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 #251: Exploit Your Luck

THE STORY
Back in the late 1960s, when Nicholas Charney was getting his Ph.D., he loved to read articles about psychology. Unfortunately, other than the occasional article in Scientific American, he couldn’t find much of interest to read on the subject. Therefore, even though Nicholas Charney was not formally trained in psychology nor had any experience in publishing, he started a magazine in 1967. He called it Psychology Today.

In a short period of time, Psychology Today became a huge cult hit. It captured the turbulence of the times and put a new countercultural spin on it. Readership was high and so were the profits. Businesses waved a bunch of money in front of Charney, so he eventually sold the magazine for a huge profit.

Well, that all seemed easy enough, so Charney decided to do it again. This time he started a magazine called Careers Today. It failed miserably in a short period of time.

Later, Charney bought the Saturday Review. He had the notion of converting the weekly magazine into four different monthly magazines. In the process, he destroyed the Saturday Review, which had to be resurrected by the old publisher.

During the thirty years or so after he sold Psychology Today, Nicholas Charney tried a number of different business ideas but never really hit upon another success.

And what happened to the magazine Psychology Today? Well, once it got into the hands of professional publishers, they destroyed the original counter-culture freedom that drove the business. Instead of the old days, when the magazine was created out of a beach house in California by a bunch of free spirits, it was moved into offices in Manhattan to be run by the professional “suits.”

Every few years, the magazine would be sold to yet another publisher. Each time, Psychology Today became an even bigger losing money pit. At one point, it was owned by a psychological association, who tried to make this counterculture classic into a dull academic journal where its members could get published. Eventually the magazine went totally bust. Now, it has been resurrected, but it is a shadow of its former self.

THE ANALOGY
There’s an old saying that it is better to be lucky than to be good. Nicholas Charney was not a good publisher. He had more failures in publishing than successes. But Charney was very lucky in that his personal interests and personal style were exactly the right blend of magic for creating a successful counter-culture psychology magazine in the culture of the late 1960s.

This lucky magic of success for Psychology Today depended upon a lot of particular events all converging at the same time—Charney’s interests, Charney’s unconventional approach to publishing (more like how dotcoms were run in the 1990s), the emotionally charged environment of the 1960s, and so on. Without the serendipity of these chance events coming together, Psychology Today would never have been a successful launch.

The problem was that people did not realize how much lucky happenstance was behind that success. Charney thought he was good enough at publishing to create a whole string of successful publications. He was wrong. He was never able to pull together enough lucky serendipity to create another success.

The publishers got it wrong as well. They thought that since they were smarter publishers than Charney, they could make Psychology Today an even more successful magazine. What they failed to understand was that the success was based on a lot of intangibles that had nothing to do with publishing—the corporate culture of the magazine, the culture of the 1960s, the unusual interests and desires of Charney, etc. When they destroyed this magic formula, there was no more magic in the magazine. The luck was sucked out of the venture.

So Charney was lucky, but not good, and the publishers were good, but not lucky. And as we said earlier, it is better to be lucky than good.

This is not the only time that this type of event has happened in the business world. Remember all those successful dotcom “geniuses” in the 1990s who sold their little start-ups for huge sums of money? They all thought they could do it again, over and over. The media called it “serial entrepreneurship.” The idea was to sell your little start-up for a fortune and then do another start-up to sell for a fortune, and then do another one, and so on.

Unfortunately, the pattern of Psychology Today was often repeated. Most of these so-called geniuses never had another blockbuster startup after their first. They had been lucky. And many times the companies who bought these startups ended up having to write them off as big failures.

Therefore, if we want to avoid these outcomes, we need to understand the role of luck in a successful strategy.

THE PRINCIPLE
The principle here is to exploit the luck that comes your way. Many years ago, I knew a business consultant who said, “Great business ventures come along very rarely. If you are lucky enough to find one, exploit it for all it is worth, because you may never get another such opportunity.” His point was that when the luck of good fortune comes your way, don’t squander it. Don’t treat it lightly. Instead, maximize its potential, because you may never get another chance.

This is the third blog in a row on luck. It all started with a statistical study by Deloitte stating that the majority of successful companies are where they are because of luck rather than skill. In the first blog, I stated that perhaps we should focus more on positioning than on skill. In the second blog, I stated that there are ways to increase your luckiness. In this blog, we will look at how to exploit the luck you have.

1) Understand the Lucky Factors and Hold Them Together
If it is true that success less to do with skill, and more to do with a lucky confluence of little serendipitous events, then it behooves one to understand what factors caused that luck. Otherwise, you will not know how to keep the luck alive.

In the Psychology Today example, the big publishers did not understand what caused the luck. Therefore, they reinvented the magazine in a manner which took many of the lucky factors away (Charney, counter-culture work environment, etc.). They thought they were smart enough and skillful enough to succeed. Their smarts and skills were less powerful than then lucky confluence of factors they got rid of.

So dissect the lucky success to see what odd mix of factors created the magic for that success. Then do whatever you can to keep that magic alive as long as you can. Rely on that magic formula more than you rely on your skills.

2) Build up the Business as Big and as Fast as you Can
This may be the only really lucky break you will have in your lifetime. Therefore, don’t squander it. Try to squeeze as much out of it as you can. Grow it large and grow it fast (provided that doesn’t break the magic formula).

Microsoft got lucky when IBM licensed its MS-DOS program. Bill Gates had a pretty good idea of what made him lucky and he build a huge business called Microsoft to exploit that lucky break as much and as long as possible. At the same time, he built as many barriers as possible to protect that lucky break for as long as possible.

3) Look for the Next Lucky Confluence Instead of the Next Repetition
Times change. The next magic formula for luck may look entirely different from an earlier version. In the late 1960s, a countercultural magazine on psychology was the magic formula. Now, it might be some app for the I-phone.

Don’t blindly try to keep repeating the same formula over again (like Careers Today magazine). Lightening rarely strikes twice in the same location. Instead, look for the next odd confluence of factors, and try to figure out the new magic formula that luckily takes advantage of this new situation.

4) Quit While on Top
Some of the lucky factors may be outside your control. For example, some of the early success of Psychology Today had to do with anti-establishment, rebellious mentality of the 1960s. As society moved to a different cultural mindset in subsequent decades, the luck started to go away. If you can see that the lucky factors are starting to go away, sell out at the top to someone who naively thinks their skill can overcome your luck.

Even though the publishers lost a lot on the purchases, Charney did okay when he sold out. And when you sell out, don’t believe that the success was all because of your “genius” and that you can easily repeat your success. Then, you are throwing away your money on ventures that will probably fail (like Careers Today or Saturday Review). Just pocket the money as a lucky break.

SUMMARY
Many times luck triumphs over skill. Therefore, when you get lucky, figure out what the magic formula is and exploit the luck for all it is worth.

FINAL THOUGHTS
Las Vegas counts on the fact that people continue to play once the luck has gone away. Don’t fall into the trap of believing you can outsmart the house. When the luck starts to go, cash in your chips.

Strategic Planning Analogy #250: Be Prepared

THE STORY
A great number of significant inventions over the years have come about due to lucky happenstance. For example:

1) The artificial sweeteners saccharine, cyclamate and aspartame we not discovered as part of a dedicated effort to find an artificial sweetener. Instead, chemists were working on something entirely different and just happened to notice a sweet taste when licking their fingers or smoking a cigarette after handling the compounds.

2) Phenolphthalein was discovered to be a potent laxative quite by mistake. It had been tested as possible marker inside cheap Hungarian wines, in order to help identify them. How would you have liked to have been the one testing those wines?

3) Velcro was discovered by a man who was frustrated with having to pull thistles off his clothing whenever he went into the woods. Once he discovered what made the thistles “sticky,” had the concept behind Velcro.

4) The principle behind microwave ovens also came by accident. A scientist working in a lab liked to carry a candy bar in his pocket for an afternoon snack. He noticed that after working around the microwave generator in the lab his candy bar always melted in his pocket. I suppose he should have also wondered what those waves were doing to the rest of his body, if it could melt a candy bar.

Louis Pasteur was well aware of this process of accidental discovery. He had determined that careful observation of randomness lead to more discoveries than deep dives into theory. As a result, in 1854, Pasteur said the famous quote “In the field of observation, chance only favors the prepared mind.”

THE ANALOGY
Great business strategies are a lot like great scientific discoveries—they often come about because of luck. The folks at Deloitte recently did some extensive research into this phenomenon. You can learn more about this study by going to these sites: here, here and here.

What Deloitte found was that a company’s success appears to have more to do with luck than with any particular management skills or techniques. The research implies that you can pretty much throw away all those books about doing what the “successful” companies do. Just get lucky.

THE PRINCIPLE
“Get Lucky” is not vey useful advice. People like McKinsey and Company would go bankrupt with that type of advice (I’m not sure Deloitte is going to make much money on this advice, either). We need to go back to the advice of Louis Pasteur. He advised that you can increase your luck if prepare your mind for it.

Over the course of time, I suppose that millions of people have been bothered by getting thistles stuck to them. Heck, my cat seems to get covered with thistles all summer long (and guess who has to get them out of the fur?). But only one person was observant enough to see the potential for Velcro in those thistles. What about the rest of us millions? Why didn’t we see the potential?

It is not enough just to be in a place where a lucky happenstance is possible. One needs, as Pasteur put it, a “prepared mind” to discover the possibilities. And that, my friends, is not luck. We have some control. In this blog, we will look at what we can do to increase our “luck” through preparation.

1) Prepare Your Visual Agenda
If you want to be in the right place at the right time, then you need to be in a lot of places, all the time. This is not to imply that your business should be unfocused and all over the place. Focus is clearly an important part of strategic execution. But if you want to create “luck,” your eyes need variety.

The point here is that if you want to see something new and exciting, then you need to be looking at new and exciting things. If you spend all your time looking at boring spreadsheets and attending boring meetings, you will not have your eyes in places where they can discover exciting things.

Put another way, if you spend all your time locked up indoors, you will never experience the thistles of life that lead to great discoveries. Get out into the real world and look around. Experience life. Go to where things are happening. Watch life in its fullness. Talk to your customers. Talk to strangers. Experience life personally…get your hands dirty.

When Ross Perot was on the board of GM, he used to complain that the top executives would never come up with any great automotive insights, because they had stopped having normal automotive experiences. They never bought cars, they rarely ever drove cars (they had chauffeurs), and one had even let his driver’s license lapse without renewal.

Make a point of blocking off time on your calendar to see what’s going on in the real world.

2) Prepare Your Mental Approach
So you get out into the world and get covered with interesting “thistles.” That’s only half the battle. Now, you need the insight to convert that into a marketable idea.

To do this, your mind needs to be prepared for the task of discovery. Discovery is more than just seeing the obvious. Discovery is being able to apply what you see to a new business model, a context not yet in existence. Seeing a thistle and envisioning a new way to temporarily fasten items are two different approaches. It is the second which leads to “luck.”

So how do we prepare our mind for this type of discovery? Here are some ideas.

a) Be prepared for unintended consequences.
In the examples in the story, great scientific discoveries were found in the process of looking for something entirely different. The chemists weren’t looking for an artificial sweetener, the wine people weren’t looking for a laxative, and the scientist was not looking for a new type of fast oven. If they had only been focused on the original task at hand, they would have ignored these little nuisances or oddities and the discovery would never have occurred.

Therefore, if we assume that many great discoveries are going to be accidental (not a part of our original objective), then we need to be open for these chance encounters. In fact, we need to actively seek them out. These unintended consequences (sweet taste, melted chocolate bar) are often the most important consequence.

Don’t become so focused on the original task that you miss the other items going on. These interesting tidbits of information can be so much more valuable than the original goal. Make note of them. Ponder them. See if they have a business application. Just because they are not immediately applicable to the original objective is not sufficient enough justification to ignore them.

b) Look for Solutions/Problems
People, in general, are not really buying products or services. What they are really buying are solutions to problems. How you solve the problem is not as important as how well you solve the problem. To fix the problem of too much weight, one can look to many distinctively different areas for a solution—exercise, diet, surgery, enemas, drugs, and so on. Often times, great success does not come from improving a current approach to a problem but in finding an entirely different approach for that solution (like laser surgery instead of eyeglasses to solve the problem of poor eyesight).

Therefore, when you see an unexpected consequence, look at it in the context of solutions. What problems will that action solve? Will this approach solve a problem better than current alternatives? When looking at the thistle, do you see a potentially superior solution for adhesion? When you see a melted candy bar, do you see a potentially superior way to heat food?

Conversely, you can look at a situation and see what problem is not currently solved well. By seeing the situation as an unresolved problem, it can focus your thinking on ways to solve it. For example, if you observe your customers in action, you may see struggles you were not fully aware of before. Now you have a focused area for inspiration (solve problem “X”), but unbounded by any particular type of solution.

C) Look For Ways To Exploit What You See
Finally, once you discover the solution (the Eureka moment), the last step is to exploit it. A lot of what appears as luck is really just perseverance and sweat. Experiment with the idea. Build prototypes. Get it out into field testing. Not everything you try will be successful, but we know that you will never be successful if you try nothing.

SUMMARY
Success often is a result of luck. However, there are ways to improve your chances of being lucky. Prepare your eyes to look for the lucky happenstance. Prepare your mind to see the potential of the lucky happenstance. Transform the lucky idea into a workable business solution.

FINAL THOUGHTS
The old Girl Scout motto was “Be Prepared.” This is not a bad motto for strategists as well.

Random Search for Excellence

In March, the folks at Deloitte produced the findings of some interesting research.  It implied that all of those business books that try to teach us the tricks behind successful businesses are of little use.

 

According to the research, most of the companies which appear to be successful in these books are really just lucky.  Therefore, studying the tactics and management styles of these so-called "successful" companies is fairly worthless, since it was luck which got them there, not their skills or management styles.

 

You can find the study at:  http://www.deloitte.com/dtt/cda/doc/content/us_consulting_persistencerandomsearchfor_April2009.pdf

 

You can find the Deloitte blog on the topic at:  http://blogs.deloitte.com/persistenceproject/.

 

I tried to put a comment about their report on their blog, but as of yet, they have not printed it.  Therefore, I am printing my response below.  In a few days, I hope to have a more formal blog on the topic.

 

My Response:

 

After reading through the data in your paper (A Random Search for Excellence), I came to a completely different conclusion than the one voiced in the document.  The underlying current written between the lines in the article seemed to be that "style does not determine substance."  In other words, the relationship between the way a company is managed (management "style") and the way it performs (its "substance" as defined by ROA or TSR) seems to be predominantly random.  Therefore, don't put a lot of hope into recommendations of how to improve your substance by changing your style. 

 

This line of reasoning leaves the reader in a rather hopeless state--Just try to be lucky and see if you can find a fable with questionable relevancy.

 

While all of this may have some truth in it, there is also a second truth in the data which I find very uplifting and practical.  This other truth is that while style may not determine substance, positioning does. Getting positioning right (something you have control over) can help you be successful.

 

Consider the two data conclusions from the paper: 

 

1) The most likely outcome for a firm in any decile is to repeat that decile in the following year.

2) This stickiness in performance is especially pronounced at the high and low ends of the spectrum.

 

What these two conclusions say to me is this:  Once you have established your position in the market, it tends to stick.  If you pick a winning position in the marketplace, you tend to remain a winner.  If you pick a losing position, you tend to remain a loser.  Therefore, rather than worrying about "style" we should focus on one's market position.  If you get positioning right, it can overcome a lot of other randomness and get you "sticky" in the right outcome place regardless of style.

 

Winning positions are the sweet spot between three forces:  consumer desires, internal capabilities and marketplace vulnerabilities.  In other words, if you are able to profitably meet a desire better than anyone else and the market allows you to own that position in the mind of the consumer, then you have a winning position.  (I go into the process of finding a winning position in a lot more detail in one of my blogs: http://planninga-from-nanninga.blogspot.com/2008/09/analogy-207-eight-questions.html)

 

Wal-Mart has won over all these years primarily because they have won the low price position in general merchandise, much more than any management trick.  K Mart has lost because it did not secure that position.  It has caused both of these companies to be stuck on opposing ends of the performance continuum.  They are not randomly walking.  Their fate is sealed by the nature of their position.

 

To learn more, read what Al Reis and Jack Trout have written on positioning, or better yet, read all of my blogs that are tagged with positioning (http://planninga-from-nanninga.blogspot.com).