Building Tomorrow’s Company, Today

Most businesses find themselves precariously balanced between reacting and planning. 

It’s a battle almost always won by the need to tend to the impact of decisions we made yesterday, the consequences of which we couldn’t or didn’t see at the time.

This creates a defensive, reductive view of a company and its possibilities, and usually results in neither the business nor its people fulfilling their potential.

Regular readers here will know that I am an impassioned practitioner of the power of envisioning the future we aspire to create - for ourselves and our business - and then designing and building a model capable of fulfilling that vision.

At the Wired/MDC conference on Tuesday, I listened to the founder of Netflix - Reed Hastings - describe the quite remarkable story of how he and his partners built their company. 

Netflix started its subscriber-based movie and TV show rental business twelve years ago. Today, it has 23.6 million subscribers, and has just passed Comcast Cable in audience size. 

Quite something for a business whose original business model was mail-order DVD rentals.

Except that its original model was not mail-order DVD rentals. 

Its original model was the one it is living today: real-time streaming of movies and TV shows over the internet. 

A model which follows a strategy borne of a simple realization. That the Purpose of a movie rental company is to offer its customers the widest choice of rentable movies whenever they want to watch them. Or as Reed Hastings wrote in 2005, "We rent movies. But the real service we provide customers is convenience."

Back in 1999, when Netflix signed its first subscriber, anyone on the web looking for content was going to AOL.com and listening to their modem sync up to the AOL servers at 56K. If you were lucky, you got mail. And if you waited long enough, a picture or two. You would have waited a long time for a movie. For some movies, you’d still be waiting.

In 1999, the best way to rent movies was to go to Blockbuster. And from Blockbuster’s perspective, they were fulfilling the movie renters' need. Some people got their first choice movie. The stores were pretty close to most people's homes. And as long as you got the movie back within a couple of days, the prices were competitive.

Except, if you looked closely, they were doing it on their terms. Not on their customers. And whenever you build a business based on what works for you, you leave a gap for someone else to build a business that works for the customer.

Enter Netflix.

“They built the railway line over the Alps before there was an engine capable of making the journey.”

One of the rock-like foundations on which the Technology Age has been built is Moore’s Law, which states that computer processing power will double every 24 months. Its accuracy has allowed for technological R&D to produce rapidly iterative design and capability.

Were all of life based on such certainty, our time here would be both richer and poorer. But when it comes to building a scalable business, speed of success is dramatically encouraged by predictability of resources.

Reed Hastings and his partners pulled out a spreadsheet and applied Moore’s Law to bandwidth expansion. Were the same growth-rate to hold true for both, when, they asked, would Netflix be able to satisfy the purest definition of its Purpose, and deliver streaming movies in real-time over the internet?

The answer, their spreadsheet projected, was 2008.

From that day, and every day for the next nine years, they worked to build a business capable of delivering the widest selection of movies as fast as possible to their customers based on current technology. It was a business whose end they had already designed.

The business was home delivery of DVDs, and they used it to create four long-term assets:

1. A brand synonymous with being the best way to bring movies into our living rooms
2. A reputation for a broad, deep and growing catalog
3. A loyal and growing subscriber base
4. A reputation for customer service

Everything else about Netflix 1999-2008, they planned to throw away.

As it turned out, the spreadsheet was right. And so was the strategy. 

In the meantime, Blockbuster - which already possessed all four of the foundations Netflix aspired to create - continued to look backwards.

Driven by its historic success, and an operational model based on number and location of storefronts, Blockbuster convinced itself its approach was right. And if its approach was right, the answer to falling revenues must be to address the fundamentals.

Extended rental periods; reduced late fees; earlier new releases; increased inventory. All of which added cost, cut into margins and did little to arrest declining interest.  Fundamentals in terms of Blockbuster’s business. But increasingly meaningless to its customers. 

Because in the pursuit of its long term strategy, Netflix had discovered that choice and convenience were more important to most renters than immediacy. And so, knowing they didn't yet have the means to satisfy the entire Purpose, they built a model that in the short-run would satisfy two thirds of it. And they started mailing out DVDs to its customers. No more disappointment at the store. No more store in fact. Just ease and choice.

And, even better, Netflix knew this was just a stepping stone. They knew that the third leg of the strategy was just a matter of time. Their spreadsheet said so. They just had to wait for the technology to catch up. 

When, in 2008, it did, Netflix satisfied their ten year old strategy to stream movies straight into the home. It took a couple of hours to download a movie, and the quality was only alright. But, innovation is about improvement, not perfection.

The results are astounding. Today, Netflix is valued at $12.5 billion and has recently committed $100 million to produce its own programming for the first time.

Blockbuster was sold a month ago for $400 million. $87 million of which was debt. From a high of 4,000 stores, its new owners are hopeful they will be able to keep 400 open. 

This week, Comcast announced a new residential internet service that will allow its subscribers to download an HD movie in 3 minutes. 

For Blockbuster, it probably means nothing.

For those waiting for new releases to be instantaneously available in 3D, it’s progress.

For Netflix, it’s just one more step on a journey that began when Reed Hastings pulled out his spreadsheet and designed the future of his company.

For the rest of us, it's perhaps a good reminder to make sure we're clear about what business we're building.

Consultancy in Action

A potential client asked me yesterday what I mean by Plan The Last Day First. Rather than give her our well honed explanation I pointed her at yesterday's post on Jerry Solomon’s blog.

We don’t disclose our work with our clients unless they choose to do so. So everything here is information that Jerry or his partner Mindy Goldberg have already openly discussed on Jerry’s blog  or on our website.

When we first met Mindy, Jerry and Jeff Preiss they were engaged in a process of redefining their partnership. A process that challenges the most self-effacing and self-aware by demanding that you compare your value with that of other human beings.

Conversations about better or worse anything quickly become emotional. Add to that the financial stakes of sharing the ownership of a business and you get, as Jerry described it, a recipe for impasse.

They hired us to help. We were able to do so. And the impasse was resolved.

Which is part one of the story.

Part two manifested itself in Jerry’s blog yesterday.

We believe that the best companies are built from passion, and towards a purpose.

Most business owners depend heavily on the passion part of the equation. And spend little time defining where they want to end up.

Which seems to miss the opportunity to apply one of the few constants in the life of an entrepreneur. The absolute inevitability that there will be an end.

Some entrepreneurs love what they do so much that they want to die doing it. Others want to capitalize on their success by selling their business one day. In either case, leaving behind a legacy of all the effort, thought and personal investment becomes increasingly important to owners over time.

Many business owners treat the end as an issue to be avoided until their own enthusiasm starts to wane. By which time their ability to affect their own outcome lies somewhere between limited and non-existent. We see this particularly in creative companies, whose founders have a difficult time separating their own value from that of the business.

However, it is the ability of an owner to ultimately make themselves irrelevant to the success of the company that creates the most dynamic future for any business. By empowering the employees left behind. Increasing dramatically the value the business has to potential buyers, or a new generation of owners. And ensuring the DNA of its founders lives on in the soul of a business long after they have ceased to be its daily heartbeat.

In Jerry’s blog yesterday he describes the decision to hire Lisa Margulis as his replacement as, “a conscious choice on whether to remain a life style business or build a company that lasts beyond the partners.”

This is the essence of Plan The Last Day First.

And the key word is conscious.

Every business owner makes a choice about the future of their company every day. Many times they don't recognize it as such. But in all aspects of life, the absence of a conscious decision to do something is an unconscious decision not to.

Deciding to take control of your future requires that you be willing to give up some control of the present. By involving others and helping them to grow. A win-win on a thousand levels.

I don’t know Lisa personally. But I suspect that she will enjoy working at Epoch a great deal.

Both because it is a company filled with extraordinarily talented, inquisitive, genuine people.

And because its owners are building a business that is committed as much to her future as it is theirs.

The Gift of 2009

The Chinese have a saying. May you live in interesting times.

Actually, it’s a curse.

As we put 2009 in the rear view mirror, I for one have a greater appreciation of Chinese irony.

The dawn of 2010 comes at the end of not just one of the most disruptive years in our lifetimes. But two.

A fact that is easy to overlook. But important to remember.

It’s been a long time since we have had a sense of stability. A year-long, polarizing Presidential campaign followed by a cataclysmic failure of the economy - the full consequences of which we have yet to see - have made for adrenaline filled days and sleepless nights. And the realization that a lot more was at stake than we had intended.

Evidence that as a species we do evolution better than revolution.

A lesson we rarely heed. By ignoring the future until it's pounding at the door. At which point we're reacting to someone else's change instead of planning our own.

Change is a constant. And no matter how hard you hang on to the known, the future is coming. A fact that a new January the 1st demonstrates numerically as well as theoretically. A sharp piece of punctuation with which to begin again.

Except that we aren’t beginning again. Unless we approach things differently. Which means:

1. Learn from the past.


2. Challenge the status quo.


3. Invent the future.

Three attributes rarely practiced by business owners through the end of the first decade of the twenty first century.

The good news is that decade ended yesterday.

I’m writing a book called Plan The Last Day First. It’s a concept that I have developed through experience. Mine and others. And one whose validity and authenticity I have challenged even as I espouse its core beliefs and develop its thesis. I believe in it more today than ever.

It’s a concept that says that any life, business or individual, comes closer to fulfilling its potential when you embrace the essence of being a human being.

To leave a legacy.

We want to have made a difference.

And the sooner we talk about how, the sooner we can take steps to make sure our life gives us a chance to do so.

It is not always about money or power or influence or material gain.

But it is always about whether, on our last day of owning a business or living a life, we can look back and say we did the best we could.

2009 was a tough year. Let us hope that it is the hardest we ever know.

But 2009 has given us a gift.

2010.

May we use it in such a way that it makes 2009 worthwhile.

Happy New Year.

Five Things Entrepreneurs Would Like To Change About Their Business

1. They don’t know where they are financially today. Either because their system (people and software) can’t tell them. Or because they have no one to find the story inside the numbers. 
The solution: simpler systems and a short education.

2. Their partnership agreement doesn’t reflect the value each partner is providing. But to raise the issue seems like opening Pandora’s box. With a big bill to follow. Financially and emotionally. 
The solution: courageous conversations, historic vs future value and fast action.

3. Their staff doesn’t do what they want, how they want. Usually because they haven’t been told. Or have been told excessively.
The solution: company purpose, personal ambition, responsibility and accountability

4. Their potential is greater than their success. Because they don’t understand their value. Or can’t articulate it.
The solution: a walk in the customer’s shoes and a single line without the use of the word ‘and’.

5. They keep having the same conversations. Proving that the first sign of insanity is repeating the same behavior and expecting a different outcome.
The solution: Plan The Last Day First®. A practice that focuses on where you want to end up. Analyzes where you are. And connects the two points.

Do You Want Your Company To be The Best In The World? Go Ahead.

One of the most influential voices in the fashion industry today lives in the suburbs of Chicago. Her name is Tavi Gevinson.

She is 13.

She’s passionate. Has a point of view. Uses the web to express herself. And didn’t know all this shouldn’t be possible in the cynical, political world of The Devil Wears Prada.

One of the first things we do when we work with a new company is to discern their underlying greatness. Then we look to see if there’s an area they can own. As in ‘best in the world’ own.

It often takes a little while for us to convince them that they have the capacity to be truly great.

And sometimes a little longer to convince them they have the right to be.

But once they accept that they do, the energy that releases is extraordinary.

In today’s world, you can lead an industry from anywhere.

What does your company do better than anyone, and what are you going to do about it?

Never Mind The Beef. Where’s The Plan?

Sad news in the advertising industry this week with the demise of Cliff Freeman & Partners, the legendary ad agency whose founder was responsible for, among other noteworthy entries, Wendy’s “Where’s the Beef?” campaign.

The Ad Age article that describes the company’s closure cites various causes, including lack of a succession plan, an inability to evolve with the changing media landscape, and failed merger attempts.

Creative service companies often end up like Mr Freeman’s. From king of the hill to an industry by-line in a decade.

These three reasons are present in virtually every case:

1. The inability or unwillingness of the founder to make themselves irrelevant. By the time Mr Freeman tried to do so, the company was operating from a position of relative weakness, and the management evolution appeared borne of desperation.

2. A relentless focus on the service that made them successful, without ever understanding the core strength that made those services valuable - as the creator of memorable brand personalities, in any medium.

3. Failed restructuring attempts. 80% of all mergers fail. When the underlying motivation is a shotgun wedding to fix a fundamental weakness, that number goes up into the high nineties. Mergers and acquisitions work when the chemistry is instinctive, or there is a clearly defined and articulated vision that one person takes responsibility for.
   

Mr Freeman isn’t the first to make these mistakes. And he won’t be the last.

But every one of them is avoidable.

At a time when the marketing food chain is changing before our eyes, the advertisng and production industries are in desperate need of better business models.

Head meet sand, however, is not one of them.

Eight Tips For A Simpler Life

1. Walk backwards to get your lunch today. So you can see where you came from.

2. Ask you kids’ school bus driver to make the journey tomorrow in reverse. So that he doesn’t get distracted by having to look ahead.

3. Next time you go food shopping, don’t think about what you’re going to make for dinner, just buy the first ten items you can find that are on sale.

4. If you discover your roof is leaking, throw a bucket on the floor and appreciate how great it is to have electric light in your house.

5. If your property taxes go up, demolish a bedroom. And a bathroom.

6. Ask everyone in your family to write down what they want to do next weekend. If you don’t get unanimous agreement, do nothing.

7. If your cable company over-charges you by $1.50, spend as much time as you need on the phone to get the mistake corrected, so that the mistake never happens again. Visit them in person, if necessary. No matter how far away.

8. If your accountant tells you your income tax bill is higher this year, ask to have your salary cut.

You probably won’t take any of these suggestions in you personal life. Who would?

Which makes us wonder why so many businesses and organizations are being run like this.

But leaves us less surprised at the results.

Self-Imposed Slavery

Do you want to sell your business?

For many entrepreneurs who own a service company this is not a yes or no question.

In some cases their indecision is driven by the fact that they so love what they do that they would choose to one day die while doing it.

As a commitment to your craft that takes some beating.

For the others, their lack of clarity about The Last Day comes from an over-emphasis on today supported by three false assumptions.

One. That because a business makes them a lot of money today it will make them a lot of money for as long as they need.

Two. That because a business makes them a lot of money it will make someone else a lot of money.

Three. That selling a successful business is a transaction negotiated largely on their terms resulting in freedom.

If your company provides a service there are only two ways you can create a retirement from it.

1. Make so much money while it it is successful that you don’t need the income once it’s not.

Because any business built to be dependent on you dies when you die. Which is disappointing for your family and employees on a number of levels.

2. Make yourself irrelevant to your business so that owning it is valuable to someone other than you.

If you do neither, you will one day reach a point when getting out is a lot more attractive than staying in. And your options for doing so will be slim and none.

Buyers buy businesses because of what they will do in the future.

If the success of your company is dependent on your personal involvement, the only way you can sell it is by selling yourself along with it.

And for three to five years you’ll be taking orders from someone else, doing it their way, and hoping their way doesn’t screw it up so badly that there’s actually money left to pay you when all is said and done. Not to mention the impact on your hard earned legacy.

If your business depends on you and you want to retire in five years, start shopping now. And then hope you can convince someone you’re not as good at running this business as they will be. And that you’re dying to work for them.

Or you can avoid all this by building a business to last. Regardless of who owns it.

This comes with a number of benefits. Including but not limited to: lifelong income; potential wealth; employee security; reward for loyalty; negotiation leverage; personal legacy; reputation; family security; quality of life; inner peace.

Actually the last one is less certain. We are complex beings, after all. The others are guaranteed.

It takes as much effort to build a business to last as one built only for today.

Doing so provides for that eventuality that overcomes all strategies. Death.

And will make your employees grateful for one thing when you’re gone.

They get your desk back.