Monday, June 8, 2015

Strategic Planning Analogy #552: Dead By 45

A few years ago, I went to a conference on Big Data put on by IBM. The first thing I noticed was that almost everyone attending (other than myself) looked younger than my children (who were in their early 30s).

After a particular seminar session at this conference, one of these young attenders asked the speaker a question that went something like this:

“What do I do about these old people in my company (old defined as over 40) who don’t get it and are don’t want to get things accomplished our way?”

The speaker answered the question something like this:

“I used to tell people like you to be patient. Those old people will be irrelevant soon enough and then you can proceed. But now I see that they are already irrelevant, so just ignore them and move on. Treat them as if they were dead.”

That was not very assuring to people like me, who still think 40 is young.

If you read the literature about the new economy, it is common to find references to the idea that anyone over 45 should be treated as dead. The idea is that if you haven’t made your millions by 45, you never will, so anyone over 45 who hasn’t already made it is irrelevant…they may as well just give up.

You may not buy into this philosophy, but it is common among the many of the key players in the new economy. And since people act based upon what they believe, this belief system is impacting the way the new economy acts.

All strategies work within the context of the environment around them. If you want your strategy to succeed in the new economy, you should consider how the “death at 45” philosophy impacts the context in which you are trying to succeed. If you don’t, death of your business is a very real possibility. You really will become irrelevant.

The principle here is that even if you do not want to play by the rules of “Death at 45,” many of your competitors may be. This may cause them to take actions which seem irrational to you and your rules. But it will be very rational based on THEIR rules. And their actions will disrupt your business in ways that will be nearly impossible to deal with unless you get a grip on their mindset.

Therefore, we will first look at how the “death at 45” system works. Then we will see how it impacts the status quo and what the status quo can do strategically in this new world.

The Rules of “Death at 45”
The rules of “Death at 45” are as follows:

  1. The only way to (legally) make it big by 45 is to cash out. You have to transfer the ownership of your concept to someone else who is willing to pay you big dollars for it. That would be to one of three choices: private equity, going public, or selling the business to another, larger business (like selling to Google).
  2. Since there is really only one meaningful transaction (when you cash out), there is really only one meaningful customer (the one you sell out to). All the other transactions related to running your business pale by comparison. They are little more than “proof of concept” examples to show to your one meaningful customer.
  3. The only income statement that matters is the personal income statement (how well did I do when I cashed out). It really isn’t all that relevant if your business model is profitable or even if there is not a clear path to profitability in the future. If you play the game well, even poor business models can cash out at a high price.
  4. Given the weak ties between financial performance and cash out potential, the game is played a lot like the lottery. Both the buyers and the sellers do a lot of transactions because they don’t know which venture will be the big one. Since the best way to win the lottery is by purchasing a lot of tickets, the best way to win by 45 is to pursue a lot of potential cash out ventures. If it looks like the current business model isn’t leading to a quick cash out, either radically change the model or dump it and move on to the next one.
Competing Against Death at 45 Businesses
So let’s say you are an older, status quo company trying to compete against an upstart playing by these rules. They can make your life very difficult, because their rules allow them to play differently than your rules allow you play.

  1. The large, established firm has pretty much already cashed out a long time ago. Without another strong cash out option, the established firm has fewer ways to make it big. It is stuck in the old, slow process of trying to increase sales and decrease costs with a relatively mature model. The new firms don’t concern themselves as much with this, because they have better options.
  2. The potential owners of the “Death at 45” companies aren’t necessarily looking for profits, especially not in the near term. By contrast, the established companies have owners who want to see increasing profits on a quarterly basis. It is very difficult to increase profits quarterly when your competitor isn’t all that interested in making any profit at all.
  3. Even if the established company tries to instill some of the culture of a business start-up into their system, it won’t be the same, because employees in the established firm won’t see as clear a path to their personal cash out potential. Since the big company they work for isn’t on a full cash out path, all that entrepreneurism effort will not reward them as well as it would in working for the right “Death at 45” company.
  4. When you are a tiny start-up, it is easy to radically flip the business model or shut down and start over again if things aren’t leading to a quick cash out. It is much more difficult for a large, established firm to be as flexible.
The increased flexibility and lack of a need to make immediate profits gives the “Death by 45” companies an apparent “unfair” advantage. But fair or not, that is reality.

What to Do?
So what should the established players consider doing to better compete in this environment?

  1. Structure your firm to be more like a holding company. Rather than defining yourself as being in a particular singular business (working in a singular manner), define yourself as a flexible holder of many types of business models and structures which can come and go as needed to be in the right place at the right time. For example, GE has used a holding company approach to effectively flex over many decades. It is now flexing away from lending and flexing towards the Internet of Things. Taking the holding company route will cause you to act more like a private equity firm. It will give you more opportunities to cash out.
  2. Work on changing the profile of your equity holders. Amazon can cause a lot of problems for its competition because its shareholders are less interested in near-term profit than the shareholders of its competitors. Just think of what you could do if you had Amazon-like shareholders behind you.
  3. Play YOUR game. Just as the little guys can do things you can’t do, you can do cool things they can’t do. You have economies of scale, distribution, a brand name, business synergies, people who have a lot of experience, and so on. Play a game that puts THEM on the defensive.

Although we only scratched the surface of this topic, we have seen that different mindsets will cause you to operate your business differently. Someone operating under the “Death by 45” mentality will have strategies very different from people in older, larger, established firms. The problem occurs when these two types of firms compete against each other in the marketplace. Their different approaches create an unlevel playing field. For example, the “Death by 45” company is less encumbered with a need to make money versus the establishment counterpart.

To win in such a world, it helps to first understand the thinking behind all the players you are competing with. That will help you understand the rules they play by. Second, one needs to find a strategic path that neutralizes the advantages of other mental models while taking advantage of what your position offers.

It is important to remember that nearly all the attempts to make it big by 45 fail. For every successful Google, there are millions of attempts that never make it to the cash out stage. The odds of personally winning with this strategy are extremely low. By comparison, the established firm has much better odds of carrying on.