Strategic Planning Analogy #513: The Business Lottery

THE STORY
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?

THE ANALOGY
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
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.

SUMMARY
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.

FINAL THOUGHTS
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.

Strategic Planning Analogy #494: The 3 Keys to Success (Part 1)

THE STORY

When I was a young boy, I owned a Piggy Bank. It had two holes. The first hole was a slot at the top, used to put money INTO the piggy bank. The second hole was on the bottom. It was used to take money OUT OF the piggy bank.

My problem was that I tried to take money out of the bottom of the piggy bank more often than I put money into the top of the piggy bank. As a result, my piggy bank was almost always empty. That made it a fairly worthless bank.

THE ANALOGY

Businesses are a lot like that piggy bank. Money comes into the business through sales.  It is like putting money into the piggy bank’s top slot. Money is taken out of the business through events like salaries, profit sharing and dividends. That is like taking money out of the bottom of the piggy bank.

If you take money out of the business faster than you put it in, the result is similar to my empty piggy bank. It becomes worthless.

Most traditional small entrepreneurs I’ve met get this principle. They put a major emphasis on cash flow, to make sure that money coming in the top slot exceeds money going out the bottom hole. They realize that if the money is not coming in the top, there will be no money for them to buy groceries to eat. 

This principle, however, seems to get lost in a lot of modern digital/social businesses and large enterprises. The connection between inflows and outflows becomes less obvious. After all, there are digital/social businesses out there valued at huge sums of money (and making their owners rich) which have little or no source of income coming into the top slot.

Without strategic concern for both holes, the business (piggy bank) eventually becomes empty and worthless.  This is why you ended up with the bubble bursting on the original dotcom boom and many stock market disappointments in the current digital/social boom. The private equity contributors to the piggy bank eventually want to get their money back out. But since more money was coming out the bottom than was going in the top, there was not enough to satisfy everyone.

THE PRINCIPLE

In this blog (and the next two), I will be talking about the keys to real success in business. I’ve spent a lifetime in the business world and have witnessed first hand (and second hand) a large number of successes and failures. 

Based on what I have seen, it appears to me that there are three key differences between the big winners and big losers. So in this and the next two blogs, I will be looking at these three characteristics which differentiate the winners from the losers. 

Passion for the Business Model

The first characteristic has to do with passion—that which captures the attention and focus of the leaders (and their followers). In the losing companies, the passion and focus tends to be on wealth.  The focus is on profits or personal wealth—making them as large and as quick as possible. By contrast, the passion of the successful firms tend to focus on the business model. The focus is on making the model ever better at serving the customer.

Does this mean that profits are bad? Is it wrong to want your business to have larger profits? Of course not. But if you are more passionate about profits than the business model, then you are like me when I kept taking money out of the bottom of my piggy bank without putting money in the top. Eventually, the model falls apart and the business becomes a worthless empty shell.

If you ignore the business model, then the only way to keep taking money out of the bottom is by “financial engineering.”  This is essentially the idea of putting other people’s money in the top so that you can keep on taking out money from the bottom. As a child, that financial engineering would be to convince my father to loan me some money beyond my allowance, so that I could keep on taking out money beyond what I earned. In the business world, this consists of taking on extra debt or equity, either private equity or public equity. 

The problem is that these types of contributions to the piggy bank come with strings attached.  These contributors also want a turn at taking more money out of the bottom of the bank than what they put in the top. And, as it turns out, it is impossible for all of you to take out more from the bottom than you put in the top if the business model is not sufficiently multiplying the money.

By contrast, if you have a passion for the business model, you will be always looking for ways to improve the way the business fulfills its position in the marketplace. This leads to efficiencies (a less expensive way to serve) and effectiveness (a more valuable service for customers). This makes the money in the piggy bank grow by getting satisfied customers to contribute to your success in ever more profitable ways.

Hence, the irony. If you want a lot of profits, don’t focus on profits; focus on the business model.  Focusing alone on profits can lead to bad behaviors, such as:

1. Underinvesting in the business model;
2. Ruining the Balance Sheet;
3. Short-term gains which ruin long-term prospects;
4. Ruining the relative value for the customers (as you give more value to yourself than to your customer)

These actions all cripple your ability take money out of the bottom of the bank over the long haul.  However, if the passion is about improving the business model, the profits will be there for years to come and the piggy bank will never be empty.

Example #1 Euro Zone

Just look at the economic challenges in Europe.  Rather than a passion for building a solid business model for a continental economy, the Euro Zone has been plagued by governments and citizens who keep taking more out of the bottom of the piggy bank than is put in.  To fund this passion of taking money out, the governments took too much of other people’s money in the form of debt. Now the piggy bank has nothing but debts that cannot be paid. And the governments seem unwilling to make the tough choices on how to fix the broken business model.

The exception is Germany.  And guess what—the Germans have focused for decades on building a solid economic business model. This business model passion means that more is going into the piggy bank than is coming out. Germany is solid

Example #2: Formica

Awhile back, I was in discussions with the top executives of Formica about doing some consulting.  They explained to me the history of the company. Decades ago, Formica had been a strong brand with great profits. They essentially owned the countertop industry. 

But then, Formica was bought by people whose passion was profits. They started taking more out of the bottom than was coming in at the top. This caused two problems. First, the countertop marketplace was changing and they underinvested to meet the challenge of the change. This hurt the status quo business model, weakening the ability of Formica to fund obligations. Second, taking too much out of the bottom required loading up the balance sheet with debt, thereby increasing obligations. Eventually, since they couldn’t make ends meet, they sold the company to others.

The “others” also had a passion for profits and continued these practices. In due time, they sold the business, too. After several iterations of this process, Formica had been so weakened, that it had become an empty shell full of IOUs that could not be paid.

Eventually, Formica ended up in the hands of Fletcher Building of New Zealand. This was a company which had a passion for the building materials business. They focused on the business models within the industry they loved. As a result of their passion for the business model, they are bringing back Formica from the dead.

Example #3: Amazon

Recently, I had discussions with some executives at Amazon. In my discussions with them, they never really talked about profits. Their talking pointed to their passion for the Amazon business model. All they wanted to do was improve that model by making it faster, easier and cheaper for customers to interact with Amazon.

As a result, the Amazon business model keeps getting better and better. This is increasing their competitive advantage in the marketplace. Yes, the near-term profits have recently suffered a bit, but that was because of extra investments in the business model, not a failure to win in the marketplace. Amazon is on strong, solid footing. It survived the dot com bust and the digital/social slump. And it has the big box stores around the world panicking as they continually lose share to Amazon. Founder Jeff Bezos was the 2012 Fortune Businessperson of the Year. This is a company built for long-term success.

SUMMARY

Long-term winners tend to have characteristics that are different from long-term losers. One of those characteristics has to do with where the passion lies. The losers tend to have a narrow passion focused around rapid personal wealth-building. This usually leads to bad behaviors which choke the prospects for long-term business success. They prematurely empty out the piggy bank.

The winners, by contrast, tend to have a passion for the business and its business model. They are more concerned with improving how the business works in the marketplace than how much they can pull out of the business for themselves. They get interested in all the little details about how to make the business better. They build piggy banks which are full for a long, long time.

FINAL THOUGHTS

Now that I am grown up, I have an electric bank which sorts coins and puts them into the appropriate paper rolls.  And when the rolls get full, I take them to the bank rather than spend it right away. That is the better path for the long term. Is your corporate culture promoting actions like what I did with my boyhood bank or my adult bank?

Strategic Planning: Business as the New Government

BACKGROUND
Back in February, Peggy Noonan wrote an editorial in the Wall Street Journal about how enthusiasm for politics is declining in the US. In what many political pundits feel is an historic election year the US, the public is not all that engaged with the process.

According to Peggy Noonan:

a) Voting in primaries tends to be down compared to prior elections;
b) News viewership drops when election stories air;
c) Political stories on the web are not getting many clicks (far less than other news);
d) Cable news ratings aren’t going up as normal in an election year;
e) Viewership of the President’s speeches is down.

People in the US just don’t seem as interested in politics as before.

THE HYPOTHESIS
I have a theory about this. It goes back to the business principle of “Solution-Selling.” The idea is that consumers don’t really desire products. What they really desire are solutions to problems. Products are only the means to that end. And as soon as people are convinced that there is a better way to solve a problem, they will abandon the old products and go with the new alternatives offering the better solution.

A perfect example is weight loss. Most people really don’t desire exercise or diet or surgery. What they really desire is losing weight. Whatever method promises to be the fastest, easiest, most convenient and least costly way to lose weight will win. That’s why there are so many weight loss fads. People keep switching to the next fad in hopes that it will provide a better weight loss solution. I speak more about this solution-selling concept here, here, here and here.

I believe that a similar situation is occurring in politics. Yes, there are those political junkies out there who love politics as much as football junkies love football. However, for most people, politics in and of itself is not a desire. No, people are looking for solutions for life and for society.

For a time, politics and government appeared to be the best solution for solving many of these problems. However, I now believe that there is a growing movement towards the idea of a better “product” for solving those problems. That better product is a combination of social media and business.

EXAMPLE
As an example, I’d like us to consider sustainable fishing. There are many who believe that if you keep taking more fish out of the ocean than the replenishment rate, that eventually you will run out of fish. Therefore, there is a movement to support fishing practices which are more sustainable over the long term.

Trying to solve this problem via government is extremely difficult. The oceans don’t easy fall under government rule. There are many different vested interests in different countries, so universal compliance would be difficult. Even if you could get all the governing factors to agree to laws and standards, they would be nearly impossible to enforce, making the laws relatively worthless.

Now compare that to what has recently been happening. Social media pressure has been placed on the large companies which purchase the most fish. As a result of this pressure, many of these companies have enacted policies to only purchase fish from those who practice sustainable fishing. It looks like this pressure has impacted a critical mass of large fish purchasers (like Wal-Mart and Supervalu). The market equilibrium has shifted.

The fishing world is now faced with a dilemma. If they want to sell the fish they catch, they are more likely to do so if they practice sustainable fishing practices. It is in their best interests since that is what the largest customers demand. It is self enforcing.

Now compare the two alternatives to solving the sustainable fishing problem—government versus social/company. To me, it is a no-brainer. The social/company approach is faster, more efficient, and easier to enforce. So following the principles of solution-selling, market share should flow from “government as solution” to “social/business as solution.”

Hence, the decline in political interest. The people have found a better solution for many of their problems.

THE IMPLICATIONS
If this is true, the implications for business are enormous.

Expectations Have Changed
First of all consumer expectations have changed. An ever growing number of consumers now expect that businesses will take up some of the responsibilities formerly handed off to governments. They expect businesses to not only be good citizens, but to be proactive in using their clout to right many of the wrongs of the world, like sustainable fishing, reducing environmental waste, helping the poor, etc.

You see this in how the millenial generation acts. They are increasingly more interested in the social activity of the companies they choose to work at or purchase products from. The largest economic generation is using their clout to bend the businesses to their point of view. It is all expected as part of the new normal.

There is Nowhere to Hide
And if a company chooses not to comply with these new expectations, it will become known. In today’s society there is no place to hide. People will discover your actions (or lack thereof) and broadcast them across the social media spectrum.

Within literally moments, a groundswell of discontent can be pointed against your company. Remember, this social media helped topple heavily entrenched governments in the Middle East. Don’t assume you are so heavily entrenched that the social forces cannot “topple” your business.

This is serious stuff.

Your Strategic Plans Must Reflect the New Reality
If the new expectation is that businesses are supposed to take up responsibilities formerly given to governments AND failure to comply can lead to nearly instant and massive retaliation, then your strategic planning should reflect this. It needs to be at the discussion table.

First of all, one needs to determine which formerly governmental responsibilities they will pick up. This can be tricky, because of two factors. First, not everyone wants the same outcomes. As we have seen in the news, stands regarding contraception, homosexuality, and Planned Parenthood can create controversy no matter what you do. Therefore, be careful about the issues you choose to fight for.

Second, there can be unintended consequences to your actions. For example, Target Corporation decided to take a stand to promote the growth of business. Therefore, they made contributions to candidates pushing a pro-business agenda. Unfortunately, one of those individuals—in addition to their pro-business stance—also had a strong position on one of those controversial issues mentioned above. Word got out that Target was supporting one of these controversial issues because of their support for this candidate. The social media’s anger was pointed at Target. All for the wrong reason.

Then, you need to determine how to use your corporate clout to affect change. This is also equally tricky for many of the same reasons.

These decisions are easier if you understand your customer and understand how to use issues to reinforce one’s strategic positioning. For example, Wal-Mart’s position is about lowering prices for people who cannot afford to pay more. Wal-Mart has chosen to fight environmental waste. The connection is that environmental waste increases costs. If Wal-Mart eliminates environmental waste, they can afford to make prices even lower. In theory, it becomes a win for everyone—the environment, the customers, and Wal-Mart.

SUMMARY
There appears to be a rising tide of opinion that the social/company approach can provide a superior solution to major problems better than the political/governmental process. As a result, companies are now expected to take on some of these governmental roles. If your strategic planning ignores or downplays this new role, you may suffer grave consequences.

FINAL THOUGHTS
Consumers are angry over their perception of the “do nothing” congress. Don’t follow in their path and get the perception of being a “do nothing” company.