Tuesday, October 29, 2013

Strategic Planning Analogy #513: The Business Lottery

Imagine a world in which business is run like a lottery. Under such a scenario, each morning every business would submit to the Business Lottery Commission (BLC) their guess of the day’s winning numbers. Then the BLC would use numbered ping pong balls to determine the day’s winning numbers.

Each company’s sales for the day would them be determined by how close their guess was to the numbers chosen by the BLC. The more numbers a company got right, the higher their sales for the day would be. If a company got none of the numbers right, their sales for the day would be zero.

That would be a strange world, because success would be random and essentially out of the control of management. Skill would be replaced by luck. Nobody would stand for a world like that, would they?

Lately, it seems like the business world is becoming more and more like the lottery, particularly in the social media space. I was reminded of this when reading the November issue of Fast Company. In the editorial, editor Robert Safian said,

“There are so many emerging technologies and newly found companies, it is near-impossible to predict which ones will have staying power. This makes both business planning and investing not just complicated, but treacherous.”

There are two main implications in such a statement. First, it implies that success appears to be unpredictable because it is based almost entirely on luck, like playing the lottery. Second, if success is based on luck, then the importance of planning is severely diminished. Why work hard on planning for success if success is primarily a result of luck?

This idea is further reinforced when one looks at the behavior of a lot of the young entrepreneurs in the social media space. They tend to spend very little time on a particular venture. If it doesn’t get “lucky” quickly, they move on—either by pivoting the current venture into an entirely new direction (like Fab.com) or by abandoning it and starting completely over. They are like the lottery player who picks new numbers to play every day because yesterday’s number wasn’t lucky.

And when these entrepreneurs do “get lucky” they often abandon participation in the business soon thereafter in order to play the game again with another new venture. In other words, they cash in their winning lottery ticket and use the proceeds to buy more lottery tickets. They call it
serial entrepreneurship. I call it lottery fever.

And here’s the even stranger fact. The entrepreneurs are paying for most of their “lottery tickets” (i.e., latest business ventures) with someone else’s money (from Venture Capitalists).

When the venture gets “lucky” and wins, it usually wins big (like Facebook, Google, Linkedin, etc.). But most of these ventures end up with nothing. That also sounds a lot like the lottery.

So maybe the people would stand for a world like that after all.

The principle here is that actions are a result of assumptions. If you assume that business success is essentially random, then you will treat business like a lottery (and planning will be minimal, at best). However, you assume that business success still has a significant element of skill to it, then you will treat it more like professional poker. Yes, poker has a high element of luck, but the good players use strategy to consistently outperform the odds of mere luck.

I believe that it is in one’s best interest to use strategy to increase the chances of success (like poker) rather than relying on betting often and hoping for the best (like the lottery).

The Problem With The Lottery Assumption
If you assume success is primarily luck, you then your actions will work against you in two ways.  First, this assumption will cause your actions to move towards quantity rather than quality. As in the lottery, the more tickets you have, the better your odds are of winning (quantity, not quality). So there is a tendency with this mindset to dabble in a lot of things somewhat superficially and for only a short period of time. If there is no instant win, then you move on, perhaps even dabbling in multiple ventures at once.

It’s sort of like the old saying that “if you want to be in the right place at the right time, you have to be everywhere all the time.” So these people try to get attached to as many ventures as possible.

Unfortunately, this is rarely the path to winning. Remember, most of the people who play the lottery lose, even when they buy a lot of tickets. Real winners are not superficially involved for a short time. They are fully devoted to the business for the long haul.

Consider Amazon. Today it looks like an obvious winner. But that was not from getting lucky early. In the early years, Amazon looked like a real loser and was written off by the “experts.” Amazon won because it was dedicated to a long-term strategy for winning in the marketplace and did what it took to make that long-term strategy a reality, even if it made the near term appear “unlucky.” Rather than cashing out, they made huge investments into the marketplace to create a winning position over a long period of time. Amazon didn’t buy into the lottery assumption.

The second problem with the lottery assumption is that it places its focus on funding the purchase of tickets (getting venture capital money) rather than winning the marketplace (getting sales from customers/advertisers). You can see this in companies with fantastic valuations among the venture capitalists which have never turned a profit. Heck, many have had sales of ZERO. “Monetization” of the business model becomes a dirty word, and those promoting monetization are seen as “not getting it.”

Call me old fashioned, but I want to see a path to profits in the marketplace. Otherwise, all we have is a pyramid scheme, where early investors expect to be bought out at a huge gain by greater fools at a later date. That’s what happens when all the focus is on who buys the equity rather than who pays for the product/service. Eventually, you may find a greater fool who pays too much (to you for your equity), gets too little (the weak business model) and suffers a huge loss to pay for your gain. But if you can’t find another buyer, then you’re the last fool and you suffer the loss.

Improving You Odds Like A Poker Pro
By contrast, poker professionals don’t rely on luck. They use skill and strategy to increase their chances of winning. Poker professionals do three things in particular to increase their odds.

First, the poker professionals study their environment. They get to know the other players at the table. They learn how the other players act and react under various scenarios. The poker pros also watch the cards to learn what has been played and what has not been played. In a similar way, the best business winners don’t merely rely on luck, but study the marketplace and their competition.

Second, poker pros use that knowledge to play an intelligent game of strategy. They understand the odds and work that to their advantage. They consider various scenarios. Then the pros make moves designed to cause the other players to act in a manner that shifts the odds even more to their advantage. The pros don’t leave winning to chance and the luck of the cards. They use strategy to improve the odds of success. Good businesses do the same.

Third, the poker pros stick around. They don’t just play one hand and walk away. The pros know that in any individual game, bad luck might be too high to overcome with their skill. They know that it is over the long run that luck evens out and their skill eventually prevails.

In addition, the poker pros know that the longer they play with a particular group, the more they will learn about them. This additional knowledge makes the pro’s strategy improve over time, thereby making the later rounds potentially more productive than the early rounds.

Similarly, good business people stick around and put in the effort to build a viable position and infrastructure. Rome wasn’t built in a day, and neither are great companies.

I am reminded of a story I heard from the founders of Netflix back when their company was barely more than a notion in their head. They told me that their goal was to win in the digital download of movies. They knew that there would only be a small window of time in which to grab that position. They also knew that the timing of that window would be five to ten years in the future. So, to optimize their odds of winning that future digital window of time, they were going to start a physical mail-order business today.

The idea was that the mail-order DVD business would do two things. First, it would help Netflix build strong ties with a large number of consumers. Second, it would help Netflix build ties with the content producers (movie makers/distributors). Those connections with customers and content from the mail-order business would increase their odds of winning when it was time to switch to digital.

This was a long, well thought-out strategy with multiple steps. And it did improve the odds of success for Netflix in the digital movie space. When that small window of time opened, there were tons of entrepreneurs trying to “buy a lottery ticket” by dabbling in the space at the moment the window opened. It was like that Fast Company editorial quote of “so many...newly found companies.”

Most of them quickly “lost the lottery” and went away. But because Netflix was playing poker instead of the lottery, they are still a major player in the space.

One’s actions are based on one’s assumptions. If you assume the business world is driven primarily by luck, then you will act as if business ventures are like lottery tickets. However, if you still think skill prevails, then you will act as if you are skillfully playing poker. And in the long run, your odds for success are better when using the skill and strategy of poker rather than the “buy a lot of tickets and hope for the best” approach of the lottery.

Now you may be saying to yourself, “I don’t think of business as being like a lottery.” Well, you may not say it, or even openly admit to yourself a belief in the lottery assumption. But if you act as if business were a lottery (by doing some of the things mentioned in this blog), then you must believe it deep in your subconscious. You actions shout your true inner beliefs and assumptions, even if you aren’t consciously aware of them.

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