A year ago the New Economy could do no wrong. Everything seemed to be charging ahead carrying each new company higher than the previous. In the crazy years immediately following the introduction of the world to the Internet phenomena, many businesses seem to have taken leave of their senses. While the rapid change engendered by the convergence of computing and communications has created vast opportunity, too many businesses acted as if staking a claim was all that was necessary for success.
In particular, the phrase " planning is dead" has rolled off the popular press and the lips of many pundits. " This, after all, is the Internet age" , they would declare. In the rush to claim the newly identified markets, it seemed to be all about capturing market share first and worrying about how to generate profits with a sound business second. Following the early successes of Netscape, AOL and Amazon new businesses rushed headlong to stake their claim in the wild Internet territory before they looked to see if they could actually mine profits from their holding. Come up with a hot new concept - the next new thing, construct a story bigger than life about how everyone will love it, find a venture backer who believes the story, and work the press to spread the word of the next impending record IPO. The only strategy that seemed to matter was getting on the IPO bandwagon.
Welcome to the New Economy. No need to plan, just outsource to a good PR firm and an investment bank and you are on your way to rack up the wealth. A few naysayers spoke of the need to have a profitable business model, but many ignored those voices. The cash that washed over these new companies, gave them the opportunity to postpone worrying about business cycles, profits and the future. They felt that if they could capture market share today, the future would take care of itself. It is easy to manage a company when things are on a steady upstroke. The buoyant stock market provided a great opportunity for new start-ups in the late 1990' s. Rushing to exploit the situation, many overlooked the need to plan for when times might be different.
Early " new economy" companies spent lavishly on marketing to capture share and grow their business. In some cases this was an explicit part of their strategy. Companies like AOL and Netscape had fundamentally sound business models, where revenues exceeded variable costs and there were relatively high fixed costs that could be spread over a large customer base. Giving away " fish food" made sense for them to jumpstart their growth. But as the popular press focused on the growth potential and the unexploited space of the internet, many other businesses were charmed into thinking it was all about growth. Profits would take care of themselves in time.
To get the growth, many focused on the price sensitive commodity segment of a market promising lower prices than through traditional channels. This would have been fine if the costs were lower, but in many cases it was just wishful thinking that sometime in the distant future the virtual world would be less costly than the real world. The final stroke for many of the dot-coms was the realization that you can' t spend $50 to acquire a fickle price sensitive customer on whom you might, in the best case, have a 10% gross margin. Those without a solid business model, without a sustainable basis for advantage, without clear benefits for customers - in short, without a strategic plan for success - have been washed away faster than they came into existence.
So how did so many smart people, entrepreneurs, venture capitalists, investment bankers, analysts and investors get it wrong? Of course there was the " charm factor" - deep down almost everyone would admit to being mesmerized by the market. But it wasn' t all " irrational exuberance" . There was, and still is, real fundamental change sweeping over the markets of the world. This is probably the most profound change in the business environment since the rise of powered factories and mass production a hundred years ago. The trick in such times of wrenching change is to sort out how much is real and how much is hype. And it is also essential to sort out the pace of change.
Change is the spice that brings out creativity; didn' t someone once say " necessity was the mother of invention?" . In a world devoid of change a pecking order is established and few plans are needed...how much planning is needed for that annual event that is going to be largely " the same as last year" ? Not much, just spruce up last year' s plan and you are on your way. It is in times of great change that great vision and plans are needed. And no one can argue that these are not times of great change...everythingis being called into question.
And that is precisely the point so many missed. In these times of upheaval, vision and a plan are essential. That is not to assume that a plan will solve all ills. Some will get it right and some will get it wrong. But you have to be in the game trying or you just drift with the tide and are left reacting on short notice to whatever comes along. Those without a plan to anchor them are usually among the first to be washed out when the tide changes. Examples abound in the dot-com crowd: Pets.com, Living.com, Value America and Garden.com to name a few.
So here we are at the front edge of at least 10-20 years of constant and tumultuous change. How do we create great vision and plans to take advantage of this opportunity to break from our current place in the pecking order and soar to new heights?
In this world of proprietary buzz words, every academic and consultant has a different answer...a vision statement, strategic thinking, transformational leadership, strategic planning, business model, critical thinking... In the final analysis, however, it doesn' t matter what you call it. It comes down to having a concept, an idea that a business can pursue. By any means available, you identify a real need in the market, not a whim, not a wish, but something that will deliver real value (where the customer' s perception of return is greater than their cost) to those who want it. And from that simple concept you build a vision of what you need to put in place to deliver that market need better than anyone else.
That concept, vision, destination...provides the sense of direction and purpose for an enterprise. With steady focus on what it intends to become over the next several years, a company can set about working out the details of what it has to do to arrive at that destination in a timely and profitable fashion given the competitive environment it faces.
AOL is an example of a company that has had both a clear vision of a market need and strong execution of a plan to realize its destiny. Not being inside AOL, one can only speculate, but from all appearances AOL has had a very consistent vision of what they intend to become, a content provider via the Internet. To get there it had to go through many stages of development: building a killer application, assembling a network, attracting initial customers, developing proprietary content, upgrading service, forming alliances for more content, dropping the price to build the customer base, divesting of the network to get more customers and content, acquiring Time-Warner. True to its stated vision, AOL has executed each stage well and succeeded at becoming the top provider of consumer content via the Internet. Whether this was the best strategy can only be judged over time, but it certainly has been a strategy that has exploited the opportunity provided by the market allowing AOL to soar to be one of the most admired companies of the last five years.
Like AOL, every business needs more than just a concept of a market need. This is not just for the New Economy companies. They are just the most recent and obvious under-performing that I could pick on. But all businesses need to develop a clear approach as to how they will innovate and create value for customers and in turn for the shareholders. This is the tough part because there are so many variables to sort out and choices to make. At the most fundamental level each business must wrestle with some key questions:
What are you going to sell?
Who are you going to sell it to?
How do you beat or avoid the competition?
And these must be answered in the context of generating sustainable growth and profits to ensure long term survival and success. Call it what you will, we call it Simplified Strategic Planning, every company needs a clear approach or process for sorting out these kinds of questions. The essential elements include:
- critical thinking about current situation and recent past
- a cauldron for debate to formulate shared assumptions about the future
- analysis to gauge impact of assumptions on our business
- creativity and innovation to develop response to a changing environment
- leadership and decision making to build consensus for solution
- objectives and action to bring vision to fruition
Far from being dead, strategizing, planning, thinking critically about your business and making a plan to realize your vision is an essential element that powers all successful business save those that thrive on luck alone.
Today it is easy to see what happened in the twilight of the 1990' s. Hindsight is 20/20. Some of the most " sage" advice emerges from the pundits on Monday morning after the big game; just when it is too late to use it for profit.
And so it is not my point to try to second-guess what has been...some strategies were " right," that is they brought success, whereas others did not. That will always be true. I don' t know anyone who can call it right 100% of the time...but win or lose, those who are in the game get to play. Those in the game control their destiny and can improve their lot in life. Those who do not play can only hope to be lucky...not a bad thing, but with it comes its counterpoint, " bad luck" and the odds of getting it will exactly counterbalance good luck over the long haul.
But if dint of effort can shift the balance in your favor, even just slightly, then compounding that success over the long haul will separate a winner from the pack. And that is the reason that strategic planning (or whatever you choose to call it) not only makes sense, but is an essential element of business success.
So let' s test the quality of the strategic thinking on your management team. We start with a five question quiz. Give each manager a blank sheet of paper. Looking out three years ask each team member to answer the following questions in at least 10, but no more than 20 words. Five minute time limit...ready, GO!
- What is the basic need in the market place that your company will fill?
- What are you going to sell?
- Who are you going to sell it to?
- How will you fill the market need better than anyone else?
- What talents should you build to beat or avoid the competition?
Now compare answers...how close are they? Did anyone draw a blank? These are pretty fundamental questions, so you would hope for good consistency and completeness across the top management team of a company...but more often than not this is not the case. How do you think some of the dot-coms that have gone belly up would have fared on this test?