Showing posts with label Money. Show all posts
Showing posts with label Money. Show all posts

Monday, December 1, 2014

Strategic Planning Analogy #542: Printing Money


THE STORY
When I was a child, I visited a site where a famous US Civil War battle took place way back in the 1860s. As a souvenir, I got some imitation samples of “Confederate Money”. This was the paper money created by the confederate states who tried to defect from the USA during the war.

The souvenir money was worthless, because it was not actual confederate money. But even if it had been real confederate money, it still would have been worthless to anyone who was not a collector of old stuff.

When the Civil War ended—and the confederate states lost—there was no government to back that confederate money. It became worthless. It had value during the war, but not afterwards. But even so, I liked my souvenir money because it came in large denominations, which made me feel rich, even if it was only in my dreams.


THE ANALOGY
Paper money is a funny thing. As long as both sides agree that the paper has value, they can use to transact business. But if they no longer agree that the paper has value, it becomes worthless, like confederate money.

Implementing a strategy can be very expensive. It may require developing competencies, acquiring firms, buying market share and other such costly activities. Without a means for paying for all of this, the strategy cannot happen.

Wouldn’t it be nice if you could just declare yourself a nation (like the confederate states) and print up your own money? Then you could buy up all the stuff you need to succeed at very little cost.

Well, in a sense you can do this.

Broadly speaking, currency is anything that people on both sides of a transaction agree upon as having value. Over the centuries, all sorts of things have been used as currency, including stones, livestock, seashells, and tulip bulbs. As long as you can get people to believe that what you have is valuable, you have invented your own currency.

Like in the case of confederate money, the time period in which it has value may be fleeting. But as long as you conduct your business during the period when the item has value, you can use it to purchase the costly necessities of your strategy.

You may have hidden value somewhere in your company that you can use to create a tradable currency. And that may be the most cost-effective way to bring your strategy to life.


THE PRINCIPLE
The principle here is that the winners in business are often the ones who can best afford the costs to acquire what it takes to win. If you can develop a currency which is less costly to you than the currency used by competition, then you can outspend your competition and win.

There are lots of currencies you can use other than money to accomplish your strategic goals. Many of these currencies can buy you a lot more than you could buy with mere money. Let’s look at a few.

1. Stock
Stock has a tradable value. You can purchase things with stock. If you can convince people that your stock has an abnormally high value, you may be able to purchase a lot more of your strategy a lot cheaper with stock than with money.

Remember when AOL stock commanded an extremely high price? AOL used that stock to purchase Time Warner. Eventually, people no longer put a high value on AOL stock, and its stock became almost as worthless as confederate money is today. But, by that time, AOL had already converted a lot of that now nearly worthless stock currency into valuable Time Warner assets.

A variation on that theme is what Amazon has done. For over a decade and a half, Amazon cultivated an interest in its stock among people who were not all that interested in whether Amazon made a profit (at least not for a long, long time). Since Amazon did not have to bother with earning a profit in order to keep its stock up, it created two cheap currencies. First, it had a relatively high value stock compared to profitability. This allowed them to buy stuff with stock that was more valuable than using money.

Second, because Amazon was less pressured to make a profit, it could afford to plow more of its money into strategy than competitors who were under profit constraints. How would you like to be a retailer who is competing against Amazon and has shareholders demanding an immediate profit when Amazon shareholders do not? Amazon can afford to offer the lower price and win the low price strategy.

So if you can develop a strategy which gives you a higher than normal value for your stock, you have created a valuable currency to convert into strategic accomplishments at a lower cost than your competitors, who are stuck using regular cash.

2. Access
Perhaps you have access to something that others want access to but cannot get on their own. For example, you could be a retailer with access to a customer type that is difficult to reach through any other distribution channel. Or perhaps you have access to data that nobody else has. Or maybe you have access to the rich and famous and can make introductions that could not otherwise be gotten. Or perhaps you have access to one of the few mines that can extract a valuable commodity.

Whatever it is, that access could be more valuable than money. You could trade that access for something very valuable at relatively low cost to yourself. For a long time, the nations of OPEC had the best access to oil, something others wanted but had no access to. The OPEC nations became very wealthy by letting others have access to that oil. (Of course, now that the US have found another access to oil via fracking technology, the value of the OPEC currency has dropped, but there are ways to manage access for optimal value)

Do you have access to something valuable? Are you properly charging what others would be willing to pay for that access?

3. Time
People say that time is money. You may be able to trade time for money. Perhaps you can do things faster than others. How much is that worth?

Perhaps the most valuable thing you have is access to a future point in time. For example, let’s say that you are a promising start-up that will eventually go public. The time in which you do your IPO may be a huge wealth transfer moment. Many people will want to be a part of that. By selling them portions of your company now at an outrageous premium, you are “guaranteeing” them a seat at the table when your company goes public in the future.

You can use that outsized amount of money today to enrich your strategy for the future.

Lowering Your Cost of Capital
Even if you are stuck using the same money as your competition, you may still have an edge over competition if your cost of capital is lower. For example, studies have shown that private, family-run businesses tend to have a lower cost of capital, because they look at money and their businesses differently than public companies. As a result, private family companies can often do things strategically that public companies cannot, often giving them an edge in businesses—particularly those with a longer payback.

Or let’s say you are a company with a “near-monopoly” business that is throwing off far more cash than that business could ever use. All that excess cash could have a lower cost of capital to invest in new ventures than what it would cost someone else to try to round up that much cash in the open market.

Companies like Google and Microsoft have had “near-monopoly” divisions throwing off tons of cash, which has opened up strategic opportunities others would find harder to do. Google’s offering of Android to smartphone companies for free was an extremely clever strategy against Apple, but how many other companies would have had the financial ability (or permission from its cash sources) to pull it off?

Sometimes you can get your cost of capital down to nearly nothing by having people give you money for free. For example, Elton Musk was able to get a fortune in government subsidies for building a battery manufacturing plant for his Tesla electric cars. That's like printing your own currency in your basement.  

In another example, children’s hospitals seem to do a better job of getting charitable donations than competing regular hospitals do, giving them a cost of capital advantage.

Look for Your Currency
So when developing your strategy, don’t just look at the options for what you want to accomplish. Look at the options for how you can pay for it. You don’t only have the option of cash. You may have better currencies than your competition hidden somewhere in your company. If you plan it properly, you can develop a funding mechanism which gives you just the edge you need in the race to winning a position in the marketplace.


SUMMARY
Although we just scratched the surface of all the strategic options for creating superior currencies, it can be seen that money is not the only way to acquire the keys to strategic success. You may have internal currencies which are more valuable than money and can allow you to afford to buy your strategic success faster and less expensively than others in the race for that same position. Either that, or maybe you have some creative ways to lower your cost of capital, so you can get your hands on more cash more cheaply than competition. Either way, that’s a strong competitive edge and should be part of your strategic consideration.


FINAL THOUGHTS
Clayton Christensen has written a lot on the disadvantages incumbents have over new startups. One of the areas he doesn’t focus on, but I think is important, is the fact that startups are often more creative in finding ways to fund themselves.

Wednesday, December 19, 2012

Strategic Planning Analogy #480: Landing a Strategy



THE STORY
I used to live in a city which had a small regional airport.  The city wanted to get more of the large airlines to land at this airport, but the airlines kept refusing.

The airlines said that they would not schedule flights to that airport because the runway was too short.  Sure, it was long enough to land the smaller planes that the airlines use, but not long enough to land the largest jets.  Because the airlines want flexibility in the use of their airplane fleet, they didn’t want to schedule flights into airports which couldn’t handle their largest planes.

After hearing the complaints, the city invested in building longer runways.  And not long after the longer runway was built, a large 747 jumbo jet landed at the airport in grand fashion.

I think it was many, many years later before the second large jet landed there, but it didn’t matter.  The renovations and the longer runway resulted in getting more scheduled flights at the airport.

 
THE ANALOGY
I like to use the term “landing a strategy.”  This concept refers to getting a strategy from being just a cool idea floating in the clouds to being a reality playing out on the ground where the company is operating.

Landing a strategy is a lot like landing an airplane.  If the airport’s runway is too short, the larger jet will not be fully landed before it runs out of runway.  The plane will keep moving at a high rate of speed beyond the edge of the runway and crash into something, creating a total disaster.  That’s why airlines insist on having long runways before committing to an airport.

It takes a lot of time and money to land a strategy (to get it from idea to reality).  If you run out of time and money before the strategy is fully landed, you are like a pilot in a big plane that ran out of runway.  Your strategic attempts are about to go off the runway and crash into something, creating a total disaster.

Due to our optimism, we may think we need a shorter runway (less time and money) than we really need to land our strategy.  As a result, we may already be well into the strategic transformation before we realize that we are trying to land our strategy at an airport (i.e., company) whose runway is not long enough (not enough time or money to finish the transformation).  Then we find ourselves frantically trying to lengthen the runway at the same time our plane (i.e, strategy) is already approaching the runway.  That’s not a very wise approach.

When a strategic transformation runs out of runway, the worst possible scenario occurs.  The old strategy is bankrupt because all the time and effort and money went into the transformation.  The old strategy is too obsolete to create sufficient cash flow to keep the transformation going (running out of money). The time for bankruptcy under the old model keeps getting closer (running out of time).  Yet, because there is not enough time and money left to finish the transition to the new strategy, you don’t end up the replacement strategy, either.  Instead, you are stuck with neither strategy.  A total disaster.

Think about Kodak.  It didn’t start trying to land a digital strategy until the analog business was almost dead.  The old analog business was not producing cash flow and was soon to die (no time or money).  As a result, Kodak’s runway was too short.  They ran out of time and money before a digital strategy could be landed.  The company ran off the runway and imploded.

The airlines in the story had a safer approach.  First make sure the runway is plenty long enough.  Then, only after the long runway is built, will the airlines consider trying land planes there.  Our strategic approaches could learn from this.

 
THE PRINCIPLE
The principle here is about change management.  Nearly all new strategic initiatives require significant change in the business in order to become reality.  You may have a great new strategy, but if you mis-manage the change process to get there, you will not effectively land the strategy.  It will crash and make a disaster.  

If you cannot effectively land the strategy, it is irrelevant how great that new strategy was.  It will crash when you run out of runway, just like a bad strategy.

Therefore, a key piece of change management needs to be assessment of the length of your runway.  If the runway isn’t long enough (not enough time and money), then the process is doomed.

Option #1 Lengthening the Runway
If the runway is too short, one solution may be to lengthen the runway.  In other words, before embarking on the transformation, look for ways to either:

  1. Increase Cash Flow; or
  2. Slow Down the Demise of the Status Quo.
These actions may not have any direct relationship to the change you are trying to accomplish, but if you do not do them, you will not have enough time or money to do those things which directly relate to the change.  So you need to do them as well.

Tactics to lengthen the runway could include:

  1. Selling off peripheral assets.
  2. Restructuring the Balance Sheet.
  3. Massive layoffs in peripheral areas
  4. Sale and lease-back of properties.
  5. Looking for legal or governmental protections of the core to keep threats to the core further away.
One of the main reasons why Ford Motor Company did not have to go through bankruptcy and government bailout while GM and Chrysler did was because Ford had taken many of these types of steps to lengthen their runway prior to the great recession.  As a result, Ford’s runway was long enough to last until they could transition through the economic recession and get to their revitalized strategy.

GM and Chrysler ran out of runway because they did not do enough of these types of things.  Without a lot of outside help, they would have crashed when their runways ran out.

Option #2 Shortening the Plane
If lengthening the runway is not enough, you can try to switch to a smaller plane.  By this, I mean that instead of trying to create massive change all at once, you can chop up the change into smaller bundles (like smaller planes) which require less time and money to land (and thus can use a shorter runway).  Those smaller changes with the quickest payback can be done first and create the new money and extra time needed to land the rest of the transformation.

Thus, you fund the latter change by strategically creating funding via the early changes.

Netflix was originally designed to be a digital downloading service (which is why the company was called Netflix instead of Mailflix).  However, the company realized that it would take massive amounts of time and money to create the Netflix model.  Therefore, Netflix started with a smaller plane (movies by mail). 

Movies by mail required less time and money to start up.  And it got Netflix a huge subscriber base and clout in the marketplace that could be applied to the ultimate vision.  And because the near-term model was profitable, it could fund the efforts needed to make the ultimate transition.

Option #3 Changing the Flight Schedule
A third option is to change the scheduling of your flight—prepare to land your plane earlier.  The idea here is that if you start the transformation earlier, before the status quo deteriorates too much, you have many advantages:

  1. The old strategy is stronger and producing more cash flow to fund the landing.
  2. The company’s image and clout are stronger which makes it easier to introduce your change to the marketplace.
  3. The ultimate demise of the status quo is further away, so you have more time.
Kodak essentially invented the world digital imaging.  They had plenty of time, clout and money to implement the change.  The problem was they waited too long to do anything about it.  If they had scheduled the landing of the digital transformation much earlier, the odds are good that it would have succeeded. 

The problem is that companies worry about cannibalization.  After all, the sooner you start the transformation, the quicker you cannibalize the old core.  What you need to realize is that someone is going to eat your core.  Your only real option is to decide whether you are going to do the eating or someone else is going to do the eating.  And if you wait, like Kodak did, and let the competition eat your core, you have no runway to get to the replacement.  All you are is eaten.

 
SUMMARY
Strategic initiatives usually require change.  Change requires time and money (and usually more than you initially realize).  Therefore, if you want to land your strategy, you’d better make sure there is enough time and money to get the change implemented.  If there isn’t, you will need to adjust your approach to that change by either:

  1. Finding more time and money;
  2. Starting with smaller change initiative bundles; or
  3. Starting the whole process sooner.
 
FINAL THOUGHTS
I worked with a company that was running out of runway.  They did not have enough time or money to finish their transition.  The solution they picked was to sell the business to someone with deeper pockets and more time.  In other words, they sold the plane to a company which owned a better airport with a longer runway.  So, before you panic, look for creative ways to get a longer runway.  Creative solutions are out there.