Sunday, February 21, 2010
Strategic Planning Analogy #307: Brakes or Paint
I’m currently trying to decide whether I want to sell my car soon or keep it for awhile. If I’m going to keep the car for awhile, I need to do some repair work—new tires and new brakes.
However, if I’m going to sell the car soon, I’ll skip those repairs. Instead, I’ll spend a little bit of money on the car’s appearance--like touching up some areas where the paint has chipped.
Although the touch up work would be a lot less expensive, it means I would be selling it and buying a new car, which is a lot more expensive than fixing the tires and brakes.
One of the great advantages of strategic planning is that it helps you to make the right decisions. Strategic plans give you the goals and objectives for your business. It tells you what you want to be. As a result, it is faster and easier to make decisions—just do things consistent with those strategic goals.
This is very similar to the story of my car. If my goal is to quickly sell my car, then I know exactly what to do—quit spending money on long-term repairs and put a little money into making the car more attractive to a buyer. If my goal is to keep the car for a long time, then I know what to do—invest in long-term repairs. Once I decide which goal I want, I will know exactly what to do.
So, we have a simple, two step process: determine the goal and then do the things consistent with that goal. Decisions become so much easier when you have the context of an overall goal, because a lot of options quickly fall away as no longer consistent with the goal.
But here is the interesting wrinkle…normally we think of strategic goals as being very long term—four to five years (or even much longer). However, sometimes a strategic goal can be very short term. In the example of my car, if I chose the goal of selling the car, then the time span is only a few weeks—touch up the car and sell it right away.
The same thing can occur in businesses—sometimes the goal for a business is to get out quickly. Before the housing bubble burst, a lot of people were following this type of short-term goal. They would buy a fixer-upper house, fix it up, and then quickly sell it. The strategy even had its own TV show: Flip that House. If you can flip a car or flip a house, why not flip your business?
The principle here is that strategic goals do not have to be designed to perpetuate a business for a long period of time. Sometimes the best goal is to quickly shut down a business or sell it off quickly.
This is not a strategy of defeat. It is a very viable approach to business. For example, a lot of people are well skilled at starting a new business, but not skilled at running that business once it gets large. They are better off flipping those businesses to people better skilled at running larger businesses once the start-up phase is over. There are a lot of these “Serial Entrepreneurs” in the high tech world. They start a business, sell it, then start another.
The same thing can also occur at the end of a business lifecycle. It takes different skills to thrive when an industry is in decline. Selling out to someone better skilled at this is a viable strategy.
So what can we learn from this?
1) Don’t Forget that Selling/Flipping/Shutting Down is a Viable Strategic Goal
When determining your strategic direction, don’t automatically assume that your goal is to create long-term viability. Short-term ownership may be a better option.
At the end of the day, it is all about cash flow. There may be more cash flow in getting out than in staying in. If your business is worth more to someone else than it is to you, then perhaps they will share a portion of that added value with you at the time they purchase the business from you.
Even if you lose money on getting out, if you lose less than if you stay in, you are better off. Take pride in choosing an option that optimizes cash flow, even if that means shutting a business down.
2) Waiting Rarely Makes These Strategic Approaches Better
Business is about taking risks. Not all risky ventures pan out as we had hoped when the pro formas were created. Sometimes, the problems can be fixed. Sometimes we just have to take our lumps and shut it down.
Studies have shown that one of the biggest problems in this area is waiting too long before shutting a bad risk down. Like an old car, waiting won’t make it more valuable. The value has nowhere to go but down. Cash flow is needlessly destroyed as time goes by.
It is easy to see why this happens. People get emotionally attached to businesses. Egos don’t want to admit that certain problems cannot be fixed. Careers may be threatened if the business is shut down. These cause us to procrastinate and postpone pulling the plug.
There are two ways to get around this. First, take away the negative social and emotional stigma to shutting a business down. Celebrate the wise decision in shutting something down quickly when that is the best option. Don’t punish the careers of those who make such a wise decision.
Second, set up predetermined trigger points before starting the new risky venture. If a particular trigger point is met during operations, this automatically starts a serious discussion around rapid sell-off/shut down. Trigger points help take the emotion out of the decision. A rational, predetermined approach has a better chance against the emotional tendency to procrastinate.
3) Once the Goal is Determined, Get All The Actions In Line With It
In the story about my car, if I decide to sell soon, I’m going to take radically different actions than if my plan is to keep the car awhile. The same is true for businesses. If the goal is to quickly sell/flip/shut-down, then all the actions should support that goal.
First of all, your definition of who you customer is may need to change. The primary customer is no longer the one who buys your products/services. Instead, the primary customer becomes the one who will buy the entire business. Are you doing everything to appeal to that new customer?
For example, at the height of the dotcom boom, a lot of start-ups wanted to eventually be bought out by a big firm like Cisco. The plan from the beginning was to sell out soon, so firms like Cisco were as much their target audience as product customers.
Cisco made it known at the time that they only wanted to buy companies located in one of three areas—Silicon Valley, Austin Texas, or the Research Triangle in the Carolinas. Therefore, if your goal was to quickly sell out, the decision was simple—locate your business in one of those three areas.
Investments should change when this type of goal is chosen. With my car, the investment would change from brakes to paint. On the show Flip That House, they showed which types of investments have the best quick returns to a prospective buyer.
Do the same. Alter your investments to optimize the sale, not to optimize long-term viability.
Selling or shutting down a business is not a sign of failure. It is often the wisest strategic move available. Therefore, do not forget to consider this as the proper strategic goal. And if it is the proper goal, act quickly and act properly. Change your actions to support the goal, even if it looks like an abandonment of supporting long-term viability.
Strategic planning helps determine core competencies. If your core competency involves specializing in running firms at a particular stage in their lifecycle, then do not be afraid to get out of those businesses when they migrate to the next life stage. In fact, plan it in advance, before the change occurs.