Thursday, May 13, 2010

Strategic Planning Analogy #325: We’re All Greece

Greece has a problem. For years, Greece has been very generous in its benefits to its citizens, especially those employed by the government. And, for years, Greece has been generously spending this money at a far greater rate than its income. The generosity is has come from borrowed money.

The turning point came this year when those loaning the money said they had had enough. They did not want to fund this generosity anymore because they didn’t see a path to getting their money back.

Greece was forced into a corner. The only way to fix the debt was to have austerity measures imposed from the outside lenders. The Greek citizens, used to the government generosity, rioted in protest. They still demanded the generosity.

And now it looks like Greece may just be the first in a wave of other countries who have followed the same path. What’s a leader to do?

When you live beyond your means for a long period of time, it becomes a habitual pattern. Those living this pattern come to define it as “normal” behavior—at least normal to them. There is not much incentive for change. After all, it has “worked” for a long time.

The problem is that eventually one has to pay back that borrowed money. Even if the time span for living beyond your means is long, eventually the time will run out. The creditors will eventually demand payment for all those loans—money which these people do not have. Then it becomes really messy, because the people who think living beyond their means is normal have no desire to adapt to living within their means, let alone live in austerity in order to pay for their past.

This is not just a problem for Greece. This is a problem for most businesses today. For example, the internet economy has created a world where most people expect to get almost anything digital for free. That sounds a lot like living beyond our means.

Meanwhile, back in the “old” economy, a lot of companies severely slashed prices during the great recession. Customers have gotten used to the low prices, which are viewed as the new normal. Although a lot of firms want to raise those prices back up in the latter half of this year, I think people will resist, similar to the riots of the Greeks (although not as emotionally or violently).

Many parts of the business world have followed the pattern of the Greek government—generously giving value to its customers at a non-sustainable rate. Eventually, someone will have to pay for all this.

Just as Greece is an early warning country of problems to eventually turn up in other countries, there are business industries that are early warnings of problems for other industries. The news and entertainment media are an early warning area, a lot like Greece.

The digital economy has trained many people to expect news to be free. New media were borrowing news from the old media and redistributing it for free. If you can get news from the new media for free, why pay for the old media? As a result, newspapers are disappearing all over the place. Last week, Newsweek magazine was put up for sale and it looks like nobody will buy it (who wants a property that loses millions of dollars a year?).

The problem is this: what will the new media distribute for free when there is nothing left from the old media to borrow? If you can no longer borrow the news, you will have to get it on your own. And then you can no longer afford to be free. But if free is the new normal, customers will rebel when you start charging them what the news is worth. Substitute the words “money” or “government benefits” for the word “news” and it sounds a lot like Greece.

The principle here is about sustainability. I’m not talking about business sustainability the way the media typically uses the term. They are looking at ecological issues like carbon footprints. I’m talking about sustainability in terms of value—giving value in proportion to what the market is willing to support. If the cost required to provide the value you give exceeds what people are willing to pay, your business is ultimately not sustainable. You are living beyond your means.

Consider the value menus at the fast food restaurants. Many of those items are sold well below cost. They have created a new “normal,” where people expect food to be priced below cost (like the Greeks expecting government benefits that the government cannot afford to give). Why pay full price for a Big Mac when you can get all that beef off the value menu for a lot less?

The restaurants are in a bind. Either you have to:

a) Put the value menu on an austerity program (shrink the burgers, take off the cheese) to the point where it is no longer a value;
b) Raise the price of the value menu (which destroys the value); or
c) Hope that there are enough high margin non-value menu orders to subsidize the value menu orders.

The same problem exists in the airline industry. People are used to buying airline tickets at a value that the airlines cannot afford to give (unsustainable). Therefore, the airlines are scrambling to find other way to get money, like charging for baggage, food, and now even toilets. They’re putting more advertising in the planes and getting other firms to subsidize the frequent flyer points programs. Getting others to pay…hmmm…sound a bit like Greece?

Big airline mergers, like United and Continental, are hoped to cut costs to pay for the unsustainable current ticket price business model. Unfortunately, the traditional airlines have tended over the years to treat many of their employees similar to how Greece treated its employees, with high benefits. Therefore, there may be less benefits to consolidation than one thinks, especially if workers (and work rules) cannot be touched.

Then there is the digital world. Facebook is huge, with about 500 million users. Some think an IPO of Facebook could fetch as much as $20 billion. Yet, it is only now starting to reach the point where it may be approaching profitability. And profitability does not mean it has a cash flow that can pay back all the investment from the early years in setting up the servers to run this thing.

Right now, Facebook is free to its customers. No wonder so many people like it. Awhile back, an idea was floated to perhaps charge a small monthly amount to its customers. The negative reaction from the customer base was huge. Many threatened retaliation (like the Greek riots?) and would quickly move to one of the other still-free sites. Ironically, one of the popular pages on Facebook is a page devoted to people against having Facebook charge a fee. And these Facebook customers do not want a lot of advertisements on the site, either (and many advertisers have not found it to be a particularly effective place to do advertising)..

And what about Twitter? It is loved by many (after all, it is free), yet there is no sustainable business model to support it (nor is one proposed for the future). Is this another Greece in the making?

Given this problem of sustainability, what should a strategist do?

1) Consider Sustainability In the Beginning
How you set up the original business model helps determine how people define “normal.” If you start off with an unsustainable model, unsustainable practices are expected forever. It is hard to later add the austerity program needed to sustain the business.

Way back in 1923, Claude Hopkins wrote the classic book Scientific Advertising. In this book, he explains why he invented couponing for new product introductions. He said if you originally introduce a new product at a discounted price or give away samples for free, you are building expectations that the product should be discounted or free. But if you sell it from the beginning at full price (and customers pay for part of the full price with the coupon), customers will accept the full (sustainable) price in the future. This is why the Wall Street Journal started its web site as one you pay for. They wanted people to expect a sustainable model.

2) Give High Priority to an Effective Business Model
It’s great to have an offering that people want. But if you lose money on every sale, then you have a non-sustainable business. Make sure your business model has a path to sustainability. As CK Prahalad speaks about in his campaign for The Fortune at the Bottom of the Pyramid, you can get items profitably priced low enough so that even the poor can afford it (and be sustainable) if you start with this premise at the point when you design the business model.

3) Look for Subsidies
If your customers are not willing to pay enough to sustain the business, make sure you put into your strategic plan additional sources to subsidize the cash flow. That could be subsidies from governments (like for building cleaner technology), or subsidies from advertising, or partnering with complementary businesses, and so on.

In essence, you need to think of these subsidizers as another one of your customers—someone you need to serve well in order to get their subsidy business. If this is not fully thought out in the plan, you will not optimize the subsidy potential.

4) Consider Selling Out Before the Debt Comes Due
If you find it hard to create long-term sustainability, then perhaps the best strategy is build into your plan a way to cash out early. Most business value is created at the point in time in which a company changes hands. Often, the seller achieves the most value, particularly if they proactively time when the company changes hands. If you know the creditors are coming, and you are in a unsustainable debt position like Greece, sell out before others realize what’s coming.

Market bubbles are unsustainable. Sell before the market bursts. Better yet, proactively build your business model so that it is easier to sell (and more desirable) to the type of people who might eventually buy it before the burst. In essence, these potential buyers of the entire company become the true customers of your business strategy (we spoke more about this idea here, here, and here).

Unsustainable businesses eventually die. To avoid this, make sustainability a key part of your strategic planning, particularly when designing the business model for a new concept. And if that doesn’t work, plan to sell before the debt comes due. Otherwise, you may end up like Greece.

All strategies eventually die. Even once highly sustainable business models, like newspapers, can fall apart if the environment changes enough. That’s why we need to go back and challenge our assumptions every once in a while, to make sure the model is still relevant and sustainable...and if it isn’t, change the model.

1 comment:

  1. Gerald, this is a probing post of the root cause of many problems. It reminds me of a sales rep. who wanted to score high to impress his employer. So, he bought the widgets he was selling and resold them at discounted prices. He impressed his employer; but he emptied his pocket. Soon, he failed to either carry on with his losing selling scheme or increase the prices to his "spoiled" customers. He lost his money and his job
    How many businesses and companies are on the same track?