CSO NY 20111

1. WhWhy
StrategiesStrategies
FailFail
Human strategists,Human strategists,
biased tools
Mark Chussil
Founder and CEO
Copyright © 2011
Advanced Competitive Strategies, Inc.

2. Wh t ld d ?What would you do?
Sales managers say they sell a commodity on price.
They say they need full factories to be profitable.
The industry suffers from losses and overcapacity.
Source: Real‐life business war game, Fortune 500 company

4. Wh d t t t i tWhy do smart strategists
choose bad strategies?g

5. Today’s quizToday s quiz
(don’t look online!)
 What was Apple’s revenue What was Apple s revenue
according to 2011 Fortune 500?
 What was the population of Peru What was the population of Peru
in 2009?
 H i t t d How many minutes separated
the champion from second place
in the 1903 Tour de France?
This exercise was inspired by Decision Traps, by Jay Russo and Paul Schoemaker

6. Today’s quizToday s quiz
(don’t look online!)
 What was Apple’s revenue $65 2 billion What was Apple s revenue
according to 2011 Fortune 500?
 What was the population of Peru
$65.2 billion
(Microsoft: $62.5 billion)
29 164 883 What was the population of Peru
in 2009?
 H i t t d
29,164,883
(3,900,000 in 1909)
169 i t How many minutes separated
the champion from second place
in the 1903 Tour de France?
169 minutes
(In 2010: 20 seconds)
This exercise was inspired by Decision Traps, by Jay Russo and Paul Schoemaker

7. A B C D E F
1 Sales growth: 4.00%
2 Price growth: 2.50%
3 (estimate)
4 PRO FORMA ESTIMATES 2010 2011 2012 2013 2014
5 Unit sales 1 000 1 040 1 082 1 125 1 170
— (forecast) —
5 Unit sales 1,000 1,040 1,082 1,125 1,170
6 Unit price $500 $513 $525 $538 $552
7 REVENUE $500,000 $533,000 $568,178 $605,678 $645,652
8
9 Purchases $144,627 $154,172 $164,348 $175,195 $186,758$ , $ , $ , $ , $ ,
10 Direct labor 97,665 104,111 110,982 118,307 126,115
11 Indirect labor 55,257 58,904 62,792 66,936 71,354
12 Distribution 26,235 27,967 29,812 31,780 33,877
13 Depreciation 17,634 18,798 20,039 21,361 22,771
Ad ti i 12 600 13 432 14 318 15 263 16 27014 Advertising 12,600 13,432 14,318 15,263 16,270
15 Commissions 27,746 29,577 31,529 33,610 35,829
16 Promotion 10,084 10,750 11,459 12,215 13,022
17 Market research 10,078 10,743 11,452 12,208 13,014
18 R & D 15,073 16,068 17,128 18,259 19,46418 R & D 15,073 16,068 17,128 18,259 19,464
19 Other 32,546 34,694 36,984 39,425 42,027
20 TOTAL EXPENSES $449,545 $479,215 $510,843 $544,559 $580,500
21
22 PROFIT $50,455 $53,785 $57,335 $61,119 $65,153
Further reading: “All About Models”
http://whatifyourstrategy.com /blog/

8. S 2Strategy 1
CEO Steve Burd
Strategy 2
CEO Craig Herkert
“Had the chain moved quicker to
lower prices, it would be ‘doing a
bit better than we are now.’”
“Increased use of promotions
‘destroyed our gross margin…
More items really cheap don’t
bring in more people.’”
Source: The Wall Street Journal, October 16, 2009

9. Wh t t k d?Whose strategy worked?
Safeway Supervalu
2010 2009 2010 2009
10‐year total return ‐9.1% ‐4.6% ‐0.9% ‐1.7%
Data from Fortune.com
y p
f

10. Wh t t k d?
Safeway Supervalu
Whose strategy worked?
2010 2009 2010 2009
Total shareholder return 7.8% ‐8.9% ‐21.9% ‐8.8%
10‐year total return ‐9.1% ‐4.6% ‐0.9% ‐1.7%
y p
Data from Fortune.com

11. Wh t t k d?
Safeway Supervalu
Whose strategy worked?
2010 2009 2010 2009
Return on sales 1.4% ‐2.7% 1.0% ‐6.4%
Return on assets 3.9% ‐7.3% 2.4% ‐16.2%
y p
Return on equity 11.8% ‐22.2% 13.6% ‐110.6%
Total shareholder return 7.8% ‐8.9% ‐21.9% ‐8.8%
10‐year total return ‐9.1% ‐4.6% ‐0.9% ‐1.7%
Data from Fortune.com

12. Wh t t k d?
Safeway Supervalu
Whose strategy worked?
2010 2009 2010 2009
Fortune rank #60 #52 #61 #47
Sales ($billion) 41.1 40.9 40.6 44.6
y p
Profits ($million) 590 ‐1,098 393 ‐2,855
Return on sales 1.4% ‐2.7% 1.0% ‐6.4%
Return on assets 3.9% ‐7.3% 2.4% ‐16.2%
Return on equity 11.8% ‐22.2% 13.6% ‐110.6%
Total shareholder return 7.8% ‐8.9% ‐21.9% ‐8.8%
10‐year total return ‐9.1% ‐4.6% ‐0.9% ‐1.7%
Data from Fortune.com

13. Wh t t k d?
Safeway Supervalu
Whose strategy worked?
2010 2009 2008 2007 2010 2009 2008 2007
Fortune rank #60 #52 #50 #55 #61 #47 #51 #62
Sales ($billion) 41.1 40.9 44.1 42.3 40.6 44.6 44.0 37.4
y p
Profits ($million) 590 ‐1,098 965 888 393 ‐2,855 593 452
Return on sales 1.4% ‐2.7% 2.2% 2.1% 1.0% ‐6.4% 1.3% 1.2%
Return on assets 3.9% ‐7.3% 5.5% 5.0% 2.4% ‐16.2% 2.8% 2.1%
Return on equity 11.8% ‐22.2% 14.2% 13.3% 13.6% ‐110.6% 10.0% 8.5%
Total shareholder return 7.8% ‐8.9% ‐29.7% ‐0.3% ‐21.9% ‐8.8% ‐59.8% 6.7%
10‐year total return ‐9.1% ‐4.6% ‐8.7% 1.0% ‐0.9% ‐1.7% ‐3.9% 8.6%
Data from Fortune.com
Safeway CEO, Steve Burd, all years.
Supervalu CEO, Craig Herkert, since 2009. Jeffrey Noddle, before 2009.

14. I h t Wh t t i f ilIn short: Why strategies fail
They’re developed by overconfident humans,
who use tools that ignore competitors and customerswho use tools that ignore competitors and customers
and that discourage investment,
and who explain complex effects
with simple causes.

15. We’re We’reWe re
stuck with
We re
not stuck with
Being human
Needing tools
Being overconfident
Needing biased toolsNeeding tools Needing biased tools

16. Why do simulations and
war games work?war games work?

17. Why do simulations and
war games work?war games work?

18. Wh t ld d ?What would you do?
Sales managers say they sell a commodity on price.
They say they need full factories to be profitable.
The industry suffers from losses and overcapacity.
Source: Real‐life business war game, Fortune 500 company

19. Wh t ld d ?What would you do?
WE SAY:
“Our competitors can’t
afford to match our price ”afford to match our price.
Source: Real‐life business war game, Fortune 500 company

20. Wh t ld d ?What would you do?
WE SAY:
“Our competitors can’t
afford to match our price ”
THEY SAY:
“We can’t afford not to
match your price ”afford to match our price. match your price.
Source: Real‐life business war game, Fortune 500 company

22. Great success
Great decisions
Great decision‐making
Great thinking

23. “Those are my principles,
fand if you don’t like them…
well, I have others.”
Groucho Marx

24. Thank you

25. Thank youThank you
Since 1992 ACS has used business war games and strategy simulators to help strategists on
six continents make or save billions of dollars.
ACS services include business war games, strategy simulators, and “how to think better”
workshops, all customized for your business.p y
Advanced Competitive Strategies, Inc.
1673A SW Montgomery Drive
Portland, Oregon 97201 USA +503.243.2586, g
info@whatifyourstrategy.com