       You can’t change org structure without taking away somebody’s privileges or status.

Creation is a progressive development.

Disruption requires destruction.

Most strategies fall short of their goals because executives fail at mastering one or the other.

Good CEOs play better. Great CEOs create the game.

But even great CEOs need both creation and destruction, which is harder than it seems.

Lou Gerstner, the CEO of IBM, who I mentioned at the beginning, destroyed many things in the company:

1.     He shifted the strategic focus from selling hardware to integrated solutions and consulting.

2.     He made e-business IBM’s heart and soul.

3.     He discontinued the development of OS/2.

4.     IBM completely withdrew from the retail desktop PC market.

But these decisions allowed the company to grow.

Stopping the losses doesn’t mean starting the gains

"The essence of strategy is choosing what not to do."

Michael Porter

Knowing what to start is smart. Knowing what to stop is genius.

Everyone knows that strategy is about choosing what not to do. Few know how to choose. Let's look at the task using product examples.

Normally, a product or a business unit comes under consideration for discontinuation in two cases:

1.     The company lacks the resources to continue it, or

2.     It stops being profitable

The resource situation is always unique. However, profit is a misleading indicator in this case.

Every product can deliver business value, degrade it, or destroy it. It depends on the amount of customer value it generates.

There are two types of customer value:

1.     Threshold value

2.     Distinctive value

Threshold value is a non-unique customer value that satisfies customer needs but doesn’t provide a competitive advantage for the business.

Distinctive value represents a unique customer value that meets customer needs and provides a competitive advantage for the business.

·       If a stove (hob) that your company sells can only heat up a pot or a pan, it delivers threshold customer value. 

·       If the stove is the only one in the market that can chat with users and offer cooking tips, it creates distinctive value—of course, as long as users are actually eager to have a kitchen buddy.

If a product provides a lot of distinctive customer value, the amount of value grows, and the company’s leaders know how to increase it even further in the future, the product delivers business value. It can be unprofitable, but if it provides distinctive customer value, it most often gives you a chance to improve it.

If a product generates only a threshold value, and the company's leaders have no idea how to turn it into distinctive value in the future, the product degrades business value. It still may be profitable, but that’s just a matter of time. Soon, it will start destroying business value by sucking precious resources out of the company.

A minute spent on a product that doesn’t deliver business value will never be spent on anything else.

A product destroys business value if it delivers little or no customer value.

·       If a product delivers business value, invest in it

·       If it degrades business value, be careful with it

·       If it destroys business value, discontinue it.

Profit is merely a ‘performance bonus’ a company earns by creating distinctive customer value.

If a business process, an asset, or your org structure doesn't contribute to creating business value, it's time to act.

Check out my book Red and Yellow Strategies: Flip Your Strategic Thinking and Overcome Short-termism here. An audio version at an attractive price is also available, but here.

Pareto illusion

You have undoubtedly heard about the Pareto Principle, aka 80/20 rule.

It states that for many outcomes, roughly 80% of consequences come from 20% of causes.

For instance, 20% of your products generate 80% of your profits.

I see it differently.

In my experience, 20% of your products bring in 100% of your profits.

50% of your products or customers generate just 20% of profits.

And the remaining 30% cause 20% of losses.

Ditch products that degrade or destroy business value, and you'll improve these proportions.

A few more things:

We’ve upgraded the product section of our website. Take a look at what we offer here.

Don’t forget about the Fast-Track Strategy product!

Free checklists are waiting for you here.

You may like my second newsletter, Strategy in Three Minutes.

Read also: Nothing Leads to Long-Term Problems Like Short-Term Thinking

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