Strategic Planning Analogy #530: The Power of Power

THE STORY
I once had to sit on a long plane ride next to a woman who wouldn’t stop talking to me. She kept going on and on about all of the products she had “invented” over her lifetime. Although she used the word “invented”, I think that was a bit of a stretch. Actually, a better term would be “dream up.”

She would tell me how she thought of an idea for a new product and then years later a company would actually bring it to market. For example, she told me that she had dreamt up the idea for disposable diapers long before Proctor and Gamble invented them. She never really pursued any of these ideas. She just had an idea that someone else would later also have. The difference was that she never did anything with her idea and they did.

There was only one of her “inventions” which really came to life. It was a brush for cleaning grease traps at fast food restaurants. And it only came to life because she worked for a brush manufacturing company and she had the company actually do the work of bringing it to life.

THE ANALOGY
Just having an idea is not enough to be a successful inventor. You need to bring your idea to life and get it successfully marketed. Lots of people have ideas. The successful ones find a way to make money off their idea.

The lady on the plane didn’t bother to do anything with her vague notions, so she never profited from them. They did her no good. She really was not an inventor—just a thinker.

Strategic planners can fall into the same trap. You can dream up all sorts of cool strategic ideas, but if the ideas are never put into practice, you haven’t really done much. You really aren’t a strategist—just a thinker.

THE PRINCIPLE
The principle here is that strategies are only useful if they are used. Therefore, a successful strategist does not stop with just an idea. Instead, the strategist finds a way to put the strategy in motion.

Making a strategy useful involves three steps: thinking, acting, and attaching.

1. Thinking

Thinking is the process of coming up with the notion of what strategy to use. This is an essential and necessary first step. It bothers me how many modern companies skip this step. They usually say that there are no competitive advantages and that things change too quickly, making strategic notions passé.

So they skip the thinking step and go right to actions. They work to be fast and agile. They want to get things done. But if you have no strategic notion, then what exactly are your actions leading to? Getting nowhere faster isn’t very comforting. You’re still nowhere.

I’ve written hundreds of blogs and numerous books on the importance of strategy. It makes a difference. Don’t skip the step of developing great strategic ideas.

2. Acting

A lot of us are like the lady on the plane who stop at step one. We have an idea, but don’t act on it. Great ideas don’t just stand up and do the work on their own. You have to do the work to bring them to life.

Thomas Edison said that invention is 1% inspiration and 99% perspiration. I’m not sure if those percentages are correct, but his point sure is. If you’re not willing to do the hard work that creates perspiration, your inspiration won’t be very useful. That applies to inventions and to strategies.

This is why it bothers me how strategic planning and operations are so isolated from each other in most organizations. Strategists and operators rarely interact. This makes it hard to connect the inspiration to the perspiration.

Worst case scenario is when the wrong type of outside strategy consultants are brought in, who do little more than just put their strategic notion on a powerpoint slide which only top management sees. The consultants then leave before the implementation stage. The consultants have no vested interest in the act of implementing. They already got their money and have moved on to their next client.

Similarly, the operators have no vested interest in the ideas of these outside consultants. The operators never met them and the operators think that those “ivory tower” consultants are out of touch anyway, so they can be ignored. The result is a failure to get the thinking converted into acting.

That is why I recommend that operators be an integral part of the thinking process. I also recommend that strategic planning departments have a combination of strategy professionals and operating professionals in them. That way, there is a more natural bond between the thinking and the acting, so the thoughts are more likely to be acted upon.

3. Attaching

Good intentions by the ones acting does not ensure that the strategy will be properly implemented. Usually, it takes some form of power to bring the strategy to a successful implementation. Without that power, you will hit a road-block on your path to implementation that you cannot overcome.

That power can take many forms. It could be the power of deep pockets of money. It could be the power of brand recognition. It could be the power of control over distribution channels. It could be the power of knowing the right people. Good strategists figure out what kind of power they need and attach themselves to that power.

It could mean attaching yourself to a venture capital group for cash. It could mean doing a joint venture with someone who has power you are lacking, like distribution. It could mean finding someone who has the power to introduce you to the right people.

The only successful invention of that lady on the plane occurred because she had attached herself, through employment, to a company who had the power to bring brushes to life. If she wasn’t attached to that power, I’m sure that grease trap brush invention would not have occurred, either.

Therefore, successful strategists consider what types of power are needed to make their idea come to life. Then, they include within the strategy a means of acquiring that power.

SUMMARY
Bringing a strategy to life has three steps:

1. Thinking: Coming up with the great strategic notion.
2. Acting: The hard work of implementation.
3. Attaching: Finding ways to get access to the power needed to overcome the barriers to success.

Many people try to skip steps. That typically leads to failure.

FINAL THOUGHTS
Good strategists understand that power is powerful (I guess that’s how it got that name). Make sure you have a way to attach yourself to power.

Strategic Planning Analogy #529: Stick to Your Stage

THE STORY
I read a story recently about how John Breck introduced shampoo to the United States back around 1930. Before then, people used some form of soap to wash their hair. But John Breck showed how to use a pH-balanced detergent which more easily rinsed away from the hair and left the hair and scalp in better condition.

I was shocked to learn how recently shampoo, as we know it today, was invented. I started thinking about all those generations of people in the past who have not had the simple benefit of shampoo.

I guess there was a reason why royalty in the past liked to wear those big crowns on their heads and why the ancient pharaohs of Egypt shaved their heads. As royalty, they did not want to be seen with dirty hair.  

THE ANALOGY
Shampoo is not the only common everyday consumer good that was invented relatively recently. Nearly all common consumer goods which fill our supermarkets are less than 100 years old. In fact, Uneeda Biscuits is considered to be the first broadly advertised branded food product. That happened in 1898. Before that, most food items were sold to grocers unbranded in bulk barrels—put into a plain brown bag for the customer by the local grocer.

Even self-service supermarkets, themselves, have only been around since abut the 1930s. They had to wait until all these products, like Breck Shampoo, were invented and branded so that consumers could choose items on their own.

You could say that a century ago, branded consumer products were the internet economy of their time. They were inventing whole new categories of products, like shampoo. They were changing the way people lived and spent their time and money. A radical transformation was going on in a burgeoning new industry. New trails were being blazed and new concepts were being invented (like couponing, which really didn’t begin to take off until all these branded products came about).

This was the era in which consumer product firms like Proctor & Gamble really grew into the huge and successful businesses they are. They were the masters of inventing new categories and inventing ways to market them to create incredibly large businesses which did not exist before (you could say that disposable diapers were like the Facebook of their day).

These consumer product companies understood how to use chemists and other scientists to invent major breakthroughs in performance (not unlike how companies in the digital economy use engineers). They blazed trails in new distribution and marketing channels, just as the digital economy did with marketing on the internet and smartphones.

Yes, less than 100 years ago, the big consumer branded product companies were Googles, Linkedins and Apples of their time.

But now look at those branded consumables found in supermarkets. Right next to them is a store brand that is just as good and costs a lot less. Sales growth is virtually non-existent. The old marketing tricks don’t move the sales needle much. It’s a very mature business driven mostly by cost control and price wars.

Consumer branded products are not at all anymore like the digital economy. And I suspect that at some point in the future, the digital economy will look a lot like the consumer branded goods industry today—very mature and without much growth. And it may happen sooner than many people think, just as I was surprised how soon shampoo went from a new category to extreme maturity.

THE PRINCIPLE
The principle here is that industries go through life cycles. There’s the introduction stage, followed by rapid growth, maturity and decline. Each stage has its own challenges—the keys to success and the skills required to win vary by stage as well.

Two Strategic Choices

As a business, you can choose one of two strategies:

1. Stick with your industry (become and industry expert) and ride the industry through its stages.
2. Stick with the business stage you are good at operating in and change your portfolio so as to stay in that stage of the life-cycle.

Looking at history, it seems that the second option is the best. General Electric has been so successful for so long because it keeps changing its portfolio. It gets out of businesses that are maturing and reinvests in newer industries that can take advantage of its corporate strengths. Proctor and Gamble has succeeded by getting out of the mature industries it helped develop and reinvest in industries (like beauty care and health care) where it’s traditional skills are still valuable.

And today, we see a lot of “serial entrepreneurs”—people who are great at the start-up stage of a business. As soon as their business leaves the start-up stage, they sell it and work on their next start-up. They succeed because they stick to the stage of business they have mastered.

It’s easy to understand why the second option is preferable. It’s hard to change one’s nature and instincts. As industries move from one lifecycle stage to the next, what is required to win is different. You have to radically change your business model and culture to adapt to the change. Most companies find it difficult enough to excel when dealing with relative stability. It becomes exceedingly difficult to excel when moving into a phase where all the rules for success are changing.

So stick with what you know—and the most important thing you know (most likely) is how to operate in a particular life stage, not the particulars about your industry.

If your company stays with your industry, your company’s life cycle will follow the industry lifecycle. You’ll decline along with the industry. Is that what you want?

It all happens faster than you think

The second option is not without its own risks, though. The trick is knowing when is the right time to make the shift—to exit one industry and enter another. If you get the timing wrong, you miss out on a lion’s share of the value creation.

One point to keep in mind is that industries move through their stages a lot quicker than we usually think. When you are in the middle of the day to day within an industry, you can sometimes lose sight of the bigger external factors that about to shake your industry into the next phase. From the inside, today looks a lot like yesterday, and tomorrow looks like it will be a lot like today. So we get lulled into thinking things are moving slowly.

But then, one day, everything seems to change. It only surprises us because we didn’t keep a closer eye on what’s happening outside the industry—where the disruptions start.

Experts tell us that industry lifecycles are getting ever shorter; the transitions come ever sooner. While I am a bit surprised about how fast consumer branded products went from invention to complete maturity, that process occurred far more slowly than what is happening today.

Back in the early 2000s, I was working with Best Buy and was trying to convince them to look for a “post retail” strategy. My concern was that the traditional retail industry was going to get extremely mature relatively quickly and if they wanted to continue to be a growth company, they would need to think beyond retail.

Best Buy thought they had a lot of time, so they didn’t act. And now, only about a decade later, Best Buy finds itself struggling because its retail foundation is in maturity (or maybe even the beginnings of decline). This just goes to show how fast this change can sneak up on you if you are not watching carefully.

So to play the second strategy, one needs to keep one eye focused on the external environment, in order to know when the times are about to change.

SUMMARY
Businesses have two strategic choices:

1. Stick with your industry (become and industry expert) and ride the industry through its stages.
2. Stick with the business stage you are good at operating in and change your portfolio so as to stay in that stage of the life-cycle.

In most cases, the second option is more likely to lead to lasting success. However, to make the second option really successful, you have to get your timing right on knowing when to shift your portfolio. That requires keeping an eye outside your industry—where the disruptions which cause your industry to shift occur.

FINAL THOUGHTS
Google is not content to think its current business foundation will be a growth industry forever. They keep investing in places where they think the next growth may come. You should

Strategic Planning Analogy #528: Business Without Brains

THE STORY
Imagine a game in which you are in your backyard and your goal is to shoot ping pong balls at targets in your neighbor’s back yard. The only problem is that there is a high wall between the two backyards so that you cannot see the targets…and, in addition, the targets are constantly moving. Since you cannot see anything, the only way you know you have hit a target is when you hear the ping pong ball bounce off the target.

Therefore, to win the game, you shoot as many ping pong balls in as many directions as possible. When you hear a ping pong ball hit a target, you start shooting even more in that direction until the target moves away. Then you start randomly shooting everywhere again.

THE ANALOGY
That sounds like a relatively stupid game to me. There’s no intellectual challenge. There’s no strategy. It’s just random shooting, hoping to get lucky. You could train a monkey to do that…or program a machine to do it.

Yet this is what modern marketing consists of at many companies. The company sets up its digital business on a web site. Then the company tries a constant stream of experiments with the site to see what works. Colors are randomly changed, the size and placement of boxes changes, prices and offerings randomly change. Text randomly changes. They try everything, everywhere.

With all of this “experimentation” going on, the company “listens” to see if they got any “hits” on the website. If so, they start doing more of what random thing seemed to cause the hit. Eventually the customer moves away from that approach, so the company randomly starts firing experiments in all directions again hoping for the next hit.

You can give this approach all sorts of fancy names like “big data” or “agile” or “digital marketing” or “listening to the customer.” But the reality is that it is little more than that silly game with the ping pong balls. No need to think; no need for strategy. Just program a machine to try a lot of things and listen for hits. It sounds like a rather stupid game to me.

THE PRINCIPLE
The principle here is that although the digital age has had a profound impact on marketing, most of the foundational principles of marketing have not been repealed. They are still valid. And if you ignore these principles, you are doing little more than shooting ping pong balls over the wall. Sure, with today’s technology, you can be more efficient with your randomness (and hear the hits better), but it still is little more than random luck. You may as well quit marketing and put all your money into lottery tickets. It takes about the same level of brainpower and strategy (virtually none) yet is a lot easier.

The only problem is that you can get VC money to make a business out of random experiments, but you cannot get VC money just to play the lottery. Perhaps venture capitalists would have higher success rates if they put their money into lottery tickets. Or MAYBE they should invest in people who still operate by the fundamentals or marketing.

Marketing Principle #1: Successful Companies Have a Reason for Being

Successful companies do not merely exist to make their owners wealthy. They succeed because there is a reason for them to succeed in the marketplace. They are fulfilling a consumer need better than anyone else. By fulfilling an unmet need, they have a reason to exist—a relevancy when it is time for customers to spend their money.

Before starting down the path of a new business venture, smart marketers will ask a series of relevancy questions. If the business idea is not sufficiently relevant, then they do not pursue the venture, for it is most likely destined for failure—because it does not have a reason for being.

Examples of relevancy questions include:

1.     Why would a consumer naturally prefer my product over the alternatives?

2.     What benefits do I provide better than anyone else?

3.     Do customers truly have a need for what I am offering?

4.     For what problem am I offering a superior solution?

5.     Is my solution valuable enough to the consumer to get them to pay me an amount that would provide a proper return on investment?

6.     If I didn’t exist, would I be missed in the marketplace?

Google initially succeeded because they offered a superior way to search the internet. It was different. It was better. Consumers could see the superiority. It was a better solution. In other words, it had a reason to exist—a reason to be successful—a reason to be preferred.

Compare that to a lot of other digital businesses trying to make it in the world today. Thousands upon thousands of these ideas are dreamed up in dorm rooms or on a sofa at Starbucks. They all look about the same and act about the same. There is no talk about superiority, because there is none. It’s still in beta and bull of bugs and won’t be great until version 4.0.  

There’s rarely talk of real benefits or meeting needs in a way people are willing to pay for. And there is rarely talk about why this version would be naturally preferred over the thousands of similar pitches being made in the same space.

Instead they talk about how fast they will be at adjusting and adapting. It sounds to me like they are just shooting ping pong balls over the wall and they think they will win because they can shoot more ping pong balls more often.  

Marketing Principle #2: Successful Companies Own a Position

But even if these people bothered to develop a great solution for an important problem, it is not enough. Others may have as good (or better) a solution for that same problem. In addition to having a solution for a problem, you have to OWN that solution in the mind of the customer. The solution has to belong to you. When the customer encounters the problem, your brand needs to be the one which comes to mind.

Google took its initial superiority in search engines and built a brand which “owned” search in the minds of most customers. By owning search, it became nearly impossible for anyone to take it away.

When I look at a lot of the proposed digital ideas today, I see people going after spaces already owned by someone else. They want to be the next “Facebook” or the next “Apple.” Well we already have Facebook and Apple. As long as they do their job, we won’t need another one.

Don’t attack a space already owned by someone else. That battle rarely leads to victory. Build a position that is different—one that you can own. Imitation may be the most sincere form of flattery, but it is a lousy way to try to win. Followers are never in the front.

How many different games do we need on our smartphones? They all seem to be minor variations on a small handful of themes. Your odds of being the next Angry Birds or Candy Crush are probably worse than if you put your money into lottery tickets.

If you cannot own a position, then you cannot achieve a winning position in the consumer’s mind for that space. And without a position, you have no reason to exist. Owning a position usually requires being early in the game, bringing something meaningful to the game, and out-executing the competition. A lot of companies are competing in the smartphone business, but only Apple and Samsung make any real money at it. Everyone else is a loser in that space because they do not own it.

Marketing Principle #3: Successful Companies Know Why they are Successful

Some of the literature on the “new” way of marketing say it is a waste of time to try to figure out why a particular experiment works. If a blue website sells more than a green one, just accept it and move on.

I’m okay with some of that as it relates to minor tactics. But at some point, one should understand why they are in business and why a customer should prefer them. You cannot strengthen or broaden a position if you don’t understand why it works.

If your only success is due to discovering the advantages of a blue website first, your advantage disappears as soon as everyone else makes their website blue. The advantage is not sustainable.

However, if you deeply understand the “why” of your success, you can use that knowledge to build barriers of sustainability. Apple understands why it is successful. It creates a consumer advantage through “coolness” and a competitive advantage through closed systems. It keeps replicating this over and over again to make Apple ever stronger. And if the superiority in coolness and closed systems lies outside of Apple, as in the case of Beats, they acquire it.

The new marketers praise the value of ignorance—just go with what works and don’t ask why. I beg to disagree.

SUMMARY
Much of what is proposed as “New Marketing” is really “No Marketing.” It is a brainless, strategy-less approach depending upon quickness and luck. The basic laws of marketing still exist. Sure, the execution will need to adapt to the digital age, but the fundamental principles still apply. Successful businesses today still need to worry today about:

a)     Having a reason to exist in the marketplace (superior solution);

b)     Owning their position in the marketplace (differentiation);

c)     Knowing what is the reason for their success (understanding why).

Even in the new digital economy, these are the characteristics of the sustainable winners.

FINAL THOUGHTS
In that ping pong game, the successful “real” marketer would put a door in that wall and design compelling reasons why the targets would be prefer to come into my backyard and/or let me walk into their backyard. This proactive, strategic approach is superior to shooting ping pong balls and hoping for the best.

Strategic Planning Analogy #527: Wedding Ring Blues

THE STORY
I got married right out of college. Since I was just a poor college student, I didn’t have a lot of money to spend on a wedding ring.

The man at the jewelry store could tell that I was a bit nervous about the big purchase and tried to ease my mind. He told me that they had a lifetime buyback guarantee. If, at any time, I wanted to return the wedding ring, I could do so—no questions asked—and get my money back.

That sounded too good to be true, so I asked a few questions. As it turns out, there was a loophole in his guarantee. I was buying the wedding ring from him at the retail price. I would be selling it back to him at the wholesale price.  That sounded like a bad deal to me.

The salesman reassured me that it was not such a bad deal. After all, wedding rings have been going up in value for centuries. If, years later, I decided to sell the ring back to him, it may have appreciated enough in value to have a wholesale price higher than the retail price I paid for it.

Maybe so, but it still sounded like this was a much better deal for the jeweler than it was for me.

THE ANALOGY
Buying that wedding ring was my first real experience dealing with the spread between retail prices and wholesale prices. As an average consumer, that spread did not seem to be in my favor. If I’m always buying at retail and selling at wholesaling, it is extremely difficult to get ahead.

There has to be quite a bit of appreciation in value to compensate me for that spread. And even then, the broker of the deal benefits more from the appreciation than I do. It doesn’t sound like a good business plan for me. And it probably doesn’t sound like a good business plan to you.

Yet business strategies often fall into the same trap. We end up with strategies which “buy at retail” and “sell at wholesale”.

Take manufacturing…you buy your raw materials at retail prices and sell your finished product to a distributor at wholesale prices.

What if you’re a web site whose profits are based on advertising? The ones advertising on your site may be paying retail advertising prices, but all you get to pocket are the wholesale prices because the advertising broker gets the markup.

What about M&A activity…you pay a hefty acquisition premium over current value to buy the asset (sort of like a retail markup), but when you get it, all you have is the core business (as is) which was valued well below your premium (sort of like the wholesale price). It’s going to take a whole lot of asset appreciation to cover that spread.

And if you want to dump a troubled asset that doesn’t work for you, others will know you are dumping and it becomes a “fire sale”, where people pay you less than you think it is worth (like selling a wholesale price).

And even if you have a desirable asset you can sell at a premium, it seems like the investment bankers and lawyers are the ones who rake in all the cash. The brokers of the deal get a much better return on the sale than you do.

So maybe business strategies aren’t all that different from my early experience with that jeweler after all.

THE PRINCIPLE
The principle here is that the wholesale-retail spread is a reality. Depending on how you build your strategy, you have that spread either work for you or against you. We’ll look at three strategic angles to minimize the negative or accentuate the positive aspects of the spread.

1) Creating Value Vs. Waiting for Value

There are two ways to attempt to profit from assets. The first way is by trading the assets (buying and selling). This method only works if you are successful at buying low and selling high. But as we’ve seen, trading assets often works in reverse (buying high at retail and selling low at wholesale). And usually there is some kind of broker or middleman in the transactions who gets a cut of the money when you buy and when you sell. Therefore, your only hope is that prices for the asset will greatly appreciate to cover these spreads.

The second way to profit from assets is to hold them and use them to create value. In this second way, the primary value comes not from selling the asset, but by selling what the asset produces, year after year after year.

Over the decades, Warren Buffett has been telling the world that the second method (hold and create) is a far superior path to profits than the first (buy and trade).  Hold and create is what had made Warren Buffet so wealthy. He regularly earns money from these companies by what they do, rather than what he can trade them for. By avoiding the churn of trading, he avoids dealing with the wholesale-retail spread found in trades and avoids paying out all the money to the brokers who facilitate all the trades. He explains it well beginning on page 18 of his 2005Berkshire Hathaway shareholder letter.

So building a strategy like Berkshire Hathaway (Buy-Hold-Create) is one way to avoid the mess of the wholesale-retail spread.

2) Own the Supply Chain

As I mentioned earlier, the supply chain creates an adverse wholesale-retail spread. You buy things upstream in the supply chain at retail and sell things downstream in the supply chain at wholesale. This can be disadvantageous. One way to get around this is by owning a larger share of the supply chain.

Take the fashion world, for example. Nearly every fashion brand owns a portion of its downstream retail channel, with company-owned stores. Why? It helps them better control pricing at retail and wholesale, which helps keep the brand value from deteriorating. It also helps the fashion brand capture a higher portion of the value of the brand whether it occurs at the brand level or the store level. When the brand sells to its own stores, it doesn’t get cheated by the wholesale-retail spread because it owns the whole transaction.

Similarly, most fashion retailers have gone upstream and own a meaningful proportion of the brands sold in their stores (called controlled brands, or private label). Retailers like Macy’s and Kohl’s own more than 40% of the fashion brands they sell. Why? By going upstream they can capture more of the value of the product without it getting lost in the transaction between brand owner and retailer. They get everything across the spread because they own both ends.

This is not to say that vertical integration is without risk. I talk about those risks here. But at least if you vertically integrate, you have greater control over pricing and are less likely to be on the losing side of the spread.

3) Be the Broker

One of my favorite movies is Trading Places, a comedy about commodity brokers. Here is a quote from the movie:

Randolph Duke: We are 'commodities brokers', William. Now, what are commodities? Commodities are agricultural products... like coffee that you had for breakfast... wheat, which is used to make bread... pork bellies, which is used to make bacon, which you might find in a 'bacon and lettuce and tomato' sandwich. And then there are other commodities, like frozen orange juice... and GOLD. Though, of course, gold doesn't grow on trees like oranges.

Randolph Duke: Clear so far?

Billy Ray: [nodding, smiling] Yeah.

Randolph Duke: Good, William! Now, some of our clients are speculating that the price of gold will rise in the future. And we have other clients who are speculating that the price of gold will fall. They place their orders with us, and we buy or sell their gold for them.

Mortimer Duke: Tell him the good part.

Randolph Duke: The good part, William, is that, no matter whether our clients make money or lose money, Duke & Duke get the commissions.

Mortimer Duke: Well? What do you think, Valentine?

Billy Ray: Sounds to me like you guys a couple of bookies.

Randolph Duke: [chuckling, patting Billy Ray on the back] I told you he'd understand.

Brokers get their money regardless of the fortunes of those around them. They take their cut from the spread which is there for both good deals and bad. Therefore, if you want to get the spread to work for you, then you have to become more like the broker.

Look at Google. The company appears to make a lot of money from doing a lot of things. But when you boil it down, Google is basically an advertising broker. Pretty much everything else they do is vertical integration into the places where they can control the brokering of ads. Google search is a place for brokering of search ads. Android is a place for brokering of smartphone ads. Driverless cars are a place where the former driver can now look at ads rather than look at the road.

Google avoids a lot of the wholesale-retail spread by owning the company that brokers the ads. The spread goes into the broker’s pocket. Then, by also owning the place where a lot of those ads appear, they cut out the spread between them as well. Google profits from the spread rather than losing to it.

SUMMARY
Although we like the idea of buying low and selling high, we are often forced to buy high and sell low due to the wholesale-retail price spread and the use of brokers. There are three strategies you can use minimize these disadvantages. First, you can use a buy-hold-create approach rather than a buy-trade approach to your assets. Second, you can vertically integrate. Third you can become the broker in the transactions.

FINAL THOUGHTS
I did a buy and hold on that wedding ring. My wife and I are still married after more than 35 years.

Strategic Planning Analogy #526: Big Stick

THE STORY
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!

THE ANALOGY

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
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?

SUMMARY
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.

FINAL THOUGHTS
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.