THE STORY
There’s an old military saying that goes something like this: In peace time, military leaders prepare for the next war as if it is going to be played by the same rules as the last war. Unfortunately, each new war comes with a new set of rules, making all that planning obsolete.
In other words, instead of looking backwards to figure out
how you could have done better in the last war, anticipate the rules of the
next war and prepare a way to win under the new rules.
THE
ANALOGY
This recommendation does not only apply to military strategy. It
also applies to business strategy. The rules of the game in business strategy
keep changing, just as in warfare. The leaders in many businesses are older and
got to the top by following the old rules. As a result, these leaders have a
tendency to prepare for the future by falling back on those old rules which
made them a success in the first place.
Unfortunately, as times change, those old rules become
obsolete. If CEOs continue to run their businesses by those old rules, their
businesses (and themselves) run the risk of becoming obsolete. To prevent that,
strategists must continually update their mindset to stay in tune with the
rules of the times.
In my opinion, we seem to be at a point where the rules of strategy are shifting again. This would be the third major set of rules during my adult lifetime. If the rules are changing as I think they are, then it is time for strategists to update their mindset again.
Ruleset #1: the
Three P’s
Back for most of the latter half of the 20th
century, the rules of strategy revolved around what I called “the 3 P’s.”
During this period, the major strategic objective was to maximize
cash flow over a sustained period of time. The best way to do this
was by focusing on three areas:
2. Pursuit: To hold a position
over the long haul, a business had to act quickly and invest in whatever it
took to maintain that position. For example, Walmart wanted to hold the
position of being the low price alternative, so it would invest in whatever
retail format had the advantage in holding the low price position. That is why
Walmart migrated from discount stores to supercenters and added Sam’s Club. It was
pursuing the winning path to hold the position.
3. Productivity: To maximize
cash flow, the cost of investments in positioning and pursuit had to be less
than the profit margins available from the business. Therefore companies also
kept a keen eye on keeping costs down, pursuing tactics like re-engineering.
Ruleset #2: The
Three F’s
As the 20th century was winding down, a new
strategic ruleset was evolving. One of the key forces behind this change was
the movement from selling physical products (atoms) to selling apps. This was
the world which spawned companies like Google & Facebook (and all the
people that wanted to copy their success). Under the new rules of that era,
there was a new major strategic objective. Instead of trying to maximize cash
flow over the long term, the objective was to maximize the selling price
when you flipped the ownership.
Not only was the idea of maximizing cash flow out, the
entire idea of profits lost favor. It was okay to lose money so long as a
future buyer would pay a lot for your business. In other words, your return did
not come from the ongoing business but from what you could make when the
business changed ownership. I spoke about that in more detail here.
And the idea of managing for the long haul was also tossed
out. After all, if you are going to flip the business to a new owner in a few
years, your time horizon is only as long as it takes to cash out.
In this new environment, the strategic rules were as
follows:
1. Fund: Find venture
capitalists who are willing to fund your business. This is where the money
comes from, not the user of the app. So, in reality, the venture capitalist is
the customer of your business and the product you are selling them is access to
all the people using your app.
2. Flex: In the wild world of
apps, one has to keep flexing the model until a version is found that resonates
with a critical mass of users. Venture capitalists of the time knew that the
end product app was rarely the same as what was originally pitched to them to
get the money. Therefore, the venture capitalists were betting more on the
flexing ability of the founders to eventually hit on a winner rather than on
the original pitch.
3. Flip: Since all the value is
created at the time the ownership changes, the strategic emphasis is on
optimizing the flip—who to sell to and for how much. For example, a lot of
people of the time thought that Cisco Systems might be a good potential buyer.
Cysco said it would only buy businesses located in Silicon Valley CA, Austin TX
or Research Triangle NC. Therefore, if you wanted to flip to Cisco, your
strategy would be to locate in one of those three areas. If your plan was to
sell out via an IPO, the strategic emphasis was placed on maximizing those
factors/metrics which would sell well in the IPO pitch.
Ruleset #3: The Three
S’s
Just as people were getting used to this set of rules, it
appears to be changing again before our eyes. There are many reasons for this.
First, future innovations do not appear to lend themselves to start-ups in the
garage. They are too complex and costly. Starting small and flipping no longer
works as well.
Second, the innovations of the digital age have sucked a lot
of the value out of entire industries. For example, the news and entertainment
industries have seen the overall profits of the whole industry shrink
dramatically. When people expect things for virtually free, it is hard to rake
in huge profits. A new way to move money in your direction is needed.
Third, the more recent flips in general are nowhere near as
dramatic as in the days when Google and Facebook flipped. If flipping is much
less of a “sure thing”, investors will hold back and IPOs won’t be as easy to
create. The whole idea of flipping is being questioned as a primary way to
think about business. You can’t sell to investors if they aren’t investing in
the old type of startups like before.
So what is replacing it? I call it the three S’s.
In the world of the 3 S’s, the key objective is to exert
maximum control/power over an entire business ecosystem. It is no
longer good enough to just have a good product or a leading app. You need to
control the entire business system in which you exist. If you do not control
how the ecosystem evolves, it will evolve in a way that blocks you from
achieving adequate profitability. Power becomes the great goal, because power
dictates where the limited amount of money goes.
To do this, you follow the 3 S’s:
1. Size-Up: This strategic
approach requires thinking big. You need to not only size up the space you
compete in, but the entire ecosystem your space lives within. This includes not
only your traditional competitors. It includes anyone who has influence on how
your ecosystem will evolve and how ecosystem profits are divvied up. It can
include governments, businesses and advocacy groups. You need to size it all up
to get your arms around the magnitude of the ecosystem.
2. System: Your strategy must
encompass more than just how your business works. It has to encompass how you
want the whole ecosystem to work. You have to strategize for the entire system.
Your best individual performance will still leave you in trouble if the
ecosystem defines the rules against you. Therefore, you have to make sure you
have a powerful seat at the table where the rules are made. And you only get
such a chair if your planning takes an entire system point of view.
3. Structure: To get the system
to work in your favor, you have to help determine how it is structured. You
have to put all the ecosystem building blocks together into a structure where
you have a disproportionately larger influence than others. Some of these
building blocks you will own. Others will be partnerships. Others will be
voluntary followers of your plan because your power makes it in their best
interest to comply with your wishes.
Here are some recent examples of this type of strategic
approach:
1. CVS:
CVS realized that it needed to be more than just a major pharmacy/drug store chain
in the US. It needed to have control over the entire healthcare ecosystem. To
accomplish this, it started in 2006 by acquiring MinuteClinic, who operated
health care facilities inside a retail setting. This gave CVS some control over
the practice of medicine. In 2007, CVS acquired the Caremark pharmacy benefit
management company in 2007. This helped them have influence over how company
pharmacy benefit plans would impact CVS. In 2015, it acquired Omnicare, a
leader in pharmacy distribution to institutions. And this year, CVS announced
the acquisition of Aetna, one of the leading health insurance providers in the
US. CVS is no longer a drug store company. It is a strong player throughout the
entire healthcare ecosystem. It even changed its name to CVS Health.
2. Disney:
Disney realizes it cannot just be good at parts of the entertainment system. It
needs control over the entire entertainment ecosystem. As the digital aspects
of the entertainment ecosystem evolve, Disney could get squeezed if it does not
influence how the rules are written. Therefore, Disney just announced the
acquisition of a huge chunk of 21st Century Fox. The logic is that
the combined content and distribution controlled by such a combination will be
so powerful that nobody will want to make any moves in entertainment without
them.
3. Another
recent announcement include the merger of Ascension and Providence to
create the largest hospital chain in the US. It is like CVS in that it is
trying to exert more power in healthcare. It is like Disney in trying to get
such a large chokehold over a major aspect of its ecosystem that it becomes a
force that cannot be ignored. In their words, they are trying to create a voice
“that can’t be ignored.”
And Target recently announced the purchase of Shipt. Shipt
is one of the largest providers of the software and trucks used in the home
delivery of items like food. In this
way, Target is expanding its influence in the consumer retail ecosystem by
getting a big share of the out-of-store experience.
This is just the beginning….
SUMMARY
The environment is always changing, so the rules of strategy must adapt. We’ve moved from the 3 P’s to the 3 F’s. Now we are moving to the 3 S’s. If you’re still doing your strategy under the older rules, you may lose your grip on the future and be left out in the cold.
Don’t fight future wars with the rules from prior wars. Fight with the rules appropriate to the times.
