It’s easy to tell what your strategy is

The purpose of this email is to share my learnings and unlearnings, with the expectation that some will be of value to you. This email was 100% written by me – not by AI.  When you send me an email, my response is 100% written by me.

What has been my most valuable learning in the past three months?

I’ve had countless confusing discussions about strategy.  I’ve concluded that it’s easy to tell what your company’s strategy is.  Let’s assume your board of directors approves your strategic plan.

• You have a slide at the beginning of your strategic plan presentation to the board. The slide states “Asking for the approval of ….”
• The minutes of the board meeting document: what exactly was approved; who is accountable for the benefits; what are the metrics for measuring success; what facts and assumptions would have to change in order for the benefits to be unachievable and the board would need to approve something different.
• The above two points illustrate that approving a strategy is a combination of a decision-making process and a learning process.

What is my personal update?

• On the mentor roster at The Hatchery, Department of Engineering, University of Toronto, Department of Engineering.
• On the mentor roster at the Health Innovation Hub, University of Toronto,
• Continued my long-term fundraising for the Geoff Carr Fellowship at Lupus Ontario. Over the past 20 years family, friends, neighbours, and colleagues have contributed over 284,000.
• Continued as a member of the Angel Capital Association in the US and the Institute of Corporate Directors in Canada.
• Continued to share with you, and on my website, some of what I’ve learned and unlearned, with the intent that some of you will find value. The learnings and unlearnings are applicable to any size company, ranging from early-stage startups to large global enterprises.
• Continued as Board Director at a private company.

I continue to focus my time to maximize the value and impact of my two professional purposes: #1 Enabling current and emerging business leaders to succeed, #2 Enabling business leaders to have a positive impact on society.

Sharing my learnings

Below are links to my website containing new and revised articles since my last update in September. The critical learnings from each article are included. Each article designed to enable discussion among founders, owners, shareholders, investors, CEOs, and boards of directors. The learnings and unlearnings are applicable to any size company, ranging from early-stage startups to large global enterprises.

Links to my points-of-view articles:

Does everyone agree on what strategic planning is?

• There is no broad agreement regarding the definitions of: strategy; strategic plan; and strategic planning process
• There is no broad agreement regarding the components and metrics of a strategic plan.
• There is no broad agreement regarding a strategic planning process.

https://koorandassociates.org/strategy-and-strategic-planning/what-is-strategy-and-strategic-planning/

Traditional strategic planning dooms your company to failure.

• TSP (Traditional Strategic Planning) evolved in a slow changing world. The future could be forecast, and decisions (and decision-making processes) were expected to be valid for several years.
• The result of TSP was that few companies survived and most delivered poor financial results.
• Today’s world is totally different: future is impossible to forecast, multiple sets of fast changes, multiple unpredictable crisis.
• Strategic planning must be rethought to determine which decisions and decision making processes have a lifetime longer than a year.

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/

Is your company actually a startup? V2

• Most companies need to become a startup again but don’t realize it. As a result, the wrong type of talent is in place, taking the wrong actions.
• Most companies don’t last long. Most companies have poor value creation. Most transformations and major business changes have poor results.
• Companies need to get into startup mode to validate and invalidate their assumptions regarding: customer needs and problems, and the number of customers willing and able to pay for a solution.
• Board directors and C-Suite cannot learn startup mode knowledge, skills and decision-making processes because their brains have hard-wired biological responses and cognitive biases.

https://koorandassociates.org/avoiding-business-failure/is-your-company-actually-a-startup/

How will startups destroy your company? V2

• The startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs. Startups are not building a solution. They are building a tool to learn what solution to build.
• Startups begin by making assumptions about the problems customers are willing and able to pay for, and about how customers would perceive the value proposition they’d achieve from the startup’s solution.
• The startup is driven by immediate and ongoing understanding of the customer based on face-to-face interviews supplemented by surveys.
• The assumptions are quickly validated or invalidated. Invalidation results either in a new set of assumptions or the startup stopping.

https://koorandassociates.org/avoiding-business-failure/how-will-startups-destroy-your-company/

AI is not accountable for benefits.

• AI is not accountable for benefits. I have seen countless articles start out with AI not delivering benefits.  AI is not accountable for benefits.
• Management is accountable for benefits.
• The way to solve this return on capital issue tis two-fold: First, improve the processes used by management to make investment decisions (including AI) and to achieve benefits. Second, improve management.

What is a startup? V3

• There are no commonly accepted definitions regarding startups.
• There are no commonly accepted definitions of a successful startup.
• Each of the 5 US universities I looked at has different definitions, metrics, and processes for startups.

https://koorandassociates.org/the-startup-journey/what-is-a-startup/

How will undergraduate founders destroy your company?

• Founders first go through a program to validate that cash paying customers believe they have a problem which needs a solution.
• The first step is to have face-to-face interviews with cash paying customers.
• There should a multi-disciplinary set of founders e.g. business, technical, social sciences people.
• Program, mentor, and founder problems are addressed by AI.
• The programs have a structured learning process to rewire the founders’ brains over a period of several semesters.
• The program is part time, with the founders taking other courses during the semester.

https://koorandassociates.org/avoiding-business-failure/how-will-undergraduate-founders-destroy-your-company/

Your survival depends on what you’ve learned.  In the past three months, what have you learned about your customers that no-one else knows? What have your learned about how to enable your customers to achieve more value from your solution than from your competitor’s solutions?

The purpose of this email is to share my learnings and unlearnings, with the expectation that some will be of value to you. This email was 100% written by me – not by AI.  When you send me an email, my response is 100% written by me.

My biggest learnings in the past three months:

• AI has been very powerful in finding fact-based research regarding the issues and challenges I’m dealing with.
• Facts alone don’t tell me what to do. I have to think about the implications and the next steps.
• The facts may also be out-of-date and not relevant in todays turbulent, fast changing, and hyper competitive world.

Sharing my learnings

Below are links to my website containing new and revised points-of-view since my last update. The critical learnings are included. Each article designed to enable discussion among founders, owners, shareholders, investors, CEOs, and boards of directors. The learnings and unlearnings are applicable to any size company, ranging from early-stage startups to large global enterprises.

Links to my points-of-view articles:

Traditional Business Transformation dooms your company to failure. V2

• Most transformation efforts fail and destroy company value.
• The failure is due to leadership flaws with the company leadership: the board of directors, CEO, and C-Suite.
• The leadership has limited understanding of employees and how to gain employee commitment to transformation.

https://koorandassociates.org/business-transformation/5920-2/

Do you need to transform your company? V4

• Many business leaders think that they need to change the direction of their company, in order to be financially viable.
• Transforming while ahead of the competition is more successful than transforming when you are forced to.
• Cost cutting is not the solution to under performance.
• If your company is underperforming, compared to the competition, determine what changes are required to the board of directors and C-Suite,
• Often the board of directors and C-Suite do not know that their company is in crisis or heading toward crisis.

https://koorandassociates.org/business-transformation/do-you-need-to-transform-you-company/

What is business transformation? V3

• There is no commonly agreed upon standard definition of business transformation.
• Your company must create your own definition and criteria for what is business transformation, which everyone understands.

https://koorandassociates.org/business-transformation/what-is-business-transformation/

Is your company planning to fail? V5

• Most companies are successfully executing their plans to fail. Most companies fail or produce poor investor returns. (Read “Your company will fail”, which is the first article under “What further reading should you do?”)
• Plans are comprised of two parts: what is in them and what’s not in them. Plans reflect decisions made and decisions not made.

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

Your company will fail. V3

• Most companies will: fail, disappear, or provide poor returns to their investors.

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

How profitable are search funds? V2

• The IRR for traditional search funds in Canada and the US has been 35.2%.
• Traditional search fund investors provide far more than capital. They also provide coaching, mentoring, board directorships.
• You need to fund between 30 to 45 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-are-search-funds/

Personal Update:

• Mentoring a startup at the University of Toronto Department of Engineering. The approach was based on weekly advisory board meetings.
• Continuing as Board Director at a private company.
• Continuing as a Patient Family Advisor at Sunnybrook Hospital.
• Continuing my long-term fundraising for the Geoff Carr Fellowship at Lupus Ontario. Over the past 18 years family, friends, neighbours, and colleagues have contributed almost $270,000. You can use the donation link later in this update
• Continuing with the Angel Capital Association in the US.
• Focusing on my two professional purposes: #1 Enabling current and emerging business leaders to succeed, #2 Enabling business leaders to have a positive impact on society.

Elite Talent – what is it? V2

 What is the purpose of this article?

Enable the investor, founders, board of directors and C-Suite to discuss the role of elite talent in their company’s success.

You can download a PDF of this article from: Elite talent – what is it V2

What are the critical learnings in this article?

• A small percentage of people can generate much of the value within any team or role. This is elite talent.
• A small percentage of roles can generate much of the value within your company. This is high potential elite talent.
• Elite talent is rare. High potential elite talent is even rarer.

What is the value and need for elite talent?

In today’s competitive business environment, there is unlimited capital for companies that have the potential to create major value,  The talent to create major value is rare.

One study of talent across many types of organizations showed that: ¹

• The top 1% of people account for 10% of the organizational output.
• The top 5% account for 25% of organizational output.
• The top 20% account for 80% of organizational output.

Adding one elite performer to a team, can increase overall team performance by 5-15%. ²

Google found that people performance follows a power law distribution, and not a bell curve. Top 1% of workers generate 10 times average output .³

McKinsey’s research on private equity portfolio company CEOs showed that: ⁴

• Top quartile CEOs deliver shareholder returns that are 9% higher than industry peers, every year that they’re CEO.
• In some industries, top quartile CEOs deliver 16% higher yearly shareholder returns.

One company with thousand of employees, found that 37 roles delivered 80% of the company’s EBITDA ⁵

How does “Moneyball: the art of winning an unfair game” by Michael Lewis, illustrate elite talent.

• Billy Beane became the Oakland A’s baseball team general manager in 1997.
• There was over 100 years of baseball wisdom on how to select talent, especially from school. The front offices, managers, coaches, scouts, and players all shared a common point of view regarding the best practices for selecting talent.
• Billy Bean did not follow 100 years of wisdom. He took a fact-based, mathematically analytical approach.
• The Oakland A’s then reached in playoffs in 2000 to 2003. In 2002, the A’s player budget was $44 million U.S., the New York Yankees’ player budget was $144 million U.S.

My observations:

• You don’t need everyone to be elite. One person can change the organization.
• The basis for change was selecting the right talent in the first place. (E.g. out of high school) rather than trying to change existing talent.
• Money alone does not ensure elite results.
• Fact-based analysis is critical. Cambridge physicist Ian Graham developed the mathematical model which was used to select the manager and players for the Liverpool FC rugby team, resulting in them winning the 2018-2019 UEFA Champions League.
• You succeed if you do something both different and better than others.
• But then the other teams copied Billy Beane’s approach. In today’s hypercompetitive world, competition improves, thus elite talent needs to also improve. If elite talent doesn’t Improve, it will no longer be elite.

Why do you need high potential elite talent ?

The definition of a high potential person is someone who can become key driver of organizational performance i.e. “generate exorbitant output that can influence the success or failure of their organization.  This is different from individual career success. Many leaders that advance in their personal career don’t turn their teams or companies into competitively differentiated success. XX

High potential people can impact your company’s success both today and in the future.  High potential people can change to continue to be elite in new roles or changing existing roles.  Yesterday’s requirement for elite capabilities may be different from today’s requirement or tomorrow’s requirements. Someone who was elite yesterday might not ne elite today or in the future.

What are the characteristics of high potential elite talent?

• Cognitive skills
  1. Long-term memory
  2. Working memory: hang onto information while using it
  3. Logic and reasoning
  4. Visual processing
  5. Processing speed
  6. Attention
     1. Sustained – for long periods of time
     2. Selective – without distraction

• Divided – doing two things at once

• Ability to quickly learn and unlearn: paradigms, frameworks, methodologies, data, facts, knowledge.
• Fluid intelligence he ability to solve problems without past experience. This is critical for innovation, which is coming up with new and better solutions.
  1. The future is impossible to predict but actions and decisions are focused on this unpredictable future.
  2. The future will also be different from the past. i.e. there won’t be historical experience to draw upon.
  3. Able to provide direction when there is no map.
• Character
  1. VME (Values, Morals, and Ethics) Warren Buffett supposedly said “…looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
  2. Courage: It takes courage to make the right decision. The right decision is often not: the cheapest, easiest, lowest risk to the company, lowest risk to you, and what everyone else is doing.
  3. Perseverance, especially against all odds.
  4. Knowing when to stop persevering. One leader told me “If you’re digging yourself into a hole, stop digging.”
• Relationship skills:
  1. The ability to create and sustain a network of personal relationships.
  2. Persuasion and negotiation, which is key to managing different points of view and interests.
  3. Creating and maintaining followers. A leader without committed followers is not a leader.
• Communications activities include:
  1. Write, speaking, singing, drawing, and body language
  2. Speaking and singing also include tones, pitch, etc.
  3. Communications is two way:
• Broadcasting
• Listening, which includes analysis of input
  1. Communications can have a variety of outcomes, including:
• Understanding other people
• Changing the belief, emotions, and behaviours of others.
• Learning such as facts, knowledge, ways of thinking.
• Building trust and relationships.
• Persuading people to take certain actions.
• Gaining the emotional and intellectual support of people.
• Creativity

A Google search of creativity reveals many very different definitions of creativity. Two definitions are:

• “The ability to think about a task or a problem in a new or different way”
• “Creativity involves two processes: thinking, then producing. If you have ideas but don’t act on them, you are imaginative but not creative”

 How do you select elite talent?

• The best predictor of how someone will perform in a job is a work sample test (29%) ⁶ For example, when recruiting board directors, they should serve for one year as a board observer, to enable assessing them.
• The two second best predictors are: are tests of general cognitive ability (26%); ⁷ and structured interviews (behavioural (tell me about a time) and situational (what would you do if) (26%). ⁸
• Four interviews predict whether to hire someone with 86% confidence and each additional interviewer adds 1% confidence. ⁹ This assumes that you are clear on what value the role provides, the specific characteristics of people who can deliver that value, and do a combination of work sample and structured interviews.
• The definitions of elite talent change over time. At the 2023 Collision conference is Toronto, one presentation shared a survey of over 200 Chief Technology officers. The top three things they were looking for in employees: ability to collaborate, ability to learn, ability to problem solve. Coding skills and knowledge of coding languages was not in the top 3. Several years ago, coding skills would have been the competitive differentiator.

 How do you select high potential elite talent?

• You first select for elite talent, using the criteria described above.
• Then you do additional assessment using the seven high potential characteristics described above.
• You’ll have use enhanced behavioural questions and background checking.
• Psychological testing is also required. This can be done by software, psychologists, or some combination

What are your next steps?

• Create the definitions which are commonly understood within your company, including: talent, value, elite talent, high potential elite talent, etc. Your words and definitions may differ from what is in this article.
• Determine which company roles would benefit from elite talent. Consider the time, effort, and skills necessary to assess, select, and develop elite talent.  The initial scope of your analysis ranges from the board of directors through to the most junior entry level employee. Contractors may also be within scope.  If there are investors which control or greatly influence your company, they are also within scope.
• You can also focus on the roles which have the greatest current, or potential, impact on company value. These roles will require high potential elite talent. The you’ll need additional time, effort, skills, and software to assess, select and develop high potential elite talent. These roles won’t necessarily be the highest roles in the organization chart, but will be at many levels. Include the board of directors, CEO, and C-Suite in your analysis
• You will need a process to allocate the extremely scarce high potential elite talent. Years ago, the board of directors and CEO were focused on allocating the very scarce capital – potential capital is now unlimited.  Thus, the board and CEO need to focus on talent allocation. You’ll also need a process to allocate high potential elite talent at the board of directors.

 Footnotes:

¹Tomas Charmorro-Preeuzic, Seymour Adler, and Robert B. Kaiser, “What science says about identifying high-potential employees.” Oct 3, 2017

https://hbr.org/2017/10/what-science-says-about-identifying-high-potential-employees

² Ibid

³ Laszio Bock, Work Rules (New York: Hatchette Book Group, 2015), 182

⁴ Maria Capozzi, Sacha Ghai, John Kelleher, and Kurt Strovink, “CEO alpha:  a new approach to generating private equity outperformance”, McKinsey article March 2023

https://www.mckinsey.com/industries/private-capital/our-insights/ceo-alpha-a-new-approach-to-generating-private-equity-outperformance

⁵ Ibid

⁶ Laszio Bock, Work Rules (New York: Hatchette Book Group, 2015), 91

⁷ Ibid., 91

⁸ Ibid., 91

⁹ Ibid., 103

What is the purpose of this article?

• Generate discussion among founders, investors, boards of directors, and C-suite regarding the characteristics of billion dollar startups.
• Enable the discussion to be fact based rather than base on myths and anecdotes.
• This discussion should be held whether you are startup or a long established global company.
• This article refers to three fact based analytical books and reports and includes only a small amount of the enormous collection of factual analysis.
• This article doesn’t tell you what to do. Just because information is correlated, does not mean there is a cause and effect relationship.

You may download a PDF of this article from: Billion dollar startup characteristics

What are the critical learnings in this article?

• A billion dollar startup requires a large number of customers who believe: they have urgent problems and needs; are willing and able to pay to address those problems and needs; and that they can obtain better value from your company that the competition.
• Success depends upon understanding customers better than the competition. This understanding must be fact based using interviews supplemented by survey and analysis of customer actions.

Characteristics of unicorns – startups which achieved over $1 billion U.S. valuation.

Ali Tamaseb studied over 200 unicorns founded between 2008 and 2018.¹

What were the founders’ backgrounds?

• A founder’s age doesn’t correlate strongly with success. Median age was 34. ²
• The #2 person had an even wider age distribution, from 16 to 76 at time of founding. Founders of health and biotech companies skew older. ³
• 20% of unicorns had a sole founder. 36% had dual founders, 3 co-founders 28%; 4 co-founders 12% more than 4, 4%. ⁴

What was the founders’ education?

• Education: 36% had bachelors; 22% had MBA, 33% had another advanced degree. College dropouts less common than founders with PhDs. ⁵
• Of those that went to university: about 35% each went to global top ten vs not in global top 100. About 30% went to global 11 to 100 universities. ⁶

What was the founders’ work experience?

• 30% of unicorn founders had only worked for themselves before.⁷
• 58% of those who had worked for other companies, (i.e. 70% of all founders), had worked for Tier 1 companies with rigorous hiring processes and reputation for hiring the best. 28% had worked for Tier 2 companies (large and well known). 14% had worked for companies not well known.⁸
• Over 50% of founding CEOs and founding CxOs had less that 1 year of relevant industry or work experience. ⁹
• 75% of healthcare and biotech founders had directly relevant industry experience; 40% of enterprise technology; and 30% of consumer unicorns. ¹⁰
• What seems to matter was: quickly learning about a new space with unbiased mind, soft skills like building a network, managing a team, hiring and firing, raising money. ¹¹

What was the founders experience with previous startups?

• 59% of unicorn founders had been a previous founder, sometimes successful, sometimes not. ¹²
• Those who had run a company before, experience ranged from a year to 27 years. Most common was 2-3 years (about 25%), about 54% were up to 5 years experience. ¹³

How severe and urgent were the customers needs and problems?

• Two approaches: Pain killer (well defined and deeply annoying pain point) or vitamin (customers get better value, efficiency, entertainment or joy) ¹⁴
• 68% of unicorns were pain killers. ¹⁵
• Close to 40% of unicorns address productivity; about 20% address saving time; 11%-15% each are: convenience, entertainment, health. Safety and security are around 2-5% ¹⁶
• Close to 50% of unicorns were system integration (bringing together existing technology. Value add comes from unique business model or marketing strategy). About 25% were technical i.e. fair amount of engineering. About 25% were deep tech i.e. it’s all about being able to create the new technology or drug. ¹⁷
• Over 2/3 of unicorns were highly differentiated from competition. Less than 1/3 were incrementally differentiated. ¹⁸

What was the market demand?

• More than 60% of unicorns started in large markets with well established demand. They either took market share or expanded the market. About 25% started in medium sized markets. About 15% started in small markets. Few unicorns created new demand or waited for the market to mature. ¹⁹
• 68% of unicorns competed for market share. 32% created a new market. ²⁰

When did the founders enter the market?

• 30% of the time unicorn was first to the market. 30% of the time 2-5^th in market.  40% later than 5^th in the market. ²¹

 What are the characteristics of companies which achieved $1 billion in revenue?¹

• More than 60% of new public companies between 1980 and 2010, no longer existed in 2010. 4% of new public companies achieved $1 billion in revenue. 34 public companies a year achieved $1 billion in revenue, regardless of economic cycle.  Only 4% of $1 billion revenue companies make it to $10 billion in revenue. ²
• 11,000 companies did IPO since 1980 and to end of 2007. Only 4% (410) grew to $1 billion in revenue, but 72% of all IPO taxes, 63% of IPO employees (i.e. 9 million), 64% of market value (i.e. $2.6 trillion), and 69% of all IPO revenue (i.e. $3 trillion).³
• Failing companies had blind passion, did not self correct, did not adjust to changing customer needs, ran out of cash.⁴
• Exponential growth companies continue to grow through tough economic times and recessions.⁵
• Exponential growth companies created and sustained break through value propositions – High order benefits or exceptional value as perceived by customers ⁶
• Exponential growth companies exploited high growth market segments: created new markets, redefined markets, or created category killers (i.e. killed incumbents). Imported ideas from other industries. Kept redefining market segments. ⁷
• Growing to $50 million revenue requires brute force speed. Create and grow customer advocacy community and market momentum as quickly as possible. After $50 million in revenue, have thoughtful speed.⁸
• The key to growing a startup to $10 million revenue was based on analyzing 2,000 business plans.⁹  Create a powerful value proposition. It must address a deep, frequent or changing unmet need. The company has a unique ability to deliver on that need. Contrast the company benefits to the competition. Talk with customers to understand the “frustration” or “What’s not working well”.¹⁰

What are the characteristics of SaaS unicorns which became public?¹

This researched examined 1,000 SaaS companies in Canada and the U.S.s 400 of which became Unicorn by going public. Many of these went public after 2013.

• On average, companies needed $125 million in revenue to become a unicorn when they went public. This required $212 million of invested capital. ²
• The TAM (Total Addressable Market) size when going public needs to be at least $25 billion.³ The % of TAM at IPO time can range up to 2.2%⁴. Facebook’s yearly revenue at the time of its 2012 IPO was $4.2 billion. The prospectus stated the addressable market was $588 billion, thus % revenue was about 0.7% of addressable market.
• Most startups do not reach the IPO point but are acquired. The TAM required for acquisition is much smaller than $25 billion.
• You need a 50% differential in how customers measure competitive differentiation. Customers perceive quality, speed and cost. The customer’s costs may be far higher than what they pay your company. ⁵
• You have product market fit when your net promotor score is at least 30 and the % of customers that would be very dissatisfied if they did not have your solution is at least 40%.⁶
• Current year marketing and sales as % of current year revenue. ⁷ About 63% when revenues are $10-50 million. About 52% when revenues are $40-$250 million. About 38% when revenues are over $250 million. The implication is that unicorns usually lost money for many years. Investors provided the capital because lifetime customer profitability exceeded the one time customer acquisition costs.
• Current year marketing and sales as a % of next year’s revenue should be less than 33% at IPO time. ⁸
• The higher the growth rate, the higher the valuation, in terms of revenue multiple. ⁹

 What are your next steps?

• Assess your understanding of your customers e.g. how they perceive you, the value they obtain from you, their profitability, etc. Improve your understanding of your customers.
• Review the facts in your plans. Identify the source of each fact.
• Review the assumptions in your plans. Determine if there are facts and analysis which would change your assumption. Be clear on which assumptions are opinions and guesses.
• Be clear on the urgent problems and needs of potential customers and determine how many are actually willing and able to pay for a solution.
• Recognize facts, assumptions, and analysis are only input to the judgements and decisions you make. E.g the amount of revenue you need to be a unicorn when you IPO may be very different from the average.

Footnotes

¹ Ali Tamaseb, Super Founders (New York: Hatchette Book Group, 2021)

² Ibid., 15

³ Ibid., 16

⁴ Ibid., 17

⁵ Ibid., 32

⁶ Ibid., 34

⁷ Ibid., 44

⁸ Ibid., 45

⁹ Ibid., 49

¹⁰ Ibid., 51

¹¹ Ibid., 52

¹² Ibid., 60

¹³ Ibid., 67

¹⁴ Ibid., 114

¹⁵ Ibid., 114

¹⁶ Ibid., 117

¹⁷ Ibid., 118

¹⁸ Ibid., 122

¹⁹Ibid., 131

²⁰Ibid., 133

²¹ Ibid., 145

¹ David G. Thomson, Mastering the 7 essentials of high growth companies (Hoboken, New Jersey: John Wiley & Sons, 2010)

² Ibid., 3

³ Ibid., 9

⁴ Ibid., 21

⁵ Ibid., 22

⁶ Ibid., 32

⁷ Ibid., 33

⁸ Ibid., 75

⁹ Ibid., 163

¹⁰ Ibid., 164

¹ Charles Plant, “Unicorn Math  an Algorithm for Rapid Growth”, Narwhalproject.org, Charles Plant, https://narwhalproject.org/wp-content/uploads/2020/06/Unicorn-Math.pdf

² Ibid., 3-4

³ Ibid., 5

⁴ Ibid., 6

⁵ Ibid., 7

⁶ Ibid., 10

⁷ Ibid., 11

⁸ Ibid., 11

⁹ Ibid., 15

 What further reading should you do?

• Read the two books and website article referenced by the footnotes.
• Do you understand your customers? V2

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

What is the purpose of this article?

Enable a company’s leaders and investors to begin the discussion on how to prepare the company’s value creation plan.  This article outlines the principles that can be used to create and manage the discussion.  This article is not intended to be 100% comprehensive in both breadth and depth. The principles apply to any size company.

You can download a PDF of this article from: How do your grow your company’s value V3

What are the critical learnings in this article?

• Growing you company’s value requires a competitively differentiated value creation plan, addressing the critical members of the company’s ecosystem e.g. customers, but not only customers.
• Your company requires competitively differentiated talent in order to develop a competitively differentiated value creation plan. g. if the board of directors and C-Suite are less capable than the competitors’ boards and C-Suites, the company fails at value creation.

Who in the company’s ecosystem are you creating value for?

Ecosystem members could include:

• Customers
• Employees
• Board of Directors
• C-Suite
• Shareholders
• Suppliers and partners
• The communities in which the company operates
• Broader society

What is the value you enable your ecosystem members to achieve?

• Value to customers might include: productivity, saving money, entertainment, improving health, and improving security.
• Value to employees could include: compensation, enabling their life’s purpose, increasing their value to the current company as well as long-term market place value.

What value do ecosystem members provide your company?

• Customers might provide: payment, recommending others to your company, and improving your company’s reputation.
• The community may provide the company with the social license to actually operate. Natural resources companies in many countries now need to consult or even get the support of local communities

How do you share the value obtained by the company?

• Sharing customer payments includes: deciding how much to charge customers, how much should employees be paid, (for example, should full time employees and full-time contractors be able to make a living income), how much should the board of directors be paid, how much should be allocated to dividends and share buy backs), how much should be spent on activities which improve local communities but generate no income, etc.

How do you decide on how to share the value?

• The decision process may include consideration of: the company’s purpose, the company’s values, morals, and ethics, laws and regulations, expectations of shareholders and local communities.
• The board of directors may make these decisions directly, through board approved policies, or delegate some of this decision making to the CEO.

How do you create value for ecosystem members?

• The specific way your company creates value depends upon your company’s specific situation and characteristic.
• The assets your company has available include: people (board of directors, C-Suite, employees, contractors, consultants, advisors), processes, technology, intellectual property, trade secrets, supplier/partner relationships, relationships with ecosystem members, and capital.  The reason I put capital last is because there is unlimited capital available for companies that are success at value creation.

What are your company’s challenges is achieving value growth?

Your company is facing competition, often from around the world.  Competitors are always working to be better than your company at:

• Enabling customers to achieve value and perceive a superior value proposition.
• Enabling talent (including the board of directors, C-Suite, employees, and contactors) to achieve value. This impacts how talent is attracted retained, developed, and exited.
• Being productive or lower cost.
• Attracting the best suppliers and partners.
• Having better support from the ecosystem.

It can be difficult to assess the root causes of historical value growth.

• Was success due to competitively differentiated talent and processes OR poor talent and processes but lucky?
• Was failure due poor talent and processes OR competitively differentiated talent and processes but unlucky?

What are the two most important things to focus on to enable value growth?

• Meeting the problems and needs of customers better than the competition. This is a combination of growing the number of customers and increasing the problems and needs which are being met. Without customers and without cash, the company does not exist.
• The most important thing to focus on is the talent. The talent creates and executes the plans to achieve results. There are two groups of talent that must be competitively differentiated: the board of directors and the C-Suite. They company will fail if board the board of directors and C-Suite are less capable than the competition.

Your next steps to create your value creation plan.

In the next three months, you will understand the process to develop your value creation plan.  You’ll go from beginning to end, making whatever assumptions are needed to complete within three months.  Your focus will be on customers and talent – specifically the board of directors chair and the CEO.  In future, you’ll consider more members of your company’s ecosystem.

• Document your company’s purpose and your company’s values, morals, and ethics. These will guide your decision making and execution.
• Determine what your customers believe is the value they obtain from your company and how your company is competitively differentiated. Be specific regarding the problems and needs being addressed and the benefits they achieve. You’ll have metrics associated with then.
• Define internal company customer metrics such as life-time profitability, and customer acquisition costs.
• Outline future customer scenarios. Describe what is driving changes to: customer problems and needs, the number of customers willing and able to pay for your solution, what customers will be paying.
• For each scenario, outline the changes and milestones for your company in the next five years in order to grow the total value customers achieve from you and thus grow your profits.
• Determine the implications of the future scenarios on the required capabilities and characteristics of the board chair and CEO. This requires describing how the board chair and CEO enable company success in the above scenarios.
• List the changes required to the board chair and CEO selection, assessment, development, and succession processes. This includes describing the type of coaches the board chair and CEO require.
• Create the ongoing process to monitor, validate and update the value creation plan.
• Determine which additional elements of the company’s ecosystem need to be included and which assumptions need to be validated as the value creation process evolves.

Further reading

There is overwhelming evidence that most companies are successfully executing their plans to fail and to not grow their value.

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

How can the board of directors create value?

https://koorandassociates.org/corporate-governance/how-can-the-board-of-directors-create-value/

Purpose of this article

The purpose of this article is to help board directors and the C-Suite determine if they understand: the strategy, how value is created, and industry dynamics.

You can download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2021/02/leaders-dont-understand-the-strategy-for-creating-value.pdf

Most company directors do not understand: the strategy, how value is created, and industry dynamics.

• A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said they strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.¹
• I believe this lack of understanding reflects the lack of understanding of the CEO and C-Suite.
• Directors are not stupid and lazy. The CEO and C-Suite are not hiding things from the board directors.  The leaders simply lack the company facts and knowledge to enable their understanding.

 Leaders’ lack of knowledge results in few major companies having sustained value creation.

• McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.²
• Less than 13% of global companies had sustained value creation in the 1990s.³
• 12% of public companies had sustained value creation from 2002 to 2012.⁴
• Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”⁵

Leaders’ lack of knowledge results in most companies not surviving.

Few major companies survive:

• 16% of major companies in 1962 survived until 1998.⁶
• Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.⁶
• 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.⁷
• 50% of the S&P 500 will not be on the list in 10 years’ time.⁸

 Most public companies will not survive.⁹

• A Fortune 500 company will survive an average of 16 years.
• The typical half-life of a North American public company is 10 years.
• Global public companies with $250 million+ market cap have a typical half-life of 10 years.

Companies do not recover from crisis.¹⁰

• 20% of companies grow from insurgency to incumbency, but then two-thirds of them stall out and less than 1 in 7 stall-outs recover.
• At any given moment, 5%-7% of companies are in free fall or about to tip into it. Only10%-15% of companies pull out of free fall.

What are the missing facts and knowledge?

The following outlines some critical facts and knowledge the leadership must have.  This is not intended to be a comprehensive list.

#1 What is value?

• Define value and how it’s measured.
• In today’s purpose driven work, there are multiple stakeholders with different types of value expectations.
• What is value to the customers? What problems and needs are urgent enough that they are both willing and able to pay for a solution?
• Another value measure is economic profit(total profit minus cost of investor and lender capital) as a percentage of invested capital.
• A critical value driver is the number of customers who believe they have an urgent problem or need that they are willing and able to spend money to address. Do these customers perceive that your company’s solution provides more value than the competition?

#2 How does the company create and preserve value?

There are two major ways the company enables value creation and preservation.

• The first way is growth in the number of customers, growth in the number of problems and needs being addressed, and growth in what the customers are both willing and able to pay. The customers must perceive your company has a better solution that both the competition and the status quo.
• The second way is retaining customers by ensuring they don’t perceive they’d be better off with a competitors solution or no solution at all.

Financial and human capital is allocated towards value growth initiatives and value preservation activities.

#3 What is the strategy?

The strategy must describe what is, how value is being created and preserved.

• The customers, and their perceived urgent problems and needs for which they are willing able to spend money to address. How many of these customers are there?
• How do customers perceive the competition?
• Where is the financial and human resource capital being deployed?
• What are the specific growth initiatives? What is the expected impact on customers and their spending?  What is the economic profit expected from each initiative?  Who within the company is accountable for: the changes in customer behaviour and the economic profit?
• What capital and human resources are devoted to customer retention? What customer perceived weaknesses would be addressed? How was it validated that these perceived weaknesses would change customer buying behaviour? E.g. My wife and I own Apple iPhones which are expensive.  But that is not a competitive weakness.  We’re not going to buy a $100 Android phone.
• What are the future scenarios? It is impossible to predict the future, therefore what is the company’s approach for being successful in a variety of emerging future scenarios?

#4 What are the industry dynamics?

First look at the historical trends leading up to the current situation:

• How have customer problems and needs changed?
• How has customer perception of your company changed relative to the competition over the years? What have competitors done to change this perception?
• How has the ways in which customers interact with your company changed?
• What new entrants have come in? Startups? Major players from adjacent markets?
• How have market sizes changed? i.e. the number of customers?
• How has the competition changed in terms of Mergers & Acquisitions or exits?
• Why have competitors failed?
• How have your benchmarking comparisons changed?

Then look at the external trends

It is impossible to predict the future, therefore you must consider scenarios, not just a single forecast.

• What are the trends? Technology, Demographics? Economic? Regulatory?  Public expectations of company behaviour?  Political? Talent availability?
• What are the implications of these trends? What will be the future problems and needs customers will be willing and able to spend money to address? How will customers expect to interact with your company? (I.e. how will the customer experience change)? How big will the market be? (i.e. how many customers?). Who will be the new competitors (i.e. startups, new entrants)? How will existing competitors respond?  What will be the M&A activity? How should you perform in your future benchmarking?

Your next steps

• Build a list of questions, relevant to your situation, using the above questions as a starter.
• Review your strategic plan including the supporting appendices.
• What are the facts? What are the unvalidated assumptions?
• What are the long-term implications of your findings?
• What changes are need to your planning, monitoring, and risk management processes?

Footnotes

¹ “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, May 4, 2018

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

² Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

³ “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed.  Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.

⁴ Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015.  Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.  Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.

⁵ https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

⁶ “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

⁷ “Unstoppable” by Chris Zook, 2007, page 7

⁸ “2018 Longevity Report” by Innosight Consulting

⁹ “Corporate Longevity”, Credit Suisse, February 7, 2017

¹⁰ “The founders mentality”, by Chris Zook and James Allen, 2016

Further reading:

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Traditional strategic planning dooms companies to failure.

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/