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29 OCTOBER 2020
Is strategy a false prophet?

by Allon Raiz: Serial entrepreneur and CEO of Raizcorp.

I have spent the last 25 years trying to understand the word ‘strategy’. People who preface a statement with the words ‘strategy’ or ‘strategically’ sound very clever – strategic thinking, strategic marketing, strategic analytics, etc.

The theory in the business world is that those who can think and act strategically are at the top of their game – the kings and queens of the commercial universe. This is borne out as you page through business article after business article. The iconography and imagery associated with strategy are typically kings and queens on a chessboard. The media is filled with glorifying stories about how successful people anticipated where the market was moving, and how they strategically set up their businesses and resources to take advantage of future events and convergences.

We are led to infer that in such circumstances there is a right move and a wrong move on the great chessboard of business – or higher-quality and lower-quality decisions to be made. In her book, Thinking in Bets, Annie Duke posits an alternative metaphor to chess for strategic thinking, namely poker. Even here, though, there is still the concept of making the right move or the wrong move. However, Duke contends that business (and life) better lend themselves to a poker metaphor rather than a chess one since in poker, and in business, you do not have all the data you need to make a truly informed decision. You can see only your own hand, some shared cards on the table (if you are playing Texas hold ‘em) and the “tells” of your opponent. Duke believes that it is important to statistically play the odds on your cards and the visible cards – irrespective of your previous hands or your competitor’s previous hands. There is still a right way to bet and a wrong way to bet.

Right and wrong strategies?

While I believe there is such a thing as a good strategy and a bad strategy, I do not believe that there is such a thing as a right strategy and a wrong strategy – only right and wrong for you. One of my colleagues, Kumaran Padayachee, the CEO of Spartan SME Finance and my co-host on BDTV’s Big Small Business Show, often talks about the cheetah and wild dog strategies. When a cheetah spots its prey (the opportunity), it first stalks it then engages in an explosive and powerful high-speed chase that is binary – either it catches the prey or doesn’t. Wild dogs, on the other hand, work in packs. They hunt their prey, keeping it moving sometimes for days until it collapses from exhaustion, whereupon they make their move. Two completely different strategies, both successful – and both congruent with who they are as animals. Each strategy, although different, is right for them.

And so we try to master these various forms of strategy – whether we base our thinking on chess (equivalent to a series of if-thens), on poker (statistically playing what is evident), or even on the 2000-year-old strategies outlined in Sun Tzu’s The Art of War. And yet the evidence around us seems to disprove that strategy is the differentiator in success. There are many smart people, many of whom are great at chess or poker, who are not successful businesspeople. Conversely, the market is filled with millionaires who were at the right place at the right time and became super successful. It seems a little unfair that a person who makes careful moves based on a well-thought-through strategy is less successful than a person who has no strategy and was simply lucky to be sitting next to someone with an opportunity at a wedding.

So, is strategy a false prophet? Is it a nice construct that sells books and courses but has no real correlation to success? How could the experienced executives who filled the Kodak boardroom – many with MBAs – make such poor strategic decisions? Was it obvious at the time or only in retrospect?

It all starts with seeing an opportunity

In my experience, all entrepreneurial endeavours, without exception, are precipitated when a would-be entrepreneur perceives a profitable opportunity in the market or faces a personal crisis – or both. Entrepreneurs will commit to a life of potential misery and sacrifice only if they believe there is a potential upside to the opportunity that they believe they have identified – opportunism at its most basic level. It doesn’t matter if you are strategic or lucky, both types of entrepreneurs precipitate the same way – with a perceived opportunity.

Luck, strategy or strategic opportunism?

For many entrepreneurs, luck is the strategy. They pursue random opportunities that do not have the potential to build on one another or create a flywheel effect, in other words, the potential to significantly scale. It simply becomes taking advantage and commercialising one random opportunity after the next. Sometimes this strategy works. In fact, it works often, especially when the entrepreneur has the gift of knowing when to get out, when to sell.

Luck as a strategy falls into two categories: desperate luck-seeking, and conscious luck-seeking. Unfortunately, most luck strategies fall into the former category, and there is little sense as to when to time the exit.

I see this often with entrepreneurs who present their business cards with their company name on one side and, on the other, the words “we specialise in… [add up to 20 ‘specialities’]”. The hypothesis here is that the more lines you cast into the sea, the more chance you have of catching fish. This type of entrepreneur is conceptually (and desperately) trying to increase the number of serendipitous (opportunistic) moments. This is a common “strategy” and one with which I disagree. The energy required to manage all the lines in the sea and all the potential “bites” inevitably means that any opportunities that present themselves are not given the effort and focus required to reel them in completely. To belabour the metaphor further, one line may produce a sea bass, a second plastic waste and a third a turtle. There is no discernment early in the process that will allow the entrepreneur to let a low-quality opportunity off the hook. Thus, the amount of energy used to try to manage all these lines, and to reel each one in slowly, is more often than not significantly higher than the energy (profit) from any of the completely reeled-in opportunities. Even once an opportunity is reeled in, the level of distraction and lack of focus usually means that the opportunity is not completely and efficiently capitalised upon. The desperate-luck strategists normally label themselves as serial entrepreneurs, carry numerous business cards of different businesses, and an eloquent story regarding the reason for each of those businesses not being successful.

Collect-a-Biz

To make this real, my own journey with strategy is beautifully illustrated by my early days in the Raizcorp journey. Starting out with an equity model (where we would take equity in return for business development services), we would literally take an equity stake in almost any small business that met our criteria for entrepreneurial selection, namely, where the leadership met our definition of the right entrepreneurial qualities. There were absolutely no selection criteria pertaining to the types of businesses. As a result, we collected an eclectic and diverse portfolio of businesses ranging from performing arts to education to software. By 2014, we had amassed 27 such businesses.

This was also the year in which my fascination with the subject of strategy began to peak. I consumed book after book, seminar after seminar, and any other material I could lay my hands on that related to strategy. What became unequivocally apparent to me was that there was no real strategy in our equity division. Our unsophisticated “strategy” was to collect businesses which opportunistically arrived at our door and which simply met our minimum criteria for entrepreneurial leadership. If they were prepared to give us an equity stake in their business, we would most likely (with the odd exception) take it. I came to realise that when it came to the Partner Elite division, I was that desperate-luck strategy guy – the multiple business cards, the stories and the relatively low level of success included. Were it not for the success of our other divisions, I wouldn’t have been able to keep Partner Elite alive.

The second type of luck strategy is the conscious-luck strategy. The fundamental difference between the two types of luck strategies is that the conscious-luck strategy includes a deep consciousness of when to exit an opportunity. Additionally, the opportunities, although relatively random, are fewer in number, thus giving more focused time per opportunity to ensure a higher probability of capitalising on them and to yield the highest return from both the dividends and from a potential sale. These conscious-luck strategy entrepreneurs can be incredibly successful. They are typically not sentimental at all, with a trader’s attitude to all the business opportunities in their portfolio. Over time, specialities begin to form in their portfolios and the opportunities that start presenting become more grooved towards that speciality. In other words, such entrepreneurs inadvertently begin to specialise without strategically trying to do so.

The third approach is the pure strategy approach – a deliberate attempt to build a cogent strategy that stacks well and takes the company to a well-designed and well-articulated vision of some point in the future. This vision anticipates the markets, geo-political and technological trends and ensures one is well-positioned to be the most likely winner in that anticipated future. This type of approach is deliberate and precise.

Exit for profit

By the end of 2014, I had designed a strategy which resulted in an understanding of where we wanted to go and what types of businesses we required in our portfolio in order to take us there. Any business in our portfolio that did not meet these new criteria was placed on a list called “Exit”. Between 2015 and 2018, Raizcorp sold and exited 22 of these businesses leaving us with five that met the prescripts of our new strategy. The three-year net result of this 81% reduction of our portfolio resulted in an increase in bottom line of around 800% since the remaining businesses were producing eight times the net profit of the whole portfolio just a few years earlier. The lower number of businesses meant more focused time with each one, while our strategy resulted in highly collaborative opportunities for each of the remaining businesses to tap into each other’s markets. Today we receive an average of 700 enquiries a year for our equity division. We might seriously look at around 36 of these and will probably land up doing three deals. But we have also become deliberate. We now actively seek out companies that fit our strategy. We approach them, and do not wait for the off chance that they might approach us. This pure strategy approach seems more grown-up and it seems to be working.

As I look back at my journey from a desperate-luck strategy to a purer approach to strategy, I am concerned that I may fall into the trap of thinking that because the pure strategy approach is producing such great results, it is the right approach. History is littered with companies that thought they had the right strategy, that rejected new ideas which didn’t fit into their narrow and precise versions of their strategy. The same history informs us that success may seem at a point in time to be causal, but actually turns out to be merely coincidental. 'A swallow doth not a summer make', as they say. Some success right now does not necessarily mean that this purist approach to strategy will work indefinitely.

Conversely, the history annals are filled with stories of entrepreneurs who sat next to someone at a wedding and had a conversation that changed their life forever. No strategy, just plain serendipity and the action that followed. There are so many of these stories out there that the pure strategy thing can feel like a false prophet. Why do I have to follow these strategic disciplines and yet someone else becomes fantastically successful with less thinking and, most often, less hard work? It all feels rather random. A little unfair.

Journey on

To be honest, my own journey towards strategic discipline is still a work in progress. When I come across opportunities that do not meet Partner Elite’s strategic dictates but whose financial returns seem handsome, I cannot stop myself from taking a look. If handsome enough, I find myself trying to manipulate a story that allows the opportunity to fit with the strategy. So far, I have not concluded such a deal, but I do recognise my vulnerability in this regard.

Reading the writings of Charlie Munger and Warren Buffet, the undoubted kings of investment strategy, has made me realise that business decisions are not a choice between opportunism and strategy. Munger and Buffet’s success is built on opportunism that fits a strategy in combination with the deliberate targeting of investee companies. A significant market crash, a fundamental political shift, a disruptive new technology – all these things upset the status quo and result in new opportunities for these “Kings of Idaho” to pounce upon. High-value assets are released by such shifts and anyone patient enough – with sufficient capital and a non-emotional demeanour – has the opportunity to identify and purchase them. It is not simply disruptive events that create value; sometimes the market is wrong or mistimed and these opportunities become targets for the Kings of Idaho. They are opportunistic in that they are not sure which high-value opportunities will be released by a shift, but are also strategic so that when an opportunity is released that doesn’t meet their strategy requirements they will be disciplined enough to decline it. This runs in parallel to a patient but deliberate targeting of individual assets.

My conclusion, therefore, is that strategy is not a false prophet. It’s more like the baby’s toy called a shape-sorter, the one with different shaped holes that only specific three-dimensional shapes can be slotted into. Sometimes the baby is fumbling with random shapes, trying to put them into one of those holes, and sometimes they are just falling from the sky and may randomly fit into one of the holes. The key is building the right shape-sorter and placing it in the most opportunity-rich context, strictly governing what gets in whether by way of a deliberate hand or a lucky falling shape.
Useful resources:

Gordon Institute of Business Science
Making an impact to significantly improve the competitive performance of individuals and organisation through business education to build our national competitiveness. GIBS is a leading business school in the heart of Sandton’s business hub, offering a wide range of executive and academic programmes. Visit our InfoCentre or website.

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