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Strategic Planning Analogy #542: Printing Money

Tags: money stock

When I was a child, I visited a site where a famous US Civil War battle took place way back in the 1860s. As a souvenir, I got some imitation samples of “Confederate Money”. This was the paper money created by the confederate states who tried to defect from the USA during the war.

The souvenir Money was worthless, because it was not actual confederate money. But even if it had been real confederate money, it still would have been worthless to anyone who was not a collector of old stuff.

When the Civil War ended—and the confederate states lost—there was no government to back that confederate money. It became worthless. It had value during the war, but not afterwards. But even so, I liked my souvenir money because it came in large denominations, which made me feel rich, even if it was only in my dreams.

Paper money is a funny thing. As long as both sides agree that the paper has value, they can use to transact business. But if they no longer agree that the paper has value, it becomes worthless, like confederate money.

Implementing a strategy can be very expensive. It may require developing competencies, acquiring firms, buying market share and other such costly activities. Without a means for paying for all of this, the strategy cannot happen.

Wouldn’t it be nice if you could just declare yourself a nation (like the confederate states) and print up your own money? Then you could buy up all the stuff you need to succeed at very little cost.

Well, in a sense you can do this.

Broadly speaking, currency is anything that people on both sides of a transaction agree upon as having value. Over the centuries, all sorts of things have been used as currency, including stones, livestock, seashells, and tulip bulbs. As long as you can get people to believe that what you have is valuable, you have invented your own currency.

Like in the case of confederate money, the time period in which it has value may be fleeting. But as long as you conduct your business during the period when the item has value, you can use it to purchase the costly necessities of your strategy.

You may have hidden value somewhere in your company that you can use to create a tradable currency. And that may be the most cost-effective way to bring your strategy to life.

The principle here is that the winners in business are often the ones who can best afford the costs to acquire what it takes to win. If you can develop a currency which is less costly to you than the currency used by competition, then you can outspend your competition and win.

There are lots of currencies you can use other than money to accomplish your strategic goals. Many of these currencies can buy you a lot more than you could buy with mere money. Let’s look at a few.

1. Stock
Stock has a tradable value. You can purchase things with stock. If you can convince people that your stock has an abnormally high value, you may be able to purchase a lot more of your strategy a lot cheaper with stock than with money.

Remember when AOL stock commanded an extremely high price? AOL used that stock to purchase Time Warner. Eventually, people no longer put a high value on AOL stock, and its stock became almost as worthless as confederate money is today. But, by that time, AOL had already converted a lot of that now nearly worthless stock currency into valuable Time Warner assets.

A variation on that theme is what Amazon has done. For over a decade and a half, Amazon cultivated an interest in its stock among people who were not all that interested in whether Amazon made a profit (at least not for a long, long time). Since Amazon did not have to bother with earning a profit in order to keep its stock up, it created two cheap currencies. First, it had a relatively high value stock compared to profitability. This allowed them to buy stuff with stock that was more valuable than using money.

Second, because Amazon was less pressured to make a profit, it could afford to plow more of its money into strategy than competitors who were under profit constraints. How would you like to be a retailer who is competing against Amazon and has shareholders demanding an immediate profit when Amazon shareholders do not? Amazon can afford to offer the lower price and win the low price strategy.

So if you can develop a strategy which gives you a higher than normal value for your stock, you have created a valuable currency to convert into strategic accomplishments at a lower cost than your competitors, who are stuck using regular cash.

2. Access
Perhaps you have access to something that others want access to but cannot get on their own. For example, you could be a retailer with access to a customer type that is difficult to reach through any other distribution channel. Or perhaps you have access to data that nobody else has. Or maybe you have access to the rich and famous and can make introductions that could not otherwise be gotten. Or perhaps you have access to one of the few mines that can extract a valuable commodity.

Whatever it is, that access could be more valuable than money. You could trade that access for something very valuable at relatively low cost to yourself. For a long time, the nations of OPEC had the best access to oil, something others wanted but had no access to. The OPEC nations became very wealthy by letting others have access to that oil. (Of course, now that the US have found another access to oil via fracking technology, the value of the OPEC currency has dropped, but there are ways to manage access for optimal value)

Do you have access to something valuable? Are you properly charging what others would be willing to pay for that access?

3. Time
People say that time is money. You may be able to trade time for money. Perhaps you can do things faster than others. How much is that worth?

Perhaps the most valuable thing you have is access to a future point in time. For example, let’s say that you are a promising start-up that will eventually go public. The time in which you do your IPO may be a huge wealth transfer moment. Many people will want to be a part of that. By selling them portions of your company now at an outrageous premium, you are “guaranteeing” them a seat at the table when your company goes public in the future.

You can use that outsized amount of money today to enrich your strategy for the future.

Lowering Your Cost of Capital
Even if you are stuck using the same money as your competition, you may still have an edge over competition if your cost of capital is lower. For example, studies have shown that private, family-run businesses tend to have a lower cost of capital, because they look at money and their businesses differently than public companies. As a result, private family companies can often do things strategically that public companies cannot, often giving them an edge in businesses—particularly those with a longer payback.

Or let’s say you are a company with a “near-monopoly” business that is throwing off far more cash than that business could ever use. All that excess cash could have a lower cost of capital to invest in new ventures than what it would cost someone else to try to round up that much cash in the open market.

Companies like Google and Microsoft have had “near-monopoly” divisions throwing off tons of cash, which has opened up strategic opportunities others would find harder to do. Google’s offering of Android to smartphone companies for free was an extremely clever strategy against Apple, but how many other companies would have had the financial ability (or permission from its cash sources) to pull it off?

Sometimes you can get your cost of capital down to nearly nothing by having people give you money for free. For example, Elton Musk was able to get a fortune in government subsidies for building a battery manufacturing plant for his Tesla electric cars. That's like printing your own currency in your basement.  

In another example, children’s hospitals seem to do a better job of getting charitable donations than competing regular hospitals do, giving them a cost of capital advantage.

Look for Your Currency
So when developing your strategy, don’t just look at the options for what you want to accomplish. Look at the options for how you can pay for it. You don’t only have the option of cash. You may have better currencies than your competition hidden somewhere in your company. If you plan it properly, you can develop a funding mechanism which gives you just the edge you need in the race to winning a position in the marketplace.

Although we just scratched the surface of all the strategic options for creating superior currencies, it can be seen that money is not the only way to acquire the keys to strategic success. You may have internal currencies which are more valuable than money and can allow you to afford to buy your strategic success faster and less expensively than others in the race for that same position. Either that, or maybe you have some creative ways to lower your cost of capital, so you can get your hands on more cash more cheaply than competition. Either way, that’s a strong competitive edge and should be part of your strategic consideration.

Clayton Christensen has written a lot on the disadvantages incumbents have over new startups. One of the areas he doesn’t focus on, but I think is important, is the fact that startups are often more creative in finding ways to fund themselves.

This post first appeared on Planninga From Nanninga: A Strategic Planning, please read the originial post: here

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Strategic Planning Analogy #542: Printing Money


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