Tuesday, August 10, 2010
Strategic Planning Analogy #346: Right to Play
Poker chips have value…but what kind of value? Some peg their value at their exchange rate—you can cash in poker chips for money at a pre-determined rate of exchange. However, that value can only be realized if you turn in your chips. In other words, this value in the chips can only be realized if you stop possessing them.
Since very few business places allow you to spend poker chips like money, that value can only be realized when you have real money. So the real value, in that case, is in the money, not the chips. If people stop exchanging your chips into money, the value in those chips vaporizes.
To me, the more powerful value in the chips is what they allow you to do while you still possess them. The unique value of poker chips is that they allow you the opportunity (i.e., give you the right) to play poker. Before you can play poker, you need to have first made an investment in poker chips. Without the chips, you cannot play. That is the true power and value inherent in poker chips.
Poker chips are a lot like market share. There is value in having a lot of market share…but what kind of value? One type of value would be to use your power of market share to create excessive profits. In many ways, this would be like cashing in your poker chips for money. And, like poker, if you cash in your market share “chips” you can no longer use them to play the game.
The logic works like this. To create excessive profits, you need to extract excessive value out of your marketplace transactions. The more value you take out of the transaction, the less value there is for the customer on the other side of the transaction. In a competitive marketplace, there will be alternatives to your excessive greediness—alternatives which provide greater value to the customer. Customers will start switching to these alternatives. As a result, your market share will go down. In other words, when you seek excessive profits, you are typically cashing in (or losing) your market share chips.
To me, the greater value in market share is like the second value for poker chips mentioned above—the value in being allowed to continue to play the game. In this case, the “game” is the game of business. If you want a business which endures and produces a return year after year after year, you have to leave a large percentage of your chips on the table. In other words, you need to continue to invest in providing the type of value needed to hold market share if you want to continue to play the game. Otherwise, your market share will drop until you are no longer able to play.
The principle here has to do with transformation. When a company is very successful and creating high levels of market share, there is a tendency to not want to transform the business model. After all, the current model is working quite well. Why kill the goose that is laying the golden eggs? Why risk current profits for the uncertainty of what would happen if you transform the business?
The Innovator’s Dilemma
Clayton Christensen wrote about this problem in the book “The Innovator’s Dilemma.” Briefly, the premise of the book is that innovation leads to marketplace disruption which creates great success for the innovator. This success makes the innovator want to cling to the status quo that his innovation produced. Unfortunately for this innovator, marketplace innovation cannot be stopped. If this innovator will not continue to innovate, others will, creating disruptions that make the original innovation obsolete. The irony is that the only way the innovator can continue to succeed is by destroying the current model of success and replacing it with successive disruptions of new innovation.
This is very similar to the poker chip analogy. Refusing to reinvest in additional disruptive innovations is like refusing to put chips on the poker table. When you have a lot of chips, the temptation to cash in (take excessive profits) is huge. But if you do, you lose the right to continue playing.
Trying to keep the high profits of the old innovation is taking excessive profits out of the game. You are no longer investing in the new innovations that will increase value to the customer. Others, who are still investing in innovation, will create greater value and take away your market share (your chips), leaving you with nothing.
Yes, it takes money away from today’s profits when you spend it on innovation. And yes, your immediate profitability may go down during the disruptive phase. BUT, if you do not ante up with these investments, you can no longer play the game. Your long-term profit stream potential goes away because you are no longer competitive once the next disruption occurs. In search of a small pot of success today, you sacrifice your ability to earn any future pots of success.
I was reminded of this dilemma when reading of a paper published on August 4th by Kristina McElheran of the Harvard Business School. This study looked at how market leadership impacted the way a business innovates. The conclusion of the study was that market share leaders may invest more in incremental innovation, but spending on truly disruptive innovation is more likely to come from non-leaders. In other words, leaders have more at stake in the status quo, so they are less willing to invest in innovations which disrupt it. The disruptions come from those who have less at stake in the status quo.
This is just the Innovator’s Dilemma all over again. The problem has not gone away. Leaders are still cashing in their chips, rather than making the investments needed to continue to play the game.
Therefore, if you are currently in a position of market share power, you need to ask yourself this question:
Am I going to use this power in a way which allows me to continue to play the game or am I going to cash out early?
Even if you still choose to cash out early, by asking the question it is at least a conscious choice that you have made based on weighing the alternatives. If you do not ask the question, you may end up cashing out by accident, and have a lot fewer chips to cash in than you had anticipated.
Selling out near the peak (before the next disruption has its impact) is a viable strategy. If you do this, you can often walk away from the game very wealthy. This is a proactive strategy with careful analysis of the environment and understanding the timing of trends and inflection points. You are putting yourself up for sale while you still have leadership benefits (i.e., still have lots of chips to cash in).
This is very different from trying to cling to the status quo as long as you can and then selling as a last resort. While clinging to the status quo, your market share is being disrupted by the next innovation. You are losing your market share chips to the next innovator. By the time you get around to selling, you have very few chips left to cash in.
Staying to Play
If you choose to stay to play, then that requires a different set of actions. You need to take some of your profits and reinvest them into the game, in order to maintain value leadership. The trick is trying to optimize the balance between the current inward cash flow from the status quo with the outward cash flow needed to create the next disruption in your favor.
At least as a leader, you have the potential to orchestrate how that transformation occurs better than others (provided you do not get too greedy in the short-term). Take advantage of the opportunity. Be proactive in guiding the transformation (rather than resisting it).
Markets continue to innovate. If you resist innovation and do not transform your business, you will lose to the next round of innovators. Therefore, either cash out while still at the top or reinvest in disruptive innovation at levels necessary in order to continue to play the game for a long time.
In poker, you can sometimes get away with bluffing. In business, you may be able to fool the customers for a short while, but eventually they will figure it out and shift their business to the place where they receive the best value. Innovation leads to better value. Therefore, if you want to maintain leadership, follow the innovation to the greater value.