Strategic Excitement: A Key to Effortless Business Success


 

Probably the most important question to ask when developing a business or strategic plan is who should be involved in its creation. Only when driven by the right people does a plan have any chance to be:

  1.  Strategically Sound, striking that fine balance between being feasible in the context of market, industry, and competitive realities, and suitably inspirational to propel a dedicated team through the inevitable adversities that will arise in its pursuit.
  2.  Tactically Detailed, where the plan’s “to dos” are grounded in the intricacies of the complex operating entities all businesses are - with their motley collections of workers, processes, technologies, capital and reputations.
  3. Transformationally Capable, where the very strategic soundness and tactical fullness of the plan catalyzes organizational transformation such that while “pre-plan” individual accountabilities were low and business innovation lacking...

...“post plan” strategic projects and tasks actually get done and new ideas and initiatives are born and maintained.

The respective responsibilities for these 3 plan components naturally fall to:

  1. To A Company’s Leadership, i.e. its CEO and Board, Strategic Direction. And for small companies that do not have a board, then by all means set one up as detailed here. This may seem obvious, but more often than you might think CEOs and Boards get “lost in the weeds” and instead of deciding upon and then sticking to a firm strategic direction instead allow things to “muddle along."
  2. To a Company’s Management, Tactical Detail. Note that while it can be beneficial to have managers listen-in to leadership as they discuss strategic direction, per the above, it should be crystal-clear that strategic decisions are not made by line managers.  The strong point is that for the very most part the jobs of managers are not strategy, but rather to relentlessly drive projects and tasks so that an organization can achieve the goals set by leadership (a subtle but crucial distinction).
  3. To Everyone, Transformational Capability. This is the most important outcome of a thoughtful planning process: to create such strategic “excitement” that accountabilities and innovations happen naturally, even effortlessly. (To envision this, imagine the cultures at future - forward organizations like Tesla, Uber, Google, et al., where the future visions and strategic directions are so bright and clear).

And finally, a word as to getting outside help on one or all of the above components of the plan.

It is often overlooked that the only way to increase value of a business is to actually increase its sales and revenues, or to have a “high likelihood” plan in place to do so in the future.

And, in turn, the only way to put that “high likelihood” plan in place is by making it more more strategically sound, more tactically “real”, and more transformationally capable..

Given this, for all but the smallest businesses with the most limited of ambitions, the leverage gained through improving any one of these aspects is so high that it almost always makes sense to bring in a trained consultant to assist.

Whether you decide to reach out for help or drive the planning process yourself, just be sure to have the right people focused on the right components of the plan then just maybe the strategic excitement in your business will grow to be so great that good things start happening all by themselves.

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Virtue: The Hidden Secret of Great Companies


 

In his classic tome, "The History of the Decline and Fall of the Roman Empire," Edward Gibbon famously theorized why the Romans, who ruled the Ancient World for close to 1,000 years, fell to such a depth that in the early Middle Ages not only was Rome repeatedly sacked, but was done so without a fight and with the great city’s once proud citizens reduced to cannibalism and to the killing of infants as their parents did not wish to bring children into a world of such suffering and so devoid of hope.

Gibbon considers, and then rejects, causes like the weight of empire, the rise of Christianity and the development of new military technologies by rivals, and instead settles as the main cause on how the citizens of Rome slowly but surely lost their “virtue” defined by Gibbon as such:

“derived from a strong sense of their own interest in the preservation and prosperity of the free government of which they were members. Such a sentiment, which had rendered the legions of the Roman Republic almost invincible, made but a very feeble impression on the mercenary servants of a despotic prince.”

Now leaving aside the foreboding comparisons to our current political age, it can be well argued that cultivating virtue should be a high goal and touchstone of any organization of ambition.

Virtue, where all of the stakeholders of a company - employees, contractors, customers, shareholders - find solid alignment between their personal interests, goals, and aspirations, and those of the organization of a whole.

Virtue, where those stakeholders have full faith and belief that if the organization prospers, then they too as individuals will prosper - spiritually, professionally, and financially.

How do we cultivate virtue like this? And more poignantly, how do we know when it is slipping away?

Well, let’s look at three classic symptoms of “declining virtue” organizational environments - high employee turnover, brand diminution / pricing pressure, and lack of innovation, and what to do about them.

High Employee Turnover. The ultimate sentiment that one no longer sees alignment with the interests of an organization is to decide that one no longer wishes to work there. Almost by definition, organizations plagued with high employee turnover have declining virtue.

What To Do About It: Address the cause of turnover at its source - in recruiting, on-boarding, position expectations, cultural and managerial norms and styles, opportunities for advancements, etc.

Recognize that more than growth itself, the footing of leadership toauthentically attempt growth is one of the best ways to “walk the talk” of virtue and earn organizational respect.

Brand Diminution/Pricing Pressure. Do customers see an organization's offerings as interchangeable with those of competitors? Is pricing pressure such that business is only won in low bid environments?

Commoditization like this is a classic symptom of declining virtue, and because of its awful impact on cash flow, perhaps more than any other factor can quickly threaten the very survival of an organization.

What To Do About It: Start with Why. Find/rediscover answers as to what the purpose - beyond paying the bills, making payroll, living to fight another day, etc. - is of our business. Because as was famously said, if we have enough whys, we will figure out the hows.

And almost always the best way to quickly identify that purpose and inject it back into an organization is through undertaking a formal strategic planning process (and ideally, one led by an outside facilitator).

Lack of Innovation. Is one's organization selling the same stuff in mostly the same way as it was five years ago? Is there an inability to start and sustain new initiatives because management is “just out of juice?”

“Heaviness” like this, is a sure sign of organization - threatening decay.

What To Do About It: Outsource it. Accept that as organizations age, their ability to effectively innovate naturally diminishes.

Big companies like Johnson & Johnson and Cisco accept this and don't even attempt to internally innovate and instead do so through acquisitions of entrepreneurial teams and technologies and through hiring consultants to drive key change initiatives.

While internal leadership of course must rate innovation as a high priority, in modern business its actual day-to-day implementation can be bought.

The Romans were great, and then they fell. And too many businesses, once they start to decline, never recover.

But history is also full of companies that rose, fell, and then rose again to even greater heights.

Let's be like them.

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Getting to the Right Strategy in 15 Minutes or Less


 

I regularly engage with entrepreneurs and executives to help them determine the right long-term strategic plans and goals to pursue, toward the end of maximizing their businesses’ valuations and their likelihoods of selling their companies down the road.

This, as I have discussed before, is the highest ROI work that a business manager can do, yet most of us invest way too little time in it, and even more vexingly the results we get from the time we do spend are middling at best.

Now, in addition to just not knowing how to strategic plan (and for those interested in a quick primer, I recommend Dave Lavinsky’s excellent book Start at the End), an under-rated reason why otherwise talented businesspeople are poor strategists is because of what I would describe as Business Dissonance -  the sad feeling that even if we do manage to arrive at the right plan, it won't make any difference.

Why not? Well, at least partly because for too many of us and the organizations we lead feel incapable of implementing and maintaining the big changes that are almost always required to attain the long-term plan.

Yes, to paraphrase a famous scene from The Godfather, it can often feel like every time we think we have freed ourselves from Business as Usual, we are pulled back in and nothing changes.

As a result, we sabotage our grand plans by frittering away our precious time and energy on the mundane, the petty, and on the "urgent" but not really important stuff that can so easily consume our day.

Like round and piles and endless streams of email.

Meetings with weak agendas and even weaker follow-up.

The daily "just getting through” client and customer “crises” (versus finding and fixing their root causes).

On chatter, and on frenetic activity that feels like hard work, but doesn’t progress us toward important goals.

Paradoxically, this state of affairs does point us to the strategic breakthrough: by gaining control of our day to day schedules and to dos, we will free up time and space to focus on the important projects as dictated by our strategic plan.

And how can we empower ourselves in such a glorious way?

Well, for those that can describe themselves as Knowledge Workers (almost all of us these days), here’s an extremely simple daily “hack”: For the first hour of our day, shut off the technology.

No email. No text. No tweets. No posts.

And if an hour feels too much, then start with 15 minutes.

Sound simple? Well, it is, but not easy. (Try it, and if you can keep it up for just a month write me back, and I'll send you a card for a free cup of coffee on me).

When we clear our minds and spirits like this to start our day, almost magically will our capacity grow to make steady progress toward our most important (and almost always extremely proactive) projects and goals.

And the deep peace of mind of knowing that today’s work is in sync feels really, really good, too.

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When Buying (Not Starting) a Business is the Right Strategic Choice


 

Wal-Mart.McDonalds. Starbucks.  

What do they have in common? Well, for one, they are businesses that were not started and grown from scratch by their original founders.

Rather, they were all started by others and then bought by ambitious and talented entrepreneurs - i.e. Sam Walton, Ray Croc, and Howard Schultz - who propelled them to a new stratosphere of growth.

And while high profile, statistically they are not atypical. 

Census Bureau statistics show that a purchased business is eleven times more likely to still be in business 5 years from time of purchase as compared to one started from scratch.

However, for most business owners, the business “transaction” path is far too often overlooked.

The main reason is lack of know-how.

You see, the vast majority of business owners have never even attempted to buy or invest in a business other than their own.

As such, they have big knowledge gaps – ranging from the strategic, such as in how to identify the right kinds of companies to target for purchase…

…to the tactical, such as in how to best review and evaluate historical and projected financial statements prepared by sellers. 

And bridging these gaps can only be accomplished experientially – i.e. by actually trying to buy or invest in a business. 

Please let me emphasize try because the majority of attempted business purchases and sales do not consummate.

This is just fine, however, because the attempt itself always leads to unique wisdoms being gained.

These include being forced to really think about the evolving industry and competitive conditions in a given market.

And to getting real as to the level of expertise, effort and resources necessary to translate a business’ potential into actual results and profits.

Now, even in those rare circumstances when a business is bought, for cash, on a "straight from the treasury" basis, the deal maker still must make a strong financial and strategic case to justify a deal’s opportunity cost.

Of course, for deals requiring outside capital, this case must be made that much more thoroughly.

Again, there is no substitute for experience.

Only by going through the exercise of actually building and defending a financial projections model can one acquire the knowledge base and savoir-faire to effectively deal make.

Let me close with a few words about deal advisors - management consultants, business brokers and investment bankers. 

In spite of the mystique these sometimes fine folks like to maintain around themselves, when one cuts through the haze the best of them offer three critical value-adds.

First, as intermediaries, they massage and facilitate the naturally combative negotiating process of a one-off transaction that is a business purchase and sale.

Second, they act as accountability coaches. 

Like other undertakings that require great proactivity - such as committing to a fitness or diet regimen - having an outside agent who is paid to keep you doing what you say you want to do has enormous and tangible value.

Now, on their own, these two value-adds are usually more than enough to justify the expense of an advisor.

It is a third value, however, that the best advisors offer that creates the really high ROI.

And that is working with an entrepreneurial and executive team to envision and articulate a business’ future value

And then, helping to create and maintain existence structures that translate this visioning into day-to-day business reality and results.

THIS is the highest form of business work.

And the highest ROI.

So whether you decide to go it alone, or to work with a talented and ethical advisor, the business purchase and sale process is one that all serious business owners and investors should engage in regularly.

Because yes, even when a deal is NOT consummated, the return on time and investment will be VERY high.

And when a deal DOES get done then the stars align…

…well it is THE fastest and most predictable path to business wealth and success known to humankind.

Just ask Sam Walton, Ray Croc, and Howard Schultz if you have any doubt about that. 

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In Modern Business, Authenticity Trumps All


 

Today, almost all businesses interact with and relate to their perspective and existing clients through multiple channels: in-person, on the phone, over e-mail and increasingly text, via social media and through Web Reputational Means of which we are usually only partially aware.

For many folks, even just reading the above paragraph arouses feelings of anxiety, frustration, and sometimes even disgust.

Golly they say - wasn't it an easier and better time when everything was just "analog" and “human” sized and paced?

And they go on, in the end doesn't all of this digital stuff cost more than it is really worth? In the day-to-day time, energy, and focus to pay attention to and consistently communicate on them all?

Well Too bad. Multiple Touch Point Business - digital and otherwise – is now the very air that we as modern executives breathe.

And we can choose to either have those breaths be deep, nurturing, and effective, or shallow, distracting, and ineffective.

It really just comes down to in all of our communication no matter its form whether or not we are one thing: Authentic.

Now for most of us this is most easily and naturally done in the traditional channels: Over the telephone and In-person.

So a great prism through which to manage and judge our digital efforts - Email, SEO, SEM, social media, etc. - is simply by how much they lead to high-quality telephone conversations and in-person interactions.

Car dealerships understand this better than anyone: that the over-riding purpose of their digital efforts is to make their phones ring and drive visitors to their lots.

Now, for those businesses in selling modalities (usually lower-priced products) where the telephone/in-person outcome is not desirable nor possible, then the guidance is to work to enrich the “virtual” experience so that it feels as real and natural as a telephone/in-person interaction.

Simple but powerful ways to do this include the use of photos in marketing efforts, along with stories and testimonials from successful and happy clients.

Online Photo Sharing, now so ubiquitous in the personal digital domain, is  utilized far less often and effectively in business contexts.

But given that social media stats show that for both business and personal purposes that photos are shared more than 5 times as much as written posts, incorporating imagery into one’s business communications is a simple and inexpensive way to emulate the power and emotional appeal of in-person marketing.

Video is another inexpensive and simple way to improve digital authenticity and effectiveness.

This can be of two forms - Recorded Video in the form of Explainer Videos, Thought Pieces, Case Studies, and Testimonials, and Live Video in the form of upgrading phone calls and presentation to video through free and inexpensive tools like Skype, Google Hangouts, and GoToMeeting.

Does this video need to be of high production quality?

It can't hurt, but a video strategy I find easily effective is to “Share the Webcam” and live video of myself at the start of a call, and then turn it off and conduct the call as normal.

This usually creates that lovely “Ah-Ha” moment when we first see the other person’s face that I am sure all of us have experienced on a Skype call or a Facetime chat without the awkwardness and work of “staying on camera” for an extended period of time.

The key caveat here is that if even for only a few moments in business contexts “staging” is important

So invest in a quality webcam, have well-lit and professional backdrop, and “Dress for Success” in whatever way that means for your business.

And finally, don't hide behind the lazy virtues of “Branding” and “Goodwill” but instead relentlessly and ruthlessly work to quantify the ROI of these multiple touch point efforts.

Yes, doing it all right requires a lot of hard work, but once in rhythm really just requires the simplest and most natural thing in the world: Giving and Sharing the Best of Ourselves.

Just remember to keep measuring and focusing on incremental improvement as we do so.

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Taking Exponential Business Leaps Forward


 

                           “Work on Your Business, Not In It”

This popular, and somewhat cliched refrain, has for many years been suggested as a managerial and entrepreneurial best practice, and as "the dream" of business owners everywhere.

Because if only...

...We could extract ourselves from all of “the stuff” that takes up our business day: customers, prospects, employees, contractors, regulators, meetings, emails, texts, social media, and more...

...and we were good enough at delegation, at process improvement, at separating the truly important from the chaff and the noise then...

...We would be left with the time and the clear and reflective energy to:

  1. Research, define, and document exactly the direction and destination toward which we wish to manage and lead our organizations.
  2. Start and make steady progress on those mission critical projects - marketing and branding, business development, product and service quality - that slowly but surely build key business assets and momentum.
  3. Create and sustain those key relationships - with customers, prospects, partners, employees, investors (current and prospective) - that make possible those oh so incredibly exciting exponential business leaps forward.

A business hero of mine that does all this and more is Richard Branson. Branson is rightfully admired for having built from scratch one of the most iconic and successful brands and family of companies in business history, and having a ton of fun while doing it.

When studying a business legend like him, I look for "lever points" - small areas of emulation that when mindsets and behaviors are modified (sometimes just slightly) to match, big productivity gains result.

Here are three great Richard Branson “work more on your business” lever points to emulate:

#3. Write. Wherever he goes, Branson famously carries with him a journal. He says there is “strategic magic” in writing, greatly because most of us learned to think in academic environments at impressionable ages with pen and paper in hand.

Because of this early-age imprinting and because writing is inherently a "quiet" activity, business work done this way is naturally more reflective and strategic.

#2. The Day’s First Hour: Sharpen the Saw. In Richard Branson’s “Why I Wake Early” post, he notes:

No matter where I am in the world, I try to routinely wake up at around 5am. By rising early, I’m able to do some exercise and spend time with my family, which puts me in a great mind frame before getting down to business.

Investing in ourselves, from the day's get go - with exercise, meditation, spiritual reading, etc. - counteracts the entropy that can downgrade our business day into just a frenetic "one task to the next" squabble.

#1. The Proactive Comes First. Good executives react well to business stimuli - they return calls, they answer emails, when a co-worker says hello, they smile and say hello back, etc.

Great executives proactively create their business reality. They define and prioritize the most important projects. They cultivate the right relationships. They invest in their physical, mental, and spiritual well-being and in their capacity for creative work. They are the masters of their domains, of their fates.

And from this confident, unhurried, centered place, easily completed are more of their mission critical “on the business” projects, tasks, and to dos.

What is more fun in business than that?

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Bridging the Global Achievement Gap


 

The fundamental challenge of modern business is finding that right balance between tactics and strategy, between execution and innovation, between management and entrepreneurship.

Typically, as companies grow and age, they naturally become more tactical, more execution - focused.

In contrast, the “tabula rasa” of startups has traditionally been the best milieu for out-of-the-box strategy and innovation to thrive.

Now in the old days, businesses could do ok by being very good at just one of these.

Big businesses could sustain profitable franchises for years by leveraging their resource advantages to keep smaller competitors out and margins high.

As for startups, it was easy to stay in the “idea bubble.”

Investors were more patient and it often just wasn’t that obvious if your team and technology had the right stuff.  You had time on your side.

But no longer - businesses must now be either good at both or they perish.

This is extremely stressful for most entrepreneurs and business owners, and especially for investors working to determine which of them to back. 

Luckily, there is an easy shorthand to separate the superstar company wheat from the chaff.

It is the simple idea that super business PEOPLE must be all of these things too.

And superstar companies are really just ones where lots and lots of superstar people work.

So, find the superstar people, and the money will follow.

In his excellent book “The Global Achievement Gap,” author Tony Wagner flags seven crucial “superstar” skills to look for:

1.    Critical thinking and problem solving
2.    Collaboration across networks and leading by influence
3.    Agility and adaptability
4.    Initiative and entrepreneurship
5.    Effective oral and written communication
6.    Accessing and analyzing information
7.    Curiosity and imagination

To this, let me add one more: Ambition.

Now I am not talking about the garden variety get good grades, go to a nice college, start a small business, complain about taxes and regulation and how hard it all is type ambition.

In this multi-billion person, highly educated, hard-working world of ours, that just doesn’t cut it.

No, the ambition I am talking about is one that burns so deep and hot that it is deeply dysfunctional.
An ambition that usually translates for sure into an insane, other-worldly work ethic, but one that goes beyond that.

It is an ambition that is channeled daily into ongoing personal and professional improvement and learning.

An ambition that leads to goals beyond the realistically possible.

Like Steve Jobs leading Apple into the music business, or Richard Branson Virgin into airlines, or Tony Hsieh with Zappos putting his life and considerable fortune on the line, for of all things, to sell shoes online.

This kind of ambition is the unifying force. It demands that everything be done right – strategy, tactics, innovation, execution, entrepreneurship, management.

Find this kind of ambition – channeled to ethical, capitalistic ends – and back it.

And you and the world will be better for it.

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In Business, Making Real Choices and Avoiding False Ones


 

Effective executives avoid false choices, decisions where only limited, and variously unattractive, alternatives are considered.

Instead, when confronted with a false choice, the best executives reframe decisions into empowering, real choices like in the examples below:

False Choice Example #1Data - based versus “Gut” - based decision making.

New school “Moneyball” executives say opinions and experience just don’t matter - that there is always more truth and wisdom in the numbers than in executive “intuition.”

“Old School” executives pooh-pooh this stuff and instead channel Henry Ford who famously said, “If I had asked people what they wanted, they would have said faster horses.”

The Real Choice: Data informs, but does not determine, key business decisions.

Time and effort is taken to collect and analyze key business data and metrics, but executives also draw upon their educations, their life and professional experiences, and the counsel of trusted advisors for the full and nuanced view.

And then, from a place of leadership and authority, decide.

False Choice Example #2A flexible and virtual work culture or a “cheeks in seats” high accountability one.

Most modern professionals, especially younger ones, value and crave mobility and schedule flexibility.

The best companies desire access to global talent, especially from lower cost geographies and on flexible, pay as you go terms.

Yet with too much of a workforce too often toiling in their pajamas from their home offices, can the energy and day-to-day nitty-gritty management necessary for high accountability and performance be sustained?

Yes and no. Yes, it is far easier to manage and motivate human beings the way it has been done since time immemorial, through ongoing, in-person interaction but....

...this high value must be weighed against the unique costs and sometimes competitive disadvantages of doing so - the costs of office space, of commuting time and energy, and of geographically limiting access to talent, etc.

The Real Choice: Instead of evaluating the choice through the typical in-person versus virtual divide, instead let’s do so through the prism of great management by crystal-clear objectives versus the fuzzier, “attaboy” approach. This means quantitatively and explicitly defining:

  • Project/process goals;
  • The precise as possible time required by each worker to accomplish those goals;
  • Over time defining better, higher ROI goals and then defining the training / additional learnings to reduce the time and energy needed to accomplish them; and,
  • Providing that training / learning no matter where that worker might be, virtual or in-person.

 

False Choice #3The work we want to do, as an organization, versus the work to pay the bills, we feel we need to do.

When leading strategic planning sessions, time and again I hear executives bemoan and belittle the clients they have now and how wonderful everything would be “if only” they could attract bigger organizations with bigger budgets that would hire them on a recurring revenue basis. 

So the false choice becomes whether or not to ditch one’s current clients and instead rebrand/reposition/refocus marketing and sales efforts to attract and secure those beloved “A Listers.”

The Real Choice: Just cherish and and serve our current clients, even when are not of the size or of the strategic nature that we truly desire, by recognizing:

  1. It is the right thing to do. They are our clients.
  2. Even when they are not terribly strategic nor profitable, as long as the revenues we generate from them are above our marginal cost, then they are making a valuable and hard-to-replace contribution to overhead.
  3. When managed right, these clients can and do create an organizational “flywheel” effect, naturally making our people and processes better in the best way possible, via the learning gained from doing real (not classroom!) work.
  4. We can always just work harder - spending our days serving the clients we have and our nights chasing the ones we want. Or vice versa.

False Choice #4: Between, as an organization, doing social “good” and doing well - i.e. making a lot of money (of the timely genre of how tiresome it is to listen to politicians of all stripes blame businesses for the problems of our world?).

The Real Choice. 99.9% of the time, successful businesses, via offering great products and services that people want and are willing to pay for, enable a virtuous circle of positivity that makes our modern world possible. Through these successful businesses:

  • Great jobs, that allow individuals to support families and communities, are created.
  • Profits, that provide the resources to invest in innovations that propel civilization forward, are generated.
  • And oh yes, paid are more than a few dollars in taxes that keep all those spouting off politicians comfy in their velvet pulpits.

Yes, as entrepreneurs and executives seeking to be great, beware these false choices.

With just a little lateral thinking and planning the far better, and real choice, is there for the making.

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Why Most Businesses Get Stuck (And What to Do About It)


 

Why do the vast majority of businesses get “stuck” - doing well enough to "stay alive" but not even close to being either a) a source of significant cash flow for their owners or b) an attractive acquisition candidate for a strategic or financial buyer?

Stuck companies face a daunting array of vexing challenges, almost all of which fall into one of these four "M" buckets - Money, Management, Model, and Marketplace.

Money. Most smaller and mid-sized businesses fight an ongoing, Sisyphean battle with money - pushing the cash flow boulder up the hill month after month, only to see payrolls, rents, materials, insurance and marketing & sales expenses drag bank balances down again and again.

However, losing at the money game is almost always a symptom of deeper problems than a cause in itself.

So when money problems arise, usually the best thing is to not focus on them but rather to confront their root causes, which almost always can be found in one of the remaining 3 “M’s” below.

Management. As described in my The Living Company post, in the end, a business is simply a “Collection of Humans” temporarily united toward a common cause.

As such, the “productive vitality” of the relationships between these humans is the most important indicator of its ultimate success, and can be well measured by answers to the questions below:

1. Would / do the people in the company recommend it as a great place to work?

2. Would / do true leaders view it as a place where they can build their careers / make their mark?

3. Does a productive camaraderie exist in the organization such that that those within it do more and better work than without?

If the answer to any of these questions is no, then a hard and sober look at the company's management and leadership is required (And, in all likelihood, the problem starts and ends right at the top).

Model (Business). I had the great fortune a few years ago to lead a change management assignment for a large, urban hospital here in Los Angeles where Mr. Charlie Munger - Warren Buffet's famed partner at Berkshire Hathaway - was Executive Chairman.

Mr. Munger's philosophy and credos were well steeped in the organization, of them my favorite was that for Mr. Munger all businesses – no matter the size, industry, or focus – could be evaluated as to their answer to one question, namely:

"Does the business consistently deliver high quality at low cost no matter the field of endeavor?"

Honestly measuring how one’s company ranks on this cost / quality spectrum relative to competition is a great predictor as to its long term success.

Marketplace. Following on Mr. Munger's wisdoms, try on one of Warren Buffet's most famous quotes:

“When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

Now, when it comes to industry and market analysis, most small and medium-sized companies undertake it anecdotally, if at all.

An investment of time and resources which almost universally yields a high ROI is to have an outside research firm undertake for the business a formal industry, competitive, market, and customer analysis.

It is almost impossible to pay too much for such work, as helping managers gain stronger focus as to what their right market positioning is (and what it is not!) is worth its weight in something far more precious than gold, opportunity cost.

Money. Management. Model. Marketplace.

Successful businesses get the last three right and the first naturally follows.

And, as they do, companies get “unstuck” and recapture the promise and excitement of the business' earliest days, but now with the cash flows and equity value that makes all of the hard work worthwhile.         

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More Risk. Good for Your Business?


 

Risk is good. Not properly managing your risk is a dangerous leap.

                                                                                         -        Evel Knievel

"The Strategy Paradox," Michael Raynor's classic book, should be required reading for executives interested in understanding the connection between risk and return in strategic planning and decision-making.

Raynor’s basic premise is that almost everyone, because of how human beings are fundamentally wired, over-rate the consequences of “things going bad” and consequently too often default to seemingly safe strategies.

Raynor goes on to make the point that while this may be fine from a personal health and safety perspective, it is quite sub-optimal when it comes to strategic decision-making.

The reasons, he cites, are both subtle and obvious.

The obvious reasons revolve around classic “agency” challenges - namely that there are a different set of incentives in place for owners versus operators of businesses.

The owners - i.e. the shareholders - main goal is investment return. As such, they usually evaluate strategic decisions through the dispassionate prism of expected value.

The operators of businesses, in contrast, usually act as who they are - emotional, empathetic, and personal-safety focused human beings.

And while, as professionally trained managers, they are of course aware and focused on expected value and shareholder return, their analysis of those rational probabilities often get overshadowed by more "human" concerns.

Like friendship. Like the stable, comfortable routine of a job. Of co-workers. Of a daily, comfortable work rhythm.

And the result of this natural human bias toward "the comfortable" is executive decision-making that defaults too often to the seemingly (that word again) conservative option.

Now as for why this conservatism is a strategic problem, Raynor delves into the concept of survivor bias and how it pertains to traditional studies of what factors separate successful companies from the unsuccessful ones.

Survivor bias can be best illustrated by all of those statistics that too many of us unfortunately know by heart regarding the abysmally low percentage of companies that make it through their 1st year of business, those that make it to 5 years, to 10 years, etc.

Now most of us naturally interpret these statistics as to mean that the leaders of these failed businesses were too aggressive, that they took too many risks, made too many big bets that didn’t pan out.

But Raynor's research actually demonstrates the opposite.

As opposed to Jim Collins’ famous (and famously flawed) Good to Great analysis, Raynor found that when the full universe of companies were surveyed – not just those that survived – that there was a direct negative correlation between those that didn't make it and the relative conservatism of their leaders and their pursued business strategies.

Or from the other perspective, the successful businesses were led and managed far more so by leaders who could be described in those "seemingly"pejorative terms - "aggressive," "risk taker," "bet the house" types.

So what does this all mean for the executive / entrepreneur interested in making quality higher risk / higher return strategic decisions?

Well, to quote the title of a famous self-help book: "Feel the Fear…but Do It Anyway."

Accept that as human beings, we are wired to be afraid.

BUT to prosper in modern business we must push through this and trust that the riskier choice far more often than not is...

...the strategically correct one.

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