Strategic Planning Analogy #448: Tornado Chasers

THE STORY
Tornado chasers are an odd bunch of people. Some would say they are crazy.

First, they spend countless hours in research looking the next possibility of a tornado attack. Most people would say that there is enough trouble coming our way on its own, so don’t look for any extra trouble. But tornado chasers are driven to proactively look for the next opportunity for danger. (Yes, to them tornados are an “opportunity”).

Second, once they find the danger, tornado chasers don’t run away from it. No, they run towards it. They try to get as close to the tornado as they can. They chase after it as fast as they can as soon as they can.

Third, the tornado chasers don’t stop after doing it once. They continue to do it year after year after year, running towards danger.

Yes, that does sound a bit crazy.

THE ANALOGY
Tornados are not the only dangerous and destructive force out there. Just look at the business landscape. Large, formerly great, industry-leading companies disappear all the time. It is as if a tornado wiped them out. Nothing is left but debris. Enron; PanAm; Lehman Brothers; Kodak; Firestone; Worldcom; Montgomery Ward. and the list goes on.

Sometimes the destructive force starts from within the company. Sometimes the destructive force that destroys the company comes from the outside environment. But no matter where the force comes from, the ultimate blame for the destruction needs to fall on management. It’s their fault, because they did not come up with a strategy to deal with the destructive force.

Destruction is not inevitable. Other companies have been faced with similar destructive forces and survived. They reinvented themselves to stay on top. Like Judo, they used the dangerous force coming at them and redirected it to their advantage.

In many ways, these surviving firms are like the tornado chasers. Rather than ignore or avoid danger, they embrace it. They look for it. They run towards it to take it on before it has a chance to destroy them.

At first this approach may seem crazy, but as we will see in this blog, it is a lot safer for businesses to chase after the tornado than to just sit in their headquarters and have the tornado come and blow them away.

THE PRINCIPLE
The principle here is that often times the best way to deal with a destructive force is not by avoiding it or by building a bigger defense. That can be the path to ruin.

As Victor Hugo put it, “There is nothing more powerful than an idea whose time has come.” It is so powerful that no defense can overcome it. When it was time for the digital revolution, there was nothing the analog world could do to prevent it. The force was too powerful. The analog firms who tried to ignore or stop the revolution lost. The firms which embraced the transformation won.

No, the best approach is often to run towards the destructive force and embrace it. We need to become more like tornado chasers.

In particular, there are four things we can learn from tornado chasers which can help our business thrive in world of destructive forces.

1. Look for Danger Before It Exists
Tornado chasers don’t wait until a tornado has touched down before taking action. No, they look for meteorological conditions where tornados MIGHT appear. In other words, they prepare for tornados before the tornado exists by examining conditions which can lead to tornados. That way, they are fully prepared in advance—in the right place at the right time when the tornado comes.

This same principle applies to business. If you wait until a danger is in full force before starting action, it is usually too late. There is not enough time to respond. You will miss your window of opportunity. The rules will already be re-written by others. You will be left out. In addition, by acting early, you still have the strong cash flow of your core to help fund the battle. The more you wait, the more cash flow you will need in the fight, and the less you will be generating (as the force increasing eats away at your core).

Think about Google and its Android platform. Android was conceived at a time when smartphones were little more than a novelty and the thought of doing meaningful activity on them via the internet was little more than a dream. However, like a tornado chaser, Google could see that mobile could create the condition for a major competitor force in the future which could blow away Google’s computer-based search foundation.

Therefore, they went to mobile early and created a way to harness the eventual force to their advantage. Experts predict that by 2013, internet access via mobile will surpass internet access via mobile. It has indeed become a major force which could have destroyed Google’s base. However, because Google attacked the danger before it existed (via Android), they have used the force to their advantage and can move their search strength to the mobile platform.

Contrast this to the history of Microsoft. Historically, Microsoft has waited until the force of threat is already quite strong before making a move. It occurred with internet access, cloud computing and mobile. With mobile already larger than computers, Microsoft is still just trying to penetrate the market. They are very vulnerable to suffering significant damage from this force because they waited too long.

Do you have an eye out looking for where potential dangers can occur, or do you wait until the danger has built up a force of power before taking action.

2. Move to Where the Action Is
Tornado chasers don’t wait for the storm to come to them. They go to the storm. This is also true for businesses. In a prior blog, I explained why it is usually advantageous to fight your battles at the periphery before it gets to your core. If the new force is going to be the next new thing, then you need to embrace the force before it makes you obsolete.

When Google saw internet time moving to mobile, they went to mobile. When Sam Walton saw that supercenters, with groceries, had the potential to under-price his discount stores, he shifted to Wal-Mart Supercenters. When Amazon saw how digital books could ruin their business model, they agressively brought out the Kindle reader.

Now people could argue that Google had no right to get into creating a mobile platform. Their expertise was search algorithms and advertising. It looked crazy. People said the same thing when Wal-Mart added groceries—it was not a part of their expertise. It looked crazy. Amazon was a digital retailer, yet it reinvented itself as a device manufacturer with the Kindle. It looked crazy.

But here is the point. If the new force is drawing away your customers, you don’t have much of a choice. Either you find a way to become an expert in the new area, or the force will blow you away, like a trailer park in the path of a tornado.

3. Take the Threat Seriously
Most tornado chasers are not idiots. They realize that tornados are powerful, destructive forces. They respect that power and take precautions. They take their threat seriously. That’s how they stay alive. The same should be true for businesses. When a new threat arises, don’t be casual and half-hearted. Treat the threat for what it truly is—a force with the potential to destroy your brand’s very existence. Take it seriously and fight as if your life depended on it.

Google took the mobile threat very seriously. They did not wait for someone to build a platform to put their search engine on. They made sure there was a platform available for them by building it themselves (Android). In addition, they were concerned enough with the possibility that the Apple platform would try to lock them out that they gave away the Android for free. Now that shows how seriously Google respected the threat. As a result, Android now has close to half the market share and Google remains a powerful force in search and advertising.

Facebook could see a potentially forceful threat by Instagram, the photo-sharing site. They took the threat so seriously that they immediately purchased the company for $1 billion, even though the sight had no revenue. Now the potential threat is an ally.

Other companies often will put up a small fight in the new space, but do not treat the battle as seriously as they should. They do not fully respect the power of the new force to destroy them. Kodak did not fight the digital imaging war as seriously as it should have.  As a result, it did not land a new position in the digital space and had the digital competition blow away Kodak’s analog film business. It ended up with nothing.

Whereas Wal-Mart was willing to bet the company on an aggressive push into supercenters, Kmart only dabbled half-heartedly with the concept. As a result, Wal-Mart grew ever-stronger and Kmart grew ever weaker.

All strategies eventually fail. They become overtaken by a new force in the marketplace. Resisting the new force in an attempt to save the core usually leads to failure in both spaces. You end up with nothing. Take the threat seriously for its potential to wipe away your core and envision a way to win even if your core is severely damaged (or completely wiped out).

4. Never Rest
The thing about tornados is that they come back every year. You can never say that you’ve seen the last tornado. There will always be another one.

The same is true in business. Forces of change will continue to come. Today’s status quo will be replaced by the next big thing. And that next big thing will eventually be replaced as well. It doesn’t stop.

As a result, one cannot rest on the past. One has to always keep an eye out for the next storm.

That is what makes the half-hearted moves by Kmart into supercenters so interesting. Back in the 1960s, Kmart (then called Kresge) could see that the force of discounting was going to destroy their Kresge variety stores. Therefore they bet the company on the new trend by abandoning the variety stores and aggressively embracing the Kmart discount store format. As a result, Kmart was a powerful, dominant, and highly profitable force in retail for many, many years.

Yet, when the supercenter force came, they did not follow the pattern of destroying the old (Kresge) for the new (Kmart). They rested on the strength of Kmart and only pursued supercenters as an additional piece—not as a replacement. As a result, Wal-Mart supercenters are replacing Kmart in the marketplace.

And now we look at the force of e-commerce on the brick and mortar stores. Was Wal-Mart resting on its supercenter success too much and not taking the e-commerce threat seriously enough? Has Best Buy rested on its past too much and missed the next retail transformation? Only time will tell.

Yahoo and AOL may have lead the change on one wave of force. However, they may get wiped away by the current wave. You can never rest on the past.

SUMMARY
Economist Joseph Schumpeter coined the term “creative destruction” to describe how capitalism works. His point was that there are forces in the economy which destroy the status quo, much like a tornado. The status quo is then replaced by something more in tune with the marketplace. As a business person, you need to devise strategies to use creative destruction to your advantage. Otherwise, the natural forces will wipe you away.

FINAL THOUGHTS
Which is more dangerous—going out to attack the tornado or sitting inside a mobile home not knowing that a tornado is about to cross your path and destroy your existence? Get out of hiding and embrace the new force before it blows you away.

Strategic Planning Analogy #408: Poisoning the Well

THE STORY
There are lots of stories written and movies made about feuding families in rural areas. A common tactic used to attack the enemy in these stories family was “poisoning the well.” What would happen was that one family would sneak onto the other family’s property. They would then do something to the well water or reservoir of their enemy with the intent of either drying up the source of the water or making it unfit to drink. This was called poisoning the well.

This was a particularly nasty tactic, because if a farmer or rancher doesn’t have access to good water, their livelihoods are ruined. Not only is there nothing for the family to drink, but nothing to feed the cattle or water the crops. The family who was attacked in this way had few options. Often they just had to give up and move somewhere else.

What makes this tactic even scarier today is the fact that it is not that difficult for a terrorist to “poison the well” of major cities. Using modern chemistry, it wouldn’t take much for a terrorist to cause the major sources of water for huge cities to become unfit to drink. Suddenly, that old tactic takes on new significance.

THE ANALOGY
A similar situation occurs in the business world. However, instead of the well or reservoir being filled with water, it is filled with cash. Just as water is needed to keep the cattle healthy and the crops growing, cash is needed to keep the company healthy and growing. Cutting off the flow of water can ruin a farm or ranch. Similarly, cutting off the cash flow to a business can ruin it.

And just as the families in these movies and books had enemies, so do businesses. And if a company makes a strategic error, they can create a situation in which competitive forces “poison the well” of cash for a business. This can be so ruinous to a firm that the company can no longer exist.

Therefore, a key component of strategy needs to be protecting the well of cash so that it does not get poisoned.

THE PRINCIPLE
Today’s principle has to do with where the emphasis should be placed when looking at the strategic aspects of a potential acquisition. I believe that, in general, too much focus is placed on potential synergies from the acquisition (ways to boost cash) and not enough time is spent looking for the potential of the acquisition to poison the well of cash (ways to destroy cash).

As we will soon see, acquisitions can trigger competitive events which may cause a poisoning of the well. Since the purchase price in an acquisition is typically linked to the value of future cash flows, any poisoning of the well seriously diminishes the value of that acquisition (because there will be far less cash after the poisoning). It can cause you to grossly overpay for the acquisition if you do not take this into account during due diligence.

Ways in Which Acquisitions Can Poison the Well
There are many ways in which an acquisition can poison the well. For example, let’s assume you want to acquire one of your suppliers. That supplier may also be supplying your competitors (your enemies). The enemies will not want to do anything to help you, so if you buy that supplier, they may take their business with that supplier elsewhere. In other words, your ownership of that supplier can trigger competitors to take away their business and reduce the supplier’s cash flow. You have poisoned the well.

Let’s say you want to acquire your distributor. Suddenly, many of your enemies who also use that same distributor may no longer want to use them because they do not want to help a distributor owned by their enemy. Again, the cash goes down due to ownership change. You’ve poisoned your well.

Let’s say that you want to acquire a direct competitor. It may be that a lot of the customers using that competitor were doing so specifically because they did not want to give their business to you. Once you buy that competitor, it becomes a part of you. Therefore, the customers who were trying to avoid you will take their business away from the company you want to acquire. The well is poisoned.

I spoke about this concept in more detail in a prior blogs (here and here). You may want to go back and review them.

Synergies Aren’t As Great As One Thinks
Given the high potential for ruinous poisoning, you’d think that more attention would be given to it. Instead, my experience has been that the bulk of the strategic focus in acquisitions is around synergies.

Synergies are good and they should be looked for, but if we focus too long in this area, we may delude ourselves into seeing more synergies than really exist. Lots of studies have looked into why most acquisitions fail. One of the key conclusions which keeps coming up is that acquisitions rarely achieve as many synergies as one thinks prior to the deal. Apparently, much of that time focusing on synergies was focusing on illusions which will not occur. They deceive us into seeing more value than there really is.

Worse yet, all that time spent on the optimism over synergies may keep us from spending enough time on the pessimism of potential well poisoning. Too much optimism combined with not enough pessimism leads to grossly overvalued estimations of cash flow. The result is that companies pay too much for an acquisition and destroy company value.

The Google – Motorola Mobility Deal
The principle of poisoning the well can be seen in the potential acquisition of Motorola Mobility by Google. Does Google have enemies? Yes, indeed. There’s a reason why Microsoft filed a complaint with the European Commission back in April 2011, alleging that Google was engaged in illegal anti-competitive activity. There is a reason why several companies which don’t usually work well together (Apple, Microsoft, Research in Motion and Sony) combined to outbid Google for Nortel’s intellectual property back in July. They don’t like the power of Google and they want to keep Google from getting stronger.

Then comes the announcement that Google wants to acquire Motorola Mobility. As it turns out, not only does this action give Google’s enemies a chance to poison the well, it also gives Google’s “friends” an opportunity to poison the well.

For example, Microsoft is expected to use this event to tell people in the industry that they cannot trust Google and should put more of their priorities into the Microsoft/Nokia system. This can poison two wells. First, it can take sales that would have once gone to Motorola Mobility and shift them to Nokia. Second, it can make a higher percentage of phones carry the Microsoft software instead of Google’s Android system. The Microsoft system will shift more mobile advertising revenue to Microsoft (through Bing and other sources) which could really hurt Google’s cash flow.

Worse yet, this just might be enough of a boost to Microsoft to give them critical mass in the mobile marketplace, something they can build on and grow. Perhaps if Google had not announced this deal, Microsoft would have eventually given up on the mobile software due to insufficient demand. A similar situation could occur with Research in Motion, who might have eventually gone away, but now may have a chance to revive itself through the poisoning of Google’s well.

Even Google’s device partners (“friends”) in the mobile space (Samsung, LG and HTC) may now become less enamored with their partnership with Google. They may begin to think that Motorola Mobility will get preferential treatment over their own devices. As a result, they might hedge their bets by getting closer to Microsoft, shifting share away from Google’s Android.

If less of the really cool devices (from Samsung, LG, and HTC) carry Android, and if Motorola Mobility puts Android on inferior devices, then consumers may revolt and switch away from Android. Again, more poisoning of the well.

And if Android starts losing significant market share from all these poisonings, it may have less influence in getting priority for cool apps from the development community. This could start a downward spiral, as even more customers see a reason to switch to others who have cooler apps sooner.

The point here is that this type of deal can cause all sorts of negative poisoning of the well. I hope Google fully considered these ramifications when contemplating the deal.

SUMMARY
Acquisitions do more than create positive synergies. They can also trigger negative impacts on cash flow (poison the well). Since the true amount of synergies in a deal tend to be less than expected, and the poisoning of the well can be larger than expected, strategic emphasis during acquisition may need to shift from synergy to poisonings.

FINAL THOUGHTS
In the old stories, it was the enemy who poisoned the well. In business, we tend to poison our own well through poor strategic decisions. Shame on us! This is a preventable problem, because it is under our control. Make sure you consider the potential for poisoning the well whenever you contemplate a move which upsets the status quo.