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 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.
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.
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.
