Strategic Planning Analogy #348: Bigger Vision

THE STORY
Back in the 1980s, David Graham was trying to figure out a way to revive the economy of southwestern Indiana. His conclusion: the economy was poor because there was no interstate highway running through the region.

Mr. Graham tried to get the government to extend interstate 69 from central Indiana to southwestern Indiana. Unfortunately, a 1990 study said that the project didn’t make financial sense. Nobody in government would back the project.

Normally, that would be the end of things, but then Mr. Graham ran into David Reed. Mr. Reed had a broader vision. Interstate 69 already ran from the Canadian border southwesterly towards central Indiana. What if this road was extended all the way to Mexico? It would become the centerpiece symbolically connecting the three countries of the newly being formed North American Free Trade Agreement (NAFTA).

All of the sudden, interstate 69 was getting fans from all over the country. All the politicians from areas located along the pathway to Mexico were rushing to back the plan. Large, national lobbyists were backing the plan. It was getting attention at the nation’s capital.

And, of course, if a road is to be built all the way to Mexico, it will have to go through southwest Indiana.

THE ANALOGY
This story is based on a review of the book “Interstate 69,” which appeared in the Wall Street Journal. The concept here is fascinating. Mssrs. Graham and Reed took a local project which nobody was interested in and made it a national passion all because they found a way to attach their local agenda onto something larger which others could get excited about. Had they stuck to just their own local agenda, nothing would have happened.

Every business has its personal agenda—things which they want their business to accomplish. They may want to increase sales, or increase production or increase profits—something which will benefit the company. However, if a business only promotes its own personal agenda, it may not get much support. Why should others help promote the profitability of any one business if there is nothing beneficial in it for anyone else?

If a business wants assistance in getting its personal goals accomplished, it helps if you can align those goals with a greater purpose which has an established base of supporters. That way, as all the support behind the greater purpose moves forward, you can ride the coattails and get your agenda accomplished as well.

THE PRINCIPLE
The principle here is that strategic planning often needs to reach beyond just what is in the interest of the company to include a broader base of constituents. Unfortunately, it is easy to get caught in the trap of localism when devising strategic plans. By this, I mean strategic planning which only selfishly looks at what is best for the company. After all, isn’t the primary goal of strategic planning to create a better future for the company? What could be more selfish than to create plans to improve a business’ prospects for success?

However, the irony is that often one can be even more successful if effort is diverted from a purely personal agenda to a larger agenda. Rather than starting a strategic planning process by asking “What will make me better?,” perhaps a better question is “What great, larger cause can I get behind that will open doors of opportunity for my business?” Because Mr. Graham got behind a larger cause of building a route between Mexico and Canada, he significantly increased the likelihood of getting the opportunity to have a major interstate expressway run through southwest Indiana. If he had stayed focused on just what is best for southwest Indiana, the potential of getting that expressway would have been 0%.

Department Store Example
There are many examples of this principle in action. I am reminded of a book called “Merchant Princes,” which came out in the 1980s. This book told the stories of the families which built all of the great local department stores in the U.S. back in the late 1800’s. In almost every case, these leaders spent a great deal of time on projects beyond the scope of their department stores. In particular, they spent a lot of time on projects designed to boost the economies of their local community.

These leaders knew that economic growth is not spread evenly. Some communities grow faster than others. They also knew that there was a greater chance that a community would grow better than average if there were groups designed to proactively promote the community. And if this larger agenda of building a strong, growing community was achieved, there would naturally be greater opportunities for their local department store to take advantage of that growth.

If these department store families went around begging community leaders to make them more profitable, they would not have gotten much support, if any. But by asking people to help them create a better local community, they got a lot of support. That support indirectly benefited the department store.

By contrast, what if these department store leaders had only concentrated on their own local business? They could have built one of the greatest department stores on the planet. However, if they ignored the larger issue, that store could end up located in a small, shrinking, dying economic area. All their effort would be for naught. Without growing populations of prosperous people, there is little chance for those department stores to be successful. It is only by embracing the larger agenda that they could maximize their local agenda.

Automotive Example
A more recent example would be in the automotive industry. The great recession was making it difficult for automotive companies to survive. The industry players needed help. They discovered that they were more likely to get government assistance if they embraced a larger agenda. That larger agenda included things like trying to protect local jobs and trying to move to greener electric automobiles.

A lot of people would be against bailing out wealthy business leaders just so that they can become wealthier. However, if you tell them they are helping to save jobs and save the planet, then you are more likely to get support. And indirectly, that effort to save jobs and save the planet also saved some automotive businesses.

Applying the Principle to Strategic Planning Process
So how do we apply this principle to the strategic planning process? Well, instead of focusing the planning process on one question, we should consider three questions. The one question we usually focus on is “How can I build my business?” This is the selfish, narrow question. To this, I would like to add two more questions:

a) How Can I Build My Base of Alliances? And
b) How Can I Build My Base of Opportunities?

Again, the irony is that if we spend less time focusing on “How to build my business” and divert some of that effort to building alliances and opportunities, we will end up building a more successful business.

Building Alliances
Mr. Graham improved the likelihood of getting his highway when he started moving his focus to building alliances. He started the Mid-Continent Highway Coalition. This became a tool for gathering a broad base of allies. The more allies he had, the more voices there were putting pressure on the government to get the highway built. To get those allies, he had to change his strategic vision to include more than just concern over southwest Indiana.

When you are creating your strategic vision, are you making it broad enough to entice allies to rally around your cause? Are you then building tactics around that vision to proactively seek a broad base of allies? Are you then building tactics to leverage your allies to your mutual benefit?

Building Opportunities
As part of Cisco’s strategy, they spend a great deal of effort sending people to developing nations to teach them about the benefits of investment in telecommunications infrastructure. They are not selling the benefits of Cisco. They are selling the benefits of infrastructure. Cisco points out how telecommunication infrastructure investments can be the best and fastest path to get a developing nation to the next level of prosperity. It will make the leader of that nation a hero.

The goal of these efforts is to build more infrastructure creation opportunities. Cisco does not always win the bid to build that infrastructure when it goes to bid. However, by devoting effort in the strategy to education, Cisco creates more occurrences when a developing country decides to build such an infrastructure. So even if Cisco doesn’t win all the bids, it ends up with more business than it would otherwise have gotten, because it has created more business to bid on.

This is like the department store leaders who worked on building prosperous cities. There was no guarantee that all that prosperity would be spent at their department store, but it certainly increased the potential pool of money that they had the opportunity to go after.

How much of your strategy is spent on building the opportunity pool to extract your business from? Being the best soccer player in the world while working in a country which hates soccer is not nearly as lucrative as being merely a very good soccer player in a country which worships the sport. Just as building the sport builds the player’s potential, spending time building your industry can improve your company’s potential.

SUMMARY
The irony is that if you want to selfishly optimize your success, it usually pays to spend less of your strategy time on your selfish ambitions and add to your strategy broader concerns. These broader concerns tend to provide you with more allies and more opportunities, which in the end provide greater potential for those selfish ambitions. This is not about merely doing good for the sake of doing good, but about building a stronger path to a larger pool of profits.

FINAL THOUGHTS
Most of the extension of interstate 69 still isn’t built. Even if you have lots of allies, when money is tight, progress is difficult. However, the state of Indiana has recently started work on extending interstate 69 into southwest Indiana. And that is success that would not otherwise have occurred.

Strategic Planning Analogy #347: GPS

THE STORY
I love those GPS devices you can put in cars. I’m a typical guy who doesn’t like to ask for directions, and with GPS, you don’t have to ask for directions.

I remember when those devices first came out, and about the only cars that had them were rental cars. I was on a business trip to go visit some stores. I put the addresses of the stores I wanted to visit into the GPS device on the rental car and the device would tell me how to get to the stores.

That worked fine until I put in the address of one particular store. The GPS device took me to a location, but the store wasn’t there. I got really angry with the GPS device for taking me to the wrong location. I was blaming it for having a defect, because it did not get me to the store I wanted to see.

Eventually, I figured out that the store I was looking for was no longer in existence. The GPS accurately took me to the empty lot where the store used to be. Apparently, my list of store addresses was out-of-date. The device was fine.

I guess this goes to show that even the latest and most sophisticated technology is worthless if you fill the device with out-of-date information.

THE ANALOGY
The purpose of the GPS device is to help a driver more easily get from his starting point to his desired destination. Strategic planning has a similar function. Its goal is to help a company more easily get from where it is now to its desired destination.

Therefore, instead of having GPS stand for Global Positioning System, we should rename it the Global Planning System.

THE PRINCIPLE
The principle here is that we can make strategic planning a lot more popular and useful if we borrow some of the functionality which has made the GPS device so popular.

1. It is next to the driver during the journey.
The beauty of the GPS device is that it is right there in the car next to the driver during the entire trip. It isn’t anchored to your desktop computer back in your office. The GPS is highly useful specifically because it is immediately available when you need it most—while you are driving.

Unfortunately, not all strategic planning systems work this way. In many cases, the strategist is there at the beginning helping to set up the destination and the path for the company, but once the journey to the future begins, the strategist is not in the “car.” It is as if the strategist is waving to the company car as it pulls away, yelling to the driver “Good luck on the journey.” No wonder a lot of companies find strategic planning as irrelevant. They don’t take it along on the journey.

You wouldn’t set up a plan on the GPS and then leave the GPS device in the office. That would be silly. No, you would take the GPS with you to use in the car while you are driving. The same principle should apply to planners. To not bring them along on the journey is equally silly.

Usually, when strategists are left behind, it is because management sees them as being a part of corporate staff, and there is apparently no place for staff once the “operators” of the business to take over. This is a shame, because just as the GPS is most useful after the journey has begun, strategists can be most useful once the journey to the future has begun.

Strategists can be there to help companies interpret the environment they are driving into and make suggestions on how to adjust to that environment. With the ever more rapid changes in the environment, this type of in-car advice is more critical than ever. But strategists can only do that if they are in the car next to the driver.

If the strategists are left out of the car, the operators will make corrections and adjustments on their own once the journey begins. Due to short-term reward systems and the “tyranny of the immediate,” long-term considerations may not get properly reflected in those adjustments (no one in the car has their eye focused on the long term). Eventually, the car may get so far off the original course that nobody can figure out how to make those old maps given them by the strategists before the journey make any sense any more. This just reinforces their original perception that these staff planners aren’t useful for the journey anyway.

As a planner, as much as it is in your power of influence, make sure you get a seat in the car once the journey begins. This will make your services more relevant and more valuable.

2. There is live-time interaction and adjustment.
There is great power in the immediacy of the information of the GPS. When it is time to turn left, the GPS will tell you to turn left. When it is time to turn right, the GPS will tell you to turn right. And if you accidentally turn right when you should have turned left, the GPS will immediately help you get back on track.

The information is given to the driver at precisely the moment it is needed, in real-time interaction. The relevancy and usefulness is increased precisely because of the frequent interaction. If the GPS only dispensed its suggestions for turning once every hour, it would not be very useful. You would miss a lot of turns, because the information would come too late, after the intersection is long passed.

This is why it is a mistake to only use strategy as part of a long, drawn out annual process. If the only time major dialog between the operators and the strategists occurs is at some annual off-site planning retreat, the strategist becomes just as irrelevant as a GPS device that only tells a driver about turns once per hour.

The annual off-site retreat is an artificial environment. The car has been temporarily parked. The daily “turns” of business have been set aside. A GPS is not as important when the car is parked, and neither is the strategist.

A lot of decisions need to be made in the period between annual business cycles. If the strategist is not there, the decisions can lose a lot of the long-term strategic perspective. Strategic turns will be missed because the strategist is not there to point them out.

Therefore, as much as it is in your power of influence as a planner, make sure you get frequent interaction time with the operational leaders of the company. Insist on having a voice at the regular meetings where the decisions on which way to “turn” are being made. As you increase the frequency of your interactions, you will also be increasing your relevancy to the business.

3. It is easy to use.
People like the GPS device because it is relatively easy to use. You don’t need to spend weeks in advance filling out complicated paperwork each time you want to use it. Just a few simple clicks and away you go.

How easy is it for your company to use the resources of strategic planning? Does your process force operators to get lost in a sea of paperwork? Do they dread having to do anything related to planning because of all the seemingly tedious and time-wasting work your process puts them through? Are you as easy to use as a GPS device?

Fortunately, if you get points 1 and 2 correct (lots of frequent interaction at the times when decisions are being made), then a lot of that complicated process stuff is less critical. Your frequent interactions help you to know what’s going on, so that you don’t need others to write it all down for you on complicated forms. More frequent access to strategists usually leads to ease in interaction, since there is greater familiarity.

4. It relies on periodic updates of its database.
GPS systems make their advice based on their database. Since roads and road conditions change over time, it is important for the GPS database to get updated. Otherwise, the GPS can make improper suggestions.

Similarly, strategists need to periodically update their data and perspective on what is happening in the environment. Otherwise, the decisions based on the data will be out-of-date and irrelevant. Are you taking the time to stay relevant with what is happening in the environment? Or are you like the situation in the story, where you are directing people to empty lots, because your information is out-of-date?

SUMMARY
If you want your strategic planning to be as desirable and as useful as a GPS device, then follow its examples:

a) Be in the car for the whole journey. Don’t just set up the trip and wave good-bye.

b) Have frequent and timely interaction with the key operators when decisions are being made—all year long. Don’t rely on an annual meeting to be your primary time of interaction.

c) Have an easy-to-use process, so people will want to interact with you.

d) Update your data periodically, so that your perspective remains relevant to the changing environment.

FINAL THOUGHTS
The Cooper Mini automobile from BMW is based off a design originally made for small race cars. That is why many of the key dials on the dashboard are in the center of the dash rather than right in front of the driver. When the small cars race, they have two occupants—one is mostly concerned about what’s happening outside and one is mostly concerned about what the dials are saying. This power of two makes for better racing. The same is true for businesses. By having the strategist alongside the driver, the strategist can better help the driver win the race.

Strategic Planning Analogy #346: Right to Play

THE STORY
Poker chips have value…but what kind of value? Some peg their value at their exchange rate—you can cash in poker chips for money at a pre-determined rate of exchange. However, that value can only be realized if you turn in your chips. In other words, this value in the chips can only be realized if you stop possessing them.

Since very few business places allow you to spend poker chips like money, that value can only be realized when you have real money. So the real value, in that case, is in the money, not the chips. If people stop exchanging your chips into money, the value in those chips vaporizes.

To me, the more powerful value in the chips is what they allow you to do while you still possess them. The unique value of poker chips is that they allow you the opportunity (i.e., give you the right) to play poker. Before you can play poker, you need to have first made an investment in poker chips. Without the chips, you cannot play. That is the true power and value inherent in poker chips.

THE ANALOGY
Poker chips are a lot like market share. There is value in having a lot of market share…but what kind of value? One type of value would be to use your power of market share to create excessive profits. In many ways, this would be like cashing in your poker chips for money. And, like poker, if you cash in your market share “chips” you can no longer use them to play the game.

The logic works like this. To create excessive profits, you need to extract excessive value out of your marketplace transactions. The more value you take out of the transaction, the less value there is for the customer on the other side of the transaction. In a competitive marketplace, there will be alternatives to your excessive greediness—alternatives which provide greater value to the customer. Customers will start switching to these alternatives. As a result, your market share will go down. In other words, when you seek excessive profits, you are typically cashing in (or losing) your market share chips.

To me, the greater value in market share is like the second value for poker chips mentioned above—the value in being allowed to continue to play the game. In this case, the “game” is the game of business. If you want a business which endures and produces a return year after year after year, you have to leave a large percentage of your chips on the table. In other words, you need to continue to invest in providing the type of value needed to hold market share if you want to continue to play the game. Otherwise, your market share will drop until you are no longer able to play.

THE PRINCIPLE
The principle here has to do with transformation. When a company is very successful and creating high levels of market share, there is a tendency to not want to transform the business model. After all, the current model is working quite well. Why kill the goose that is laying the golden eggs? Why risk current profits for the uncertainty of what would happen if you transform the business?

The Innovator’s Dilemma
Clayton Christensen wrote about this problem in the book “The Innovator’s Dilemma.” Briefly, the premise of the book is that innovation leads to marketplace disruption which creates great success for the innovator. This success makes the innovator want to cling to the status quo that his innovation produced. Unfortunately for this innovator, marketplace innovation cannot be stopped. If this innovator will not continue to innovate, others will, creating disruptions that make the original innovation obsolete. The irony is that the only way the innovator can continue to succeed is by destroying the current model of success and replacing it with successive disruptions of new innovation.

This is very similar to the poker chip analogy. Refusing to reinvest in additional disruptive innovations is like refusing to put chips on the poker table. When you have a lot of chips, the temptation to cash in (take excessive profits) is huge. But if you do, you lose the right to continue playing.

Trying to keep the high profits of the old innovation is taking excessive profits out of the game. You are no longer investing in the new innovations that will increase value to the customer. Others, who are still investing in innovation, will create greater value and take away your market share (your chips), leaving you with nothing.

Yes, it takes money away from today’s profits when you spend it on innovation. And yes, your immediate profitability may go down during the disruptive phase. BUT, if you do not ante up with these investments, you can no longer play the game. Your long-term profit stream potential goes away because you are no longer competitive once the next disruption occurs. In search of a small pot of success today, you sacrifice your ability to earn any future pots of success.

I was reminded of this dilemma when reading of a paper published on August 4th by Kristina McElheran of the Harvard Business School. This study looked at how market leadership impacted the way a business innovates. The conclusion of the study was that market share leaders may invest more in incremental innovation, but spending on truly disruptive innovation is more likely to come from non-leaders. In other words, leaders have more at stake in the status quo, so they are less willing to invest in innovations which disrupt it. The disruptions come from those who have less at stake in the status quo.

This is just the Innovator’s Dilemma all over again. The problem has not gone away. Leaders are still cashing in their chips, rather than making the investments needed to continue to play the game.

Therefore, if you are currently in a position of market share power, you need to ask yourself this question:

Am I going to use this power in a way which allows me to continue to play the game or am I going to cash out early?

Cashing Out
Even if you still choose to cash out early, by asking the question it is at least a conscious choice that you have made based on weighing the alternatives. If you do not ask the question, you may end up cashing out by accident, and have a lot fewer chips to cash in than you had anticipated.

Selling out near the peak (before the next disruption has its impact) is a viable strategy. If you do this, you can often walk away from the game very wealthy. This is a proactive strategy with careful analysis of the environment and understanding the timing of trends and inflection points. You are putting yourself up for sale while you still have leadership benefits (i.e., still have lots of chips to cash in).

This is very different from trying to cling to the status quo as long as you can and then selling as a last resort. While clinging to the status quo, your market share is being disrupted by the next innovation. You are losing your market share chips to the next innovator. By the time you get around to selling, you have very few chips left to cash in.

Staying to Play
If you choose to stay to play, then that requires a different set of actions. You need to take some of your profits and reinvest them into the game, in order to maintain value leadership. The trick is trying to optimize the balance between the current inward cash flow from the status quo with the outward cash flow needed to create the next disruption in your favor.

At least as a leader, you have the potential to orchestrate how that transformation occurs better than others (provided you do not get too greedy in the short-term). Take advantage of the opportunity. Be proactive in guiding the transformation (rather than resisting it).

SUMMARY
Markets continue to innovate. If you resist innovation and do not transform your business, you will lose to the next round of innovators. Therefore, either cash out while still at the top or reinvest in disruptive innovation at levels necessary in order to continue to play the game for a long time.

FINAL THOUGHTS
In poker, you can sometimes get away with bluffing. In business, you may be able to fool the customers for a short while, but eventually they will figure it out and shift their business to the place where they receive the best value. Innovation leads to better value. Therefore, if you want to maintain leadership, follow the innovation to the greater value.

Strategic Planning Analogy #345: Up in the Clouds

THE STORY
The other day, I was pondering the question “How much do clouds weigh?” I looked it up on the internet.

A typical common cumulus cloud is about 1 cubic kilometer in volume and weighs a little over a billion kilograms (close to 2.2 billion pounds). This is approximately the weight of 6,300 blue whales.

What is interesting is the fact that even though a cloud is much larger and over 6,000 times heavier than a blue whale, it can float in the air. The smaller, lighter blue whale cannot float in the air.

THE ANALOGY
Businesses would like to soar above the competition. In many circles, the conventional wisdom is that it is easier to soar if you are small. The reasoning is that large companies are not nimble, flexible, or fast enough to do what it takes to soar.

Yet clouds are very big and extremely heavy and they can soar above the earth. Similarly, there are many large companies that appear to be doing rather well. For many decades, huge General Electric was considered by many to be among the best managed companies on the planet.

On the other hand, there are a lot of large companies (like the old General Motors) which needed to go through bankruptcy because they were overly bureaucratic and sluggish. In fact, I can find great successes and great failures among both large companies and small ones. Size does not appear to be the key determinant of success.

So if size is not the determinant of success, what is? Well, clouds soar because they have less density than the air around them. Usually, the air around a cumulus cloud has a density of about 1.007 kilograms per cubic meter. The clouds are only 1.003 kilograms per cubic meter, making them lighter than air. By contrast, the smaller, lighter blue whale cannot float because it is much denser than the air.

Hence, if you want to soar, you need to reduce your density.

THE PRINCIPLE
The principle here is that strategic plans need to focus more on density than on size. I have seen many instances where strategic plans have focused primarily on size. They want the company to get very big very quickly and state their long-term goal in terms of size. Or maybe the strategy is to split up the company to keep it from getting too big.

There are lots of ways to make a company get very big, very quickly. And many of those ways can be very destructive. For example, one can overpay for a poor acquisition. Remember the disastrous joining of AOL and Time Warner? Sure, the company got very big very quickly from the merger. Unfortunately, the net result had a market cap much lower than the sum of the companies when they were separate. It destroyed value.

One can also get very big by selling below cost. The airline industry is full of very big companies that have horrible negative returns on investment because their fees do not cover their costs. These big airlines try to fix the problem by merging (so they can become even bigger). Unfortunately, if you are losing money on most of your sales, getting more sales just increases the losses.

On the other extreme, there are companies that put the main focus on shrinking. Particularly during the recent great recession, many companies focused the strategy almost exclusively on cutting—be that cutting employees, cutting investment or cutting corners on product quality. However, study after study has shown that the companies most focused on cutting during recessions (particularly during the latter portions of a recession) tend to do the worst when coming out of the recession. They have ruined morale, disappointed their customers, and fallen behind on technological advances and sales capacity issues. As a result, the benefits of the next boom go to someone else.

Size alone is a horrible goal (in either direction). There are just too many ways to reach your size goal while destroying the company. That is why I think it is better to focus a strategy on density.

What is business density? I think of it as those factors which enhance or impede one’s ability to get where one wants to go. Consider two situations: walking in your office versus walking inside a swimming pool. It takes a lot more effort (and you move a lot slower) walking in a swimming pool than in an office. Why? The water environment of the pool is much denser than the air in your office. The extra density of the water gets in the way of forward progress.

The same is true in business. There are lots of factors that can impede forward progress. They can include things like excessive bureaucracy, confusing/conflicting goals, micromanagement, insufficient investment in infrastructure, weak systems, corruption, and so on. These types of things increase your density. If you want to move quickly and soar like the clouds, you need to reduce the density of your business environment. This is true whether your company is small or large.

There are two ways in which strategic planning can help reduce a business’ density.

1. Narrow the Focus of the Company Goal
One of the most important ways that strategic planning can reduce business density is by providing focus. A clear, focused business mission, well-communicated to employees, can make it easier to move forward. It eliminates the density problems of confusion, hesitation and conflicting priorities which come from a lack of strategic focus. When you have a solid understanding of what is truly important, you can more boldly go down that path (with less resistance).

Perhaps even more importantly, a focused strategy helps people to understand what is not important. A lot of effort can be wasted chasing agendas that add little to moving a company forward. A good, focused mission helps keep people from chasing down these rabbit trails of unproductive side-issues, because they can then see them as clearly “off-strategy.”

If everyone knows where the focus is, and is motivated to move in the direction of the focus, then less effort is needed to micro-manage the company. Excessive, dense bureaucracy can be trimmed away, because there is a more natural effort to get the right job done when the same focus is uniformly embraced by the whole organization. This allows innovation around the focus to bloom, increasing the speed to success.

Strategic planning is ideally suited for helping a company to choose and then rally around such a proper narrow focus.

2. Broaden the Focus of the Strategy Plan
But knowing the focus of the direction is not enough. Eventually, you have to reach your destination. Efforts at direction and implementation need to work together in order to reduce density.

In many companies, strategists are a key part of helping determine the planning focus, but then are excluded when it comes time to implement the plan. I think this is a mistake. If you do not proactively bake the key components of implementation into the original plan, you will create inefficiencies.

This is why I believe that great strategic plans need to address three components together:

a) Positioning: What is my focus? Where am I going to win?

b) Pursuit: Do I have all the proper pieces in place to reach my goal as quickly as possible? Do I have the proper types and amounts of expertise to reach my goal? Have I built enough capacity in order deliver in sufficient quantity to win? Have I built up enough of the right kinds of contacts up and down the supply chain in order to accomplish what needs to get done? Am I properly investing in the areas necessary to pursue the focus in front of me?

c) Productivity: Have I shrunken waste and increased efficiencies, so that I have enough time and cash flow to win the game? Have I gotten rid of wasteful activities, so that more time can be spent on activities related to the focus? Have I invested in technologies and processes needed to improve efficiency? Am I building and leveraging my power in the marketplace so that my actions have a stronger impact?

There is a reason why the keyword labels for positioning, pursuit and productivity are so common in this blog. They are the cornerstones for a successful strategy. I believe that strategists need to be an active part in coordinating all three areas together. Otherwise, excessive density can creep into the process and your cloud will sink.

SUMMARY
Clouds soar because they are less dense than the air around them. If you want your business to soar, eliminate the density in your internal environment which impedes your ability to move forward. Strategic Planning can help you do that by 1) narrowing the focus of who you want to be (and what you want to do) and b) broadening the strategy plan to proactively manage pursuit and productivity. If you do this, you can be nimble and effective, even if you are a large company.

FINAL THOUGHTS
Density is a relative term. You soar if you are less dense than the environment around you. Although blue whales are more dense than the air, they are less dense than the water they swim in. As a result, the whales succeed in the water. Therefore when attacking your internal density, keep in mind how your goals stack up against others in the same space. Will you be the least dense? Have you chosen to focus in an area where you company’s density gives you an advantage?

Strategic Planning Analogy #344: Who to Court

THE STORY
The following are some quotes from billionaire entrepreneur Sam Wyly’s autobiography regarding the timing of his IPO of Sterling Software:

“Not only did we break new ground with our software company roll-up; we also broke new ground with the instant exchange listing. The market loved all this and, within one week, took our share price up from the initial $9 to $15. From there it headed to $30. Along the way, we raised more cash at $17 in what’s called a secondary offering. But in June, only thirty days after we’d gone public, the markets ran out of gas and lost their enthusiasm for technology. Prices dropped dramatically and the IPO market was as dry as a pumped-out oil field.”

“If we hadn’t hit the market when we did, we would have suffered during the following seven-year IPO equity drought along with a lot of other wanna-be technology start-ups that never got off the ground. Our timing was perfect.”

And this is what he said about the timing of when he sold the company:

“My initial investment was less than $2 million. We sold out in March 2000, at the peak of the tech and telecom market boom, for a price per share that was 30% over market. The total sale package was $8 Billion…Amazingly, we hit the very last month of the long bull market. The tech-heavy NASDAQ Index would drop 80% over the next two years.”

THE ANALOGY
The stock market tends to act like the fashion industry. Sometimes a certain sector will be in fashion and have people clamoring to get in. Other times, a sector will fall out of fashion and have people clamoring to get out.

Sam Wyly made his billions in part because he understood the fashion cycles of the market. He quickly did his IPO of Sterling because he had a sense the tech stock IPOs would soon be going out of fashion. He was right and got the IPO done just in time. Later, he had put together an accelerated push to sell out quickly, because he sensed that the latest tech boom was about to end. He was right again.

In between the IPO and the sale, Wyly could see that anything remotely related to the internet was getting unrealistically high evaluations. Therefore, he split Sterling into two companies, with one piece positioned to be as much like those dotcom companies as he could. When he did a separate IPO for that piece (called Sterling Commerce), he took advantage of the high fashionability of the dot com boom and got very rich again.

Wealth from stocks did not always correlate to profitability. To quote Wyly, “In 1995, the first web browser, Netscape went public, its shares priced at $28. It jumped to $75, valued at more than the country’s biggest defense contractor, General Dynamics…Netscape launched an ‘irrational exuberance’ in the market…I saw no rationality to these dot-com companies going public and instantly reaching such astronomical heights when they consisted of little more than a Web site and a few computer kids pecking away at their keyboards. To me, it was nothing more than the old Wall Street broker rationale: ‘When the ducks are quacking, you feed the ducks.’”

So Wyly did well by making Sterling Commerce look like a duck (and then getting out before the ducks stopped quacking).

If a lot of the valuation is based on getting in tune with the Wall Street fashion, then perhaps one’s strategy not only needs to look internally at maximizing performance, but also externally at optimizing the fashionality of the stock market.

THE PRINCIPLE
In the last two blogs, we’ve been looking at the importance of properly defining your category. First we looked at how to define your category for your customers. Then, we looked at how to define your category for your management. Today we will look at defining your category for your shareholders.

How the market categorizes a particular stock often has a large impact upon how investors treat that stock. If you are perceived as being in a hot sector (e.g., category), investors may flock to your stock and bid it up, even if you are not a leader in the sector. Conversely, if you are seen as being in a weak sector, they may abandon you and drive your price down, even if you are a leader in the sector.

Therefore, it is not enough to just manage your individual performance. It is also important to manage how your stock gets categorized, since that may have as much to do with your valuation as your individual performance.

There are two key principles to this process:

1) Look for solid investment category ownership
There are many different goals an investor could have when choosing where to invest. They may be looking for high growth, or maybe low risk, or maybe cash income, or high liquidity, or long-term gains, or support for a particular social cause, or some other factor.

If you want people to prefer to invest in your business (and pay a premium for the privilege), it helps to own leadership in one of these types of investment categories. Being “sort of okay” at many factors is not as good as solidly owning a single factor. For example, being categorized as a strong growth stock will get you preferential treatment by those who want to invest in growth stocks. Or being known as a great dotcom company when dotcom companies are in fashion will get you preferential treatment by those swept up in the irrational exuberance of investing in dotcom companies.

Therefore, a key step in maximizing one’s share price is to:

a) Pro-actively choose an investment category to own; and

b) Have a strategy which re-enforces that position.

We saw this when Sam Wyly proactively tried to position Sterling Commerce as being in the exuberant dotcom category, even if it required a strategy of splitting the company into two parts. This positioning to the investor is very similar to the idea of positioning to the consumer. You

a) Define who you are (the investment problem you are solving),

b) Deliver on the promise of that definition (own the solution in the mind of the investor), and

c) Sell to those who are looking for that type of solution (the investor who wants that type of investment)

2) Consider the fashion cycles of the investment community when timing your equity moves
Timing is an import part of strategy. Strategy for the investor is no exception. Sam Wyly became very wealthy in part because of his timing with investors. Customers come and go. It is better to sell to them when they are coming than when they are going. This also applies to customers of your stock.

Closely observe the fashion cycle for your investors. Design a strategy in advance so that if you start seeing a shift in the fashion, you are ready to move quickly.

3) Manage your audience based on the best category for you
Now I have heard many strategic planners complain that catering to the whims of the investment community is death to strategic planning. Their complaint is that most investors are only looking near-term. They say the investors are only interested in the current quarter and are not interested in the long-term. They say that if you cater to the investors, they will ruin long-term prosperity in the name of short-term gain.

Yes, this is true of many investors. But it is not true of all investors. There are people out there like Warren Buffet, who tend to ignore current fashions in stock and invest for the long-term rather than the short-term. Many of these investors place value on good long-range planning.

To those complainers, I say don’t become a victim of the investment community and don’t let them dictate the rules of your business. Become pro-active in controlling the relationship. Choose a great investment position for your company that puts you in a category which rewards long-range planning. Then pro-actively seek out the types of investors who prefer those types of investments.

If you court the right types of investors, they will support what you are trying to do. If you find enough of them, they will bid up the stock, broadening your appeal even further.

SUMMARY
As part of your strategic planning, don’t just position your company to the consumer. Many of those same consumer positioning principles also apply to your investors. As part of your strategic planning, choose an investment category to own and then seek out and court the investors who are looking for that kind of investment. This will increase the value of your business beyond just how your income statement and balance sheet looks.

FINAL THOUGHTS
Although the long-term approach is typically the way to go, it doesn’t hurt to bend a little sometimes to the current fashion of your investors. After all, they are the customer of your stock. Don’t you bend a little to satisfy the current fashion of the customers of your product?