Tuesday, March 25, 2014

Strategic Planning Analogy #526: Big Stick

One time, while vacationing in northern Minnesota, I stopped to see the big tourist attraction in Eveleth—the world’s largest free-standing hockey stick. The stick is 110 feet long and weighs over 5 tons. Next to the hockey stick is a 700 pound hockey puck.

My thought is that, sure, that’s a big hockey stick. But I’ve seen bigger ones in the business world. I’ve seen business graphs with hockey sticks that span millions of dollars!

When a line graph shows a history of slight decline followed by an incredibly fast upward rise, people call that a “hockey stick.” It got that name because the graph has a shape similar to a hockey stick (see chart).

In the business world, I’ve seen lots of hockey stick graphs. The story behind the graph is always the same: Yes, our historical performance has been poor, but you just wait. The magic is about to happen! Soon, everything will suddenly become wonderful and money will come pouring out of the sky!

Just look at the social media world. There are companies who have never made a profit and are actually increasing their burn rate through cash as losses ever widen. Yet they are going public at astronomically high valuations. Why? Because, supposedly, the magic is about to happen when profits will skyrocket. They’ve sold people on the idea that the company is about to experience a “hockey stick” performance.

Given the high valuations placed on these companies, I suspect that their hockey sticks make the one I saw in Eveleth look very small indeed, by comparison.

The principle here is that just because you can fill a spreadsheet full of projections and make all sorts of fancy charts about the future does not mean that your scenario will come true. Adding extra decimal points to a wildly optimistic guess does not make the guess any more accurate.

Studies have shown that people are more likely to believe a wild guess is more accurate if the last digit in the number is either a 3 or a 7. But changing a wild estimate from $32,665 million to $32,667 million only gives the illusion of more accuracy. It’s still just a wild guess.

So don’t automatically believe a projection just because it is presented in a way that appears objective and well thought out. People can dress up inaccuracy to look like respectability.

One should be especially skeptical when presented with a hockey stick future. After all, if it is going to be so easy to rapidly improve performance in the future, why is today’s performance going in the other direction?

Where Does the Magic Come From?
There’s an old saying that the definition of insanity is doing the same thing over and over again and expecting a different result. That’s insane because the only way to get a different result is to do things differently.

Hockey sticks assume a wildly different result in the future. So a fair question to ask is what has made things so different to cause a different result. If a truly wonderful and believable change is presented that reinvents the rules dramatically in your favor, then maybe the hockey stick makes sense. Otherwise, the change is nothing more than hoped-for magic. And I’m not going to bet the future on some mysterious magic.

In the social media space, the magic is often referred to as “monetization.” In other words, they say “We currently have no idea how we’re going to make a profit, but once we amass a huge bunch of people, we will ‘magically’ come up with a way to monetize them. Trust us. We’ll find it later.”

I’m not sure I trust the magician.

And even if there appears to be a credible scenario for why a specific type of change will reinvent the rules in my favor, there is still reason to be skeptical. As I mentioned in an earlier blog, I once asked a group of executives what they would do if competition suddenly found a way to take a lot of share from them. They replied that they would get aggressive and do whatever it takes to get the share back. In other words, they would fight to reverse the effect of the change.

Remember, you are not the only one trying to write the rules of the future. So is the competition. Competiton WILL retaliate and try everything they can to pull the line of your hockey stick down. Even if the only thing they can do is copy your change, it gives them a chance to take away about half of the benefit of your hockey stick as they share the benefits of change with you.

What are Their Motivations?
Another thing to look at is the motivation behind the one showing you the hockey stick. How do they personally benefit from having you accept a hockey stick scenario? Is it just a lie so as to advance their career? Is it just a distraction to make you forget about how badly they’ve managed the business in the recent past?

Hockey sticks are hard enough to believe in the hands of those with noble intent. They are almost impossible to believe in the hands of those whose motivations cannot be trusted.

What is their Supporting Data?
All the numbers and math behind the hockey stick can be accurately calculated. But that doesn’t mean that they are accurate conclusions. All the inputs to that math are based on assumptions. If the assumptions are lousy, than it doesn’t matter how accurately you do the math. The answers will still be wrong.

Therefore, instead of arguing the math, you should focus the discussion on the assumptions behind the math. Are the assumptions:

  • Believable?
  • Doable?
  • Able to Withstand a Competitive Response?
  • Capable of Creating a True Advantage?
  • On an Identifiable Path to Profits? 
Or is it just a bunch of magic?

Many presentations of the future include a hockey stick—a rapid and large improvement to the business after years of weak performance. Since hockey sticks rarely occur in real life, seeing one on a chart should set off warning bells in your head. Work extra-hard to determine if the scenario should be believed. Look for believable and achievable change in the environment to your advantage. Make sure the presenter has the right motivations. And double check the assumptions.

Hockey is just a game and hockey sticks are a tool to advance that game. Be wary of business people who use hockey sticks to advance their game of deception in order to wrongfully advance their selfish cause.

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