Ep. 22 - Why Shifting Your Strategic Paradigm Matters
The strategy needed to become exit-ready no longer align with the traditional strategic focuses. Now more than ever, it has become important to change your strategic paradigm. In this episode, Dr. David Gruder and Jason Tuzinkewich reveal the importance of embracing and upholding an exit-readiness mindset. They dive into why conventional strategic focuses are a mismatch with the strategy required for becoming exit-ready, why adopting an exit-readiness strategic focus can boost your business’ performance and value even if you don't plan to sell your business, and why it's never too soon to make this shift. They also share valuable tips for enabling you, your executive team, and your implementers, to adopt and maintain an exit-readiness focus. So tune in to this conversation and learn how to usher your team into this shifting strategic paradigm.
Watch the episode here
Listen to the podcast here
Why Shifting Your Strategic Paradigm Matters
How To Usher Your Team Into An Exit-Readiness Focus
In this episode, we're going to explore the process of shifting your leadership team's paradigm from a conventional strategic paradigm to an exit-minded paradigm.
The most important thing to start with is defining this exit-minded strategic focus that we're going to be shifting into. To do that, it's good to set the parameters of what we are talking about when we say conventional strategic focus so that we can then contrast it with what we're talking about in the show, exit mind strategic focus. Why don't you hit us up with the first stage of the conventional focus?
Even before the conventional strategic focus, most businesses aren't even at that level. They're chasing dreams or putting out fires. In a typical business, no matter how much the owner and the team aspire to be doing something other than chasing dreams or putting out fires, that's what they end up spending an awful lot of time and energy on, chasing opportunities to make the dream happen and putting out fires that happen that they hoped wouldn't happen but inevitably arise. The management style ends up being management by crisis, even though that's not what they intend, but that's a pre-conventional focus.
If you think about how most entrepreneurs get into starting a business, it's not that they are strategic thinkers and they need a product to articulate their strategic vision. It's that they're technical and operational experts. They know that they can either fill a need better than anything that's out there or improve upon something in a way that current manufacturers or businesses aren't doing. They're so centric on the mindset of this product that strategy is a rear-view window thing. It's something they know is important, but it's not something that typically is in their comfort zone to make it a priority in a lot of these cases.
Some are visionaries that don't understand the process of translating a vision, dream, idea, innovation and invention into something that becomes a viable business.
If you're one of those business owners and you're thinking, “I pretty much don't strategically plan,” that's me. Don't be ashamed. You're in great company, but we can help you elevate your game by starting to act, behave and think in a more strategic fashion. Quite frankly, that's what the leadership team is there for, to help round out your excellence and drive the business forward in a more professional way. With all of that said, I'm going to start talking about conventional strategic planning.
The way that conventional strategic planning typically works is by starting with the perfect vision. You know where you want to go, and you assume you're going to get there. You take that perfect vision and walk backwards. “If I'm going to get there in 10 years, what do I have to do in the next 3 years to be moving in the right direction?” Assume success and then back that forward. You'll get to one year or your quarter, but every stage of the way, it's like, “What do I need to do knowing that I'm going to succeed?”
This is the point where I always like to bring up my good friend, Mike Tyson. Everybody has got a plan until they get punched in the face. Strategic planning is the same way. That's what the vast majority of businesses that do strategic planning focus on. There is another level of strategic planning excellence in the conventional focus arena, which is you make that perfect plan, and then before you start to implement it, you do a post-mortem on it and say, “Assuming it went bad, what happened? What got in the way?”
The thing that I get worried about with this pre-mortem mentality is it has a place and use. It's always good to be thinking about that failure. If you do it after you've already committed to your perfect plan, then you're not going to see all of the barriers, hurdles and walls because you've emotionally and mentally invested in your perfect plan. We're going to talk about the exit-minded strategic focus, but we're going to be looking at risk first. It's a different way of thinking. The tools of exit-mindedness will help you get into that risk first thinking to build a perfect variable plan.
Before we turn our attention to contrasting the conventional focus with the exit-minded focus, one last comment is about the biggest conventional strategic focus blind spot that there is, at least that you and I know about, Jason. That's not building appropriate drift prevention KPIs or Key Performance Indicators and meaningful threat mitigation contingencies.
When we don't build into our strategic planning process an appraisal of what the threats might be and how to mitigate, reduce, prevent or deal with those threats, we don't build KPIs, OKRs, or however you want to put that, and we don't build in observable and measurable indicators of progress that keep us on track and prevent us from drifting from our purpose, we're in trouble. That's a big blind spot in strategic focus in the conventional approach to strategy that you and I have observed over and over again.
That is huge. We see so many times where projects have scope creep. They become more expensive and get executed in a slower fashion. Even businesses themselves become stagnant or drift from the course because of these blind spots. Thank you so much for bringing that up.
Let's turn our attention to the contrast between that and an exit-minded focus.
The reason that we're talking about this is not because we want you to be fixated on exiting your business but because we have recognized through years of running our businesses and working with business owners that this conventional focus is not enough to prepare a durable, agile business. It's not going to get you to the exit that you're looking for.
Exiting takes years to prepare for because it's traditionally shifting a business from an operation to an investment. If you're running your business as an investment, you're going to be more durable and agile. You're also going to be making more money while you do it. You'll be building value into your business instead of just growing the distribution of your product and service. We want to focus on this not just for business owners that are looking to exit but for all business owners. We believe that this is a universally valuable transition in strategic planning mindsets.
I want to underline a gem that came out of your mouth that's so important. It's so unusual, but you tend to string gems one after the other. One I want to underline is that this is a shift in mindset and strategy from treating your business as an operation to treating your business as an investment. That's huge.
That's something that people don't recognize enough, especially in our business. In the work that we do, our peers and ourselves, we're not bringing that into the consciousness as much as I would like to see us do it.
The key to an exit-minded focus is having an accurate and realistic understanding of your business value, which is usually different from the amount of value that most business owners think their business is worth. Building or having business value, computing business value is 100% determined by future risk.
With an exit-minded focus, you start with a threat analysis. You use this to determine how to proceed strategically. The thing that I want to add about that is we're not trying to give you a subliminal message that says you should live in fear. You should not live in fear because if you live in fear rather than abundance, you'll stumble all over yourself, and there will be all kinds of undermining and self-sabotage that occur. We're talking about having eyes wide open, not being in a state of fear.
If you live in fear rather than abundance, you'll stumble all over yourself and there'll be all kinds of undermining and self-sabotage that occurs.
This brings me back to the idea that knowledge is power. Many of the business owners that we've talked to in our decades of doing this don't want to know the business value because they're not ready to sell. They have an idea, and that's good enough. For me, the actual value of your business is almost a consequence of doing things right versus the number that you drive for. This point that you made, Dr. Gruder, about business value being 100% determined by risk is super important.
What we're saying there is that the only way to understand what your business is worth is to understand what can threaten the continued prosperity of the business and what can stand in the way of future growth. If you understand risk in your business, then you can start to identify what you need to work with as you're developing a strategy. What is going to stand in the way of your long-term strategy?
Getting the value and the number is great because you've got this target that you can drive towards. You can use business value to determine where you fit within your ecosystem or peers. You can determine the gap between where you want to be when you exit and where you are now. You can make moves to address value-related things, but that's a number.
What's important is understanding those risk elements because that's where the magic happens both in strategic planning and building great value. By always looking at those things and regularly looking at your business value, it's a lot easier to determine hard and fast numbers for return on investment for your projects. It's a lot easier to prioritize what projects matter and what projects are shiny things. This concept of value and risk is great as a filter for how you're going to develop a strategy.
The mindset we were talking about is having the courage to see and not living in fear of risks. It’s important for you to ask yourself, where is your business weakness? What must you strengthen to mitigate those weaknesses? What guardrails does your team need to install to effectively mitigate those risks? How can you and your team change behaviors that, in turn, change the state of your business instead of only focusing on the business plan itself? How do you do behavior change in the business that is mindful of the risks and mitigates the risks but in ways that focus on helping you flourish, improve and boost your business' value?
This change in behaviors accompanies the change in the business. This is another piece to this type of strategic planning that frequently gets missed when you're talking about objective-oriented conventional strategic planning. All we want there is to see a change in the objective measures of the company, but those objective measures will not be changed in a durable way if the behaviors aren't changing commensurate.
This idea of “What are my weaknesses and gaps?” and what behaviors are involved in those threats, as well as the operational factors, resources, skilled professionals and equipment are important too, but taking the people into account is a huge part of this exit-minded strategy. Once you've got those things, understand where your weaknesses are, put up guardrails and talk about the changes in operation as well as in behaviors, you can start to build a new vision that is empowering. It's going to be similar to the vision that you would have built in the conventional plan, but it's going to be so much more robust because it's a big-picture vision.
It's going to inspire people and be built with a why that almost states its how. This is how you charge people. Once you have all of your measurements and understanding of risk and value and you have this overarching inspiring vision, you can say, “What's the gap between where we are now and where we are going?” You can start to holistically, with risk in mind, build a plan to fill that gap that is durable, agile and building out risk mitigation while it's building up the future of business. It's so much fun.
To tie a bow around this contrast that we're trying to illuminate between exit-minded focus and conventional strategic focus, an exit-minded focus looks at your business as an investment vehicle in contrast to a conventional strategic focus, which looks at your business as a day-to-day operation and how to get through each day.
I don't think you can say that enough. That is so important. It's a different way of thinking. When you're thinking in a different way, you're acting in a different way. The one thing that I would like to stress one more time in this episode is this is not about exiting your business. It will get you there better, but that's not what it's about. It's about thinking in a different way to build a better business.
That also can't be emphasized enough, for sure. Let's shift our attention. You've got a sense of the contrast between an exit-minded focus and a conventional strategic focus. Let's look at the three big challenges that we want to focus on in this episode, at least about shifting into an exit-minded focus. The first of those is recognizing this shift is needed in the first place. Not knowing that this shift into an exit-minded focus is needed or denying that it's needed. Making excuses for delaying making this shift doesn't bode well for your business thriving, regardless of whether you are focusing on an exit.
Some of you out there reading might be able to say, “I don't have to make the shift because I've never been strategically planning. I can start with a clean slate.” It is great, but you're still making a shift from not planning strategically to getting that strategy in. You're skipping a couple of steps or ahead to the front of the line and doing it well right away.
The second big challenge is huge. It is understanding how to identify and interpret your risk profile. This is not something that I've seen taught in business schools. It wasn't something that I learned when I got my MBA, but it's critical. It's the key to unlocking this whole strategic planning door. We'll talk about some steps on this in the future, but you need to be open and willing to figure out what your risk profile is and then interpret what that means for your business. Having those skills are going to put you in a different place against your competitors because you're looking at the competitive landscape in a different way.
The first big challenge is recognizing that the shift into an exit focus is needed. The second is understanding how to identify your risk profile. We should devote an episode, at least one, to that. The third big challenge is inertia, which is the old status quo addiction that so commonly sets in, “This is the way we've always done it and it's worked well enough. Let's not monkey with the process.” It's good enough. Keep going.
That's a challenge that needs to be overcome at the people level, the motivation level and at the level of addressing and mitigating fear that people have around change. This big challenge is about getting your entire organization or company to move away from what's been comfortable into this new mindset. It’s out of that old mindset of, “Work well enough for us and it’s home,” to “What about even better? What do we stand to gain by supercharging our strategy in an exit-minded way?”
This is another big deal. Inertia is real. We've seen so many great companies kill themselves because of this inertia. I think about this mantra that Toyota has, which is, “The moment you're content, you've started to fail.” It's so concise, but it's so powerful. It's true of any business. When you let that inertia set in, and you stop driving forward, you're rolling backwards immediately. Now that we've got these three issues identified, let's start talking about how to overcome them and achieve success. It's crazy. What a concept. We're going to get some good news.
The moment you're content, you've started to fail.
Starting with the very first one, recognize that the shift is needed. The way to start understanding and informing your team that this shift is needed is to get informed yourself. We recommend starting this by having a sound M&A firm that does valuations within an active marketplace that serves to run evaluations on your business.
Like Blue Sky Business Resources?
We could do that. We're not the only ones. We'd love to see you in our firm. The point is, get that information. The experts that do these valuations should be the first step to identifying your risk profile. The better the firm is, the more robust its assessment of your risk profile is. Once you do this, the next big step in gaining this understanding is to take a deep breath and get over the shock of, “This is not at all what I expected. My buddies at the country club all said it's a 12 multiple, and they're saying it's 3.5 because I'm manufacturing. What do I do?” Reality will set in.
This is not the end of the world. This is the beginning of the world. Having your eyes open, in some cases, hurts the first time. Now you know where you're at, you can start driving toward where you want to be. Once you've dealt with the emotion of having your very first business valuation, maybe you love it or hate it, it's just a moment in time for you to work from. Once you've done that and you've confronted your emotions and fears within this process, start to share that information with your internal team as well as your advisory team.
If you need to, start talking to some experts. Start talking to people who can help you interpret this and help it become meaningful for your business. This process is also going to help business owners decouple their identity from the identity of the business. This can help to start a business owner in gaining that understanding that's so critical that they are not their business. You are a key element of the business. You are the parent of the business, but you are not and never will be the business. Starting this process is often very powerful in helping you decouple emotionally from the business in a meaningful way.
Even though we’re doing a deeper dive in a future episode, we'll give you a little bit of an overview primer on how to identify your business's risk profile. Some of that is going to be revealed through the business valuation process, and important parts of it will be. In addition, you're going to want to get industry-specific profiling on the industry your business is in.
The best source that we know about for gathering that information is the data from the Risk Management Association, which they maintain. Get industry-specific profiling in your industry. Also, don't overlook the wisdom inside your business. Ask the right people in your business. Your frontline and middle management folks are the ones who know where the problems are.
They're dealing with them, breath in and breath out, day in and day out, at the boots on the ground level in ways that you probably aren't if you are a business owner or a business executive. Tap into that source of internal wisdom inside your business. Those factors are a solid triad for identifying your risk profile.
You've built a pretty stable stool there. I wanted to go back to that RMA data, the Risk Management Association data. If this is a new term or concept to you, there are several places that you should be able to go. Oftentimes, you'll be able to access RMA data at your public library. We don't think about going to libraries very often anymore but there are great resources for business owners to access major databases that would cost you a prohibitive amount to subscribe to yourself.
You can also go to your trade association. Most trade associations will have access to RMA data, whether they give that directly to you as a member benefit or you can talk to the board of the trade association and they can pull a report for you. Many business trade associations will have access to that data. Lastly, your reputable, trusted valuation advisor should also have access to a database that can pull RMA data. There are a lot of different places you can go to find this.
There's another one. Bankers use RMA data all the time. This is the dataset that bankers use to determine risk and establish their principal investment portfolio as well as their interest rates. You can also ask your banker. I want to make sure that you know that you've got a lot of avenues that you can pursue to try to get this data so don't say, “I've never heard of Risk Management Association. I'm not going to pay for access to this to get the risk profile. It's not worth it.” Don't pay for it. Talk to one of your resources, find a resource that can get it for you and get these reports pulled.
I'm so glad you added all of that. It’s very crucial.
When I was running businesses when I was a startup guy, it took me a long time to find this stuff but once I found my library and recognized all of the resources that there are, I spent a lot of time at the library again. It was like being a kid. Let's move on to this number three. This one's a big one. Dr., if you wouldn't mind sharing this one with me? Let's start talking about this overcoming inertia business.
The first key dimension in overcoming inertia is dealing with mindset blocks. I already touched on one, which is the status quo addicts, the people who are afraid of change because they like being in a habit that's well established but they don't have to think about too much.
You run a Twelve-Step program for these people.
Status Quo Addicts Anonymous, SQAA. We have mindset blocks that dreamers tend to have, the ones who are the visionaries. They tend to have difficulty facing that gap that we've talked about between the actual value of the business and the value they hope the business currently has. I have rarely met a business owner who doesn't have that dream gap. It's common. I say that because if that's true of you, know that it's built-in. There's nothing wrong with you that you've got that gap. The only thing that would be wrong is if you don't face it and mitigate it. It's not a problem that you have it. You came by it, honestly.
This is such great timing because I've been doing business valuations for over a decade. I have done hundreds of them. I met my first business owner that had an impression or a gut instinct of value that was lower than what his business was truly worth. It was the most fun valuation I ever did because he's like, “That's amazing.”
You found the needle in the haystack.
I found them. I pinched myself.
The last mindset block that we're going to touch on in this episode is a variation on status quo addiction. It's about plausible deniability. It’s that attitude that says, “If we're already successful, profitable, doing well and able to keep growing and scaling, then why do we have to change? If it is not broken, don't fix it.” If you are not in an exit-minded focus, you don't know that it is broken. If you are not in an exit-minded focus but you're still in profitability, it becomes a seducer to stay asleep rather than a motivator to go the next step.
Do not go the Kodak route. It's so heartbreaking to me but I don't think a lot of people realize this. The average life expectancy for a business in this rapidly changing and highly technological world is 40 years. The average business that starts now will not get to be as old as I am. My brain melted when I heard the statistic but it's because of the codex of the world. It's because of this inertia that they've been so successful and owned so much market share for so long that they quit looking at the next innovation. Let's be honest. Digital photography was born in a Kodak research facility.
How is that for irony?
It's crazy. You've got Fujifilm on the other side which diversified into chemicals and films for technological products and then into cosmetic applications. Rather than saying, “We're number two,” the second biggest film producer in the world said, “We are a firm that is based on this film-centric chemistry knowledge. The world is going away from the film. What can we translate that knowledge into?” They're doing great. Keep that in mind. This leads me to the big piece of success that starts this whole thing, which is up-leveling your why.
We touched on this. Have a more robust business that is overarching and inspiring and that allows for the evolution of your business. It allows you to be opportunistic when markets and technology change. You're not stuck in that mindset of, “We are Kodak. We're the greatest filmmaker in the world.” Go to Fuji. “We are a chemical and film-minded company filled with experts that satisfy needs.” That's the overarching way that you want to have.
It's focused on your core skills and passion but it's broad enough to allow the company to adjust and grow. That's where this momentum starts because if you have that inspiring way that allows you to change, you're always looking for fulfilling that why in a new way. This is going to motivate your whole team to never be complacent and never find that comfort level that causes your business to start to decline.
I want to underline something that you said that's so important. The biggest risk to a business's viability is its success. That seems counterintuitive but the thing that you are stressing that I want to underline is that when businesses become successful, the inertia tendency is to rest on their laurels. Rather than keep asking, “Now that we become a market leader in our industry, what's coming next? How do we retain being a market leader in the industry? If we rest on our laurels, it's only a matter of time and probably not a long period before we're no longer the industry market leader because some innovator came, swooped in and took our market leader position from us.”
The absolute biggest risk to a business' viability is its success.
The process, climate and cost viability changes. I think about the Ball Corporation, which is one of those companies that has lived well over 100 years. Everybody recognizes them for the beautiful little canning jars. They don't even make those anymore. They sold off their division because glass got prohibitive to manufacture. They moved into metals. They bought an aerospace company.
They could have access to people with the metal knowledge that they needed to continue to evolve because they are a container company, not a beautiful glass jar company. They're still getting royalties because whoever bought that company and is making the glass products still puts the Ball name on it. They're getting royalties for those glass jars but they're not making them anymore because the markets changed and glass became prohibitively expensive. That's what we want to be able to do.
A great why also starts to answer the how question. Once you've got that, then you can start doing those gap analyses. “What's the difference between our overarching why and how we're operating now? What's the difference between the value that we're looking for and where we are now? What's the difference between full risk mitigation and our risk profile now?”
Some simple examples can start to put a fine point on what we're talking about when we're identifying these gaps. “What's your day-to-day process? Is it in writing? Is everybody following the same routine or do you have some knowledge experts that have their way of doing it?” They can get results that are different than everybody else's results because they're doing it their way and everybody else is doing it a different way. Are those processes in writing? Are they consistently utilized? Most importantly, are they being regularly refreshed?
Are they clear enough so that someone new who comes in can learn them quickly and implement them effectively?
That's going right to the next point I was going to say, which is the transferability of knowledge and relationships. Not only should a new team member be able to come in and get up to speed on the processes very quickly so that there's a short time of productivity loss in their stations but they should also be able to jump into the relationships, outside stakeholders, clients and suppliers. That should be transferable to everybody whom they have relationships with.
This is important because it gives everybody a lot more responsibility and ownership of the success of the company. It's also important because you don't want an employee that can hold your entire business hostage. They're the only one that has key knowledge or holds key relationships. If they leave, the business is going to be crippled.
I see this time and time again where there is a key salesperson who has all the relationships. If that salesperson goes to a competitor, all your clients go with them. You've got that technical expert in the company that is the only one that knows how to truly do quality assurance or the only one that knows how to design for specific technical requirements for their clients. You cannot have that. That's a massive gap that needs to be closed as quickly as possible.
Also, it's never too soon for the owner to start emotionally separating themselves from the identity of the business. Even start to think about that as they're pulling away from day-to-day operations and becoming the visionary leader instead of the operational leader, they can also start envisioning, “What am I going to do next? At some point, I'm going to exit this building.” I hope you exit the building a couple of times a week but you'll be exiting the business.
“What does life look like in my next chapter?” This is an important consideration. It's something to start dreaming about because like starting a business, it didn't happen overnight. Transitioning into your next stage of life will not happen overnight either. There are a lot of different elements to closing these gaps throughout your business once you understand your risk profile.
To underline that, we've covered this in a prior episode at least once. If you don't have a compelling next chapter as a business owner after you exit the business, you will inadvertently undermine the exit process. You will undermine the business's ability to be sold effectively or whatever your exit plan happens to be.
Even when you do exit, you'll have remorse because you won't have been able to let go yet.
That's the seller's remorse in contrast to the buyer's remorse. To tie a bow around the roadmap for an exit-oriented plan is proper implementation. We don't have to belabor this point but we did want to at least touch on it briefly. It's not enough to have your implementation teams focused on getting stuff done from an exit readiness development mindset.
It's crucial that your executive leadership and advisory teams clearly and explicitly support that and remind your implementers about that. The tendency when you're boots on the ground and you're implementing things on a day-to-day basis is to lose track of the higher vision and the intentions behind the things you're doing in the way of implementation.
We are not saying this ever becomes easy because what we're asking you to do is create tension within your business through the strategic plan. You want to be operating as efficiently as possible in your product delivery and production, whether that's a product or a service, while you're changing everything. You've got to be able to do both. You've got to be able to run your business the way that it's designed in the most efficient way possible while changing the long-term design of the business to do something different.
This is very challenging and it's going to take the entire team. It's going to take implementation. That is, and I like to quote the term from a professor of mine, ambidextrous. You have your exploitative portion, which is about optimizing what you're doing and that has to run in an entirely different way than your explorative portion, which is designing what you're going to do next.
The importance of this is it is a powerful way to illuminate the notion of working on your business, not in your business if you're an executive or an owner. This is a concrete example of what working on your business means.
We said we weren't going to belabor the point so stop it there but we'll talk about these concepts in other episodes for sure. With that said, let's go to the takeaways. Let's talk about what each of us brings away from this episode and hope that you bring it away from the episode. If you don't mind, I'll start. My big takeaway from this is that you don't have to throw away conventional strategic planning.
We're not saying that all these great minds that developed the foundations of strategic planning over years of experience and research are wrong. There's value to the conventional approach to strategic planning. We just want to modify it. We want to add to that conventional approach by starting with risk and working through it at all times. Work through your strategic planning process with that risk and gap analysis in mind so that the plan you come up with is more robust, agile and going to be more prone to success with a minimum of drift.
You don't have to throw away conventional strategic planning. There's value to the conventional approach to strategic planning. Modify it.
To emphasize this one last time, as a takeaway, it's never too soon to shift into an exit readiness focus, even if you don't plan to exit or don't yet know when you'll exit.
That's so powerful. If you think you're going to exit in the next few years, you're already behind on a lot of things that need to be done. If you don't have an exit on your horizon, you're in a perfect place to start doing this. It will help you maximize your benefit as the owner of the business every day you own it. It will put you in that top quartile or top decile of the market when you're looking to exit.
With all of that said, on behalf of Dr. Gruder and myself, I'd like to thank you so much for joining us in this episode. I hope you had as much fun as we did. We thank you for reading. Please click the subscribe button so that you get the updates as we churn out new episodes. We've got some great interviews coming up so stay notified. We'd love to hear your thoughts, questions and topic ideas. Please feel free at all times to use the comment section. You can help us shape the future of the show.
Visit the Blue Sky website as well. There's a lot of great information and some cool tools at BlueSkyAdvisors.net. If you go to BlueSkyAdvisors.net/Podcast, that will take you to all the episodes. On the website, click Free Assessment. We've got over a dozen micro-assessments quick to fill out but give you some meaningful and powerful insights into your operational infrastructure. With that said, thank you so much.