Most people recognize that markets don’t stand still. Customers, competitors, and technology are constantly changing.
Although most people recognize that, many don’t appreciate the imperative that that dynamic places on them as leaders. The simplest way I’ve learned to describe that imperative is this…
Your business model is a depreciating asset.
In other words, the way you do business – whether that’s how you find customers, how you produce what you offer, how you deliver what you sell – is losing value every day.
Like other depreciating assets you have – your house, car, refrigerator, computer – you have to maintain it simply for it to keep working the way it’s supposed to. And you have to more-fundamentally change or replace it on some kind of predictable cycle – 3-4 years for a computer, 5-10 for a refrigerator.
How quickly your business model depreciates is mostly a function of the degree of change in your market. And, since there’s more change in every market these days, we all need to put our leadership teams on notice that we’re going to have to reinvent our business model sooner than we’re used to. Rule of thumb: the cycle is probably half what it used to be. (So if the model used to last 10 years, it’s best to plan for it to last 5.)
If your leadership team is skeptical when you tell them this, offer the following true story. I know a smart, tech-savvy teenager who has a nose for online businesses. He found an opportunity last Fall that he liked. Here’s how that played out:
- Week 0 – discovered opportunity
- Week 1 – supply chain set up
- Week 2 – open for business
- Week 5 – profits to date: $200K
- Week 11 – profits to date $500K
- Week 13 – rejected offer to purchase business for $100K
- Week 16 – competitors raise cost of advertising to a level that the economics no longer work, business model no longer profitable, business closed
To summarize, that’s a business model that was able to net $500K in 4 months – I know $15MM businesses that aren’t generating that profit for the year – but whose value depreciated to $0 in that same 4 months.
If you talk about markets changing, it seems like something “out there” that may not impact you. If you talk about your business model depreciating around you week by week, it gets much clearer that you need to act with some urgency.
I was in a meeting this week with a client, and they were talking about the gigantic case they take to trade shows – which is called “The Coffin” and may have cost an employee a finger (the story wasn’t clear and I didn’t want to ask). The person who bought it, and still saw it’s utility, countered the jokes and jabs by saying, “Well, actually, it’s light if you have a forklift.” I’m not sure if it was a joke or a legitimate argument, but it got me thinking…
There are a number of pitfalls that will trip up people who don’t have a lot of experience with strategic planning. One of the more regular ones – especially in retreats where people are asked to free their thinking – is not taking into account limited resources.
All kinds of amazing things are possible to dream up if you assume you have unlimited time, effort, strength, brainpower, flexibility, etc.
That case is light (if a forklift is available where we’re going, and we have the money to pay for it)
That metal is flexible (if we have a sledgehammer and the strength to wield it)
That market is accessible (if we have the VP of Sales who knows the right people and can use their trust to benefit our product)
That new initiative is going to be easy for people to support (if we have a culture that is very adaptive and a leader who consistently pushes it)
Options that look good with unlimited resources often look terrible when limitations come into play. So it’s important to take resources – money, bandwidth, expertise, relationships – into account when choosing a strategy.
Overlooking resource constraints is just one form of a broader category that undermines strategy – the hidden assumption.
There’s no way to avoid hidden assumptions – we all have them lurking in our blindspots. But there are things you can do in your planning to reduce the likelihood that assumptions will lead you into a bad decision:
- Include people with different perspectives in your discussions – and listen to them all
- Ask, “Why is this a stupid idea?” or “Why would this fail?”
- Think of other decisions that ended badly and were driven by hidden assumptions, and assess if there are similarities
- Clarify the criteria that you use to evaluate your options
One of the things that separates good strategists from poor ones is the ability to see what’s missing and hidden. It’s a hard skill to develop – it takes knowledge and experience and inquisitiveness and discipline.
But it’s a really valuable skill. If you reflect on the worst decisions you’ve made, they are usually built on top of a hidden assumption that turned out to be way more off base, and way more important, than you’d have imagined…if you’d known to think about it.
If there’s one thing in Stage 2 companies that does not take a lot of thinking, it’s identifying who your “High Potential” staff are. They come to mind immediately whenever I ask leaders who they are.
But, as much as it’s a no-brainer to get the most out of the people who offer the most, Stage 2 companies do a consistently horrible job of actively developing their High Potentials. Why? Because the Well-Oiled-and-Balanced Wheel is easy to ignore (and besides, it has a lot of weight to carry and can’t afford much “down time”.)
The first step I’d recommend in developing your High Potentials is to come up with a model that you can use to identify your High Potentials. Since it’s always obvious who they are, why would you need a model? Two reasons.
First, you need a program to develop your High Potentials, both to get the benefit of the full value that they can give you, and to keep them engaged and hopeful about their future at your company. And in order to have a program, you need to explain to people who is part of the program and who is not.
Second, you also have people who are Good Potentials. Most of them will never make the jump to High Potential – but some of them will. And to do that, they need a model of what they’re aiming for – what a High Potential is.
I have a 1-page model for talking about High Potentials. It’s a graphic that you can put in front of High Potentials to talk about why you value them so much and how you want to continue to develop them. And you can show it to Everyone Else to explain in simple terms what it takes to be (and be treated like) a High Potential.
If you want to see my model and learn some tips for using it, sign up for my upcoming August Strategy Hour webinar (even if you can’t make it you’ll get a copy), or go to the Contact Us page and reach out to me to request it.
My sons love Legos. They love building the kits based on the instructions that come with them – and they love building their own creations out of a bin of parts that is the resting place of all those well-made sets.
When my son is building a triple-winged rocket, or an army base, it’s very clear that the creation process is not connected at all to the sales process. Yet, for some reason, when we are working on an innovation in our business, for some reason it’s much easier to think that the creative process is inherently connected to the commercialization process.
But it isn’t.
Being a business owner, I sometimes think as I watch my son and his Legos, “What would it take to make this little hobby a business?” My mind first goes to customers – their feedback, engagement, and money. And then it goes to logistics – managing the schedules, inventory, work flow.
You need creativity, customers, and control to commercialize innovations. The creativity part comes easily for Stage 2 companies – but if you don’t have customers and control, you’re just playing with Legos. Which, I can tell you from watching my sons, is engrossing and rewarding…but is not a sustainable business model.
I wrote several years ago about how growing companies need to manage their shifting need for innovation talent, referring to Ted Prince’s work with the Perth Leadership Institute. I’d like to highlight a few ideas about innovative people now.
First, Prince’s research indicates that relatively few people have the skills to be innovators, and someone can only learn to be more innovative if they have a high degree of “leadership agility,” as Prince calls it. So the first problem with hiring innovative people for a growing company is that there just aren’t many out there.
Second, the way innovation happens in Stage 2 means that more innovation doesn’t necessarily mean more innovators. Why? Because much of the innovation process is not about invention and creativity. There are other skills that are needed – sales and management skills being the two most prominent. Sales skills ensure that the company’s innovations are connecting with customers. Management skills ensure that the company keeps control of innovation projects. Sales and management skills enable your true innovators to do more of what they do best, so you will actually get more out of innovators even if their number stays the same.
So, for you Stage 2 leaders, the bad news is that it’ll get harder and harder to find truly innovative people for your growing business – and the good news is that you won’t need them as much as you might think.
I hear Stage 2 leaders all the time say, “Creativity and flexibility is what made us great – we cannot change that.” It’s a “pound the table” statement for most.
I agree – but my “pound the table” statement back is, “You’re right – but creativity and flexibility look different in a growing company than they do in a start-up company.”
And this is especially important – and hard for Stage 2 leaders – when it comes to innovation.
Most start-up leaders invent and innovate with customers that they know very well, and so there is a very short leap between the innovation process and customer feedback.
In Stage 2, though, companies usually have the resources to start pursuing their own ideas – not just react to what customers ask them for.
This change is far more challenging than most leaders realize.
First, Stage 2 leaders think that their experience with a few customers extrapolates to larger markets – which is true sometimes, but oftentimes isn’t. Second, Stage 2 leaders often involve customers less in the development process (they can be a pain, after all), which makes it less likely that the customer will want it, and more likely that the sales process will take longer. Third, a Second Stage company has enough moving parts that need to work together, that creativity without boundaries will cause more harm than good.
We’re not talking about too many controls here. A monthly review meeting. A customer meeting once a quarter. A paragraph of milestones and expectations that progress can be assessed with.
The Futurist magazine had an article several months ago titled, “Innovating the Future: From Ideas to Adoption” by Peter Denning. In it, Mr. Denning described “the work of innovators,” which included 8 types of activities that need to take place for innovation to happen.
The article is interesting to consider when thinking about how small business innovation happens – especially for Second Stage companies.
Remember, growth companies are often led by very inventive and creative people – which is a huge asset in the start-up phase. But in Stage 2, that needs to be supplemented with structure and discipline. Denning’s 8 innovation practices offer a good model to show what’s going on in growth-company innovation.
Second Stage companies are good at these 4 of Denning’s innovation practices:
- Sensing new possibilities
- Envisioning a compelling story about the possibilities
- Leading and mobilizing people to adopt innovations
- Embodying the innovations in their own actions
On the other hand, Second Stage companies are typically weak at the other 4 of Denning’s innovation practices:
- Gaining preliminary customer buy-in to start innovating
- Overcoming resistance to change and creating customer commitment to try the innovation
- Helping customers integrate the innovation into the environment and stick with it
- Managing all commitments to completion
What’s the difference between those 2 lists? The first one – the things Stage 2 leaders do well – leverage inventors’ strengths of vision and passion. The second one – the things Stage 2 leaders struggle with – involve dealing with the complexity of customers, teams, cultures, markets, and projects.
As I say again and again, the only way to deal with all that complexity is to create some structure, process, and systems to handle it. Not a lot…but some.
All 8 of Denning’s innovation practices are important to commercializing new ideas. So, it’s no surprise that many Second Stage companies have a lot of great developments going, but struggle with making money from them.
This has to have been the most interesting quarterly planning cycle I’ve been a part of. On the one hand, the broad economy seems to be picking up, and the stress and strain from the outside world is receding. On the other hand, the economy is not at a point where people and companies can return to the way they used to be. And, companies are now having to deal with the fall-out of decisions they made a year ago, when they did what was right and expedient in the short term – often at the expense of what was good for the longer-term.