Virtual Ocean Strategy (VOS) comes to life, in three steps, with three questions!

With our firm’s Virtual Ocean Strategy (VOS) approach, getting some good press within the blogosphere, we decided to answer one of the key questions, that gets, often asked during our strategic planning engagements, in one form or the other - how does VOS stack up against, other popular strategic planning approaches - and more specifically, how does VOS address the major shifts, that are happening within the 21st century strategic planning engagements?

First of all, for the benefit of the larger audience, let us recap some of the major shifts, that are happening within the strategic planning world, to help answer this question, within its right context-

1. Shift from “correlation/causality driven imaginative possibilities/choices, represented in the form of novel hypothesis” to the “reverse scenario of imaginative possibilities/choices driving the correlations/causality, that are needed to make the possibilities to come to life”.
2. Shift from “designing the tests for the winning choice, after the choice is made” to “designing custom tailored tests for all possibilities ,and let those test results, leading us to the final choice”.
3. Shift from “rules guided correlation/causality driven strategy diagnosis/prescription” mindset to “nature’s scientific principles driven causality/correlation driving the diagnosis needed to prescribe the possibilities” mindset.
4. Shift from shareholder value (with a CSR component) to Porter’s “Creating Shareholder Value” based value (and now to our firm’s Triune Shared Value (TSV) – as explained in one of our other CapitalismPlus articles).
5. Shift from capital economy driven strategy formulation” to “capital/behavioral economics balanced driven strategy formulation”.

While all of these shifts may or may not be happening simultaneously, “SHIFT #5”, in our opinion, is the foundational shift that causes the remaining shifts.

One might ask how?

While most modern day strategic planning approaches have done a great job of helping companies, to develop some great strategies, history is also filled with many examples, where great leaders, at times, have ended up making some irrational choices. Part of the reason for that behavior is that, humans, often times, get influenced, heavily by the social and psychological type behavior economic factors, which is what, sometimes leads us to those irrational choices, in spite of some great rational choices are available to us.

The question however is - how do we make sure, that we avoid those irrational choices? This where, we recommend our clients, to step back and first understand the underpinnings of this so called “possibilities/choices” driven approaches, in a larger context with a behavior economics lens, using a hypothesis that “causal relationships, within the psychological dimensions of Motivations, Beliefs and Actions, are the starting point for diagnosing/prescribing, strategies in both life and business situations”?

What do we mean?

• Purpose(or Passion/Compassion) in the form of Motivational/Emotional energies, that get birthed in Heart /Spirit dimension, happens to be the root event for all imaginative possibilities and diagnosis, as guided by nature’s energy management principle -> Energy dimension
• Which then causes Beliefs to get propelled in Mind /Soul dimension, which then sets the nature’s seedal chain principle in motion -> Force dimension 
• Which then causes Actions to be landed in Body/Environment dimension by balancing nature’s balancing opposite’s principle, with a "doing both" mindset-> Power dimension. 

Simply put, the PURPOSE SEED (that is made up of Vision, Mission, BHAG, Values and Codes), in its essence, is what,  germinates into an encapsulated capsule, with this three dimensional MBA causal map. Once this MBA causal map driven purpose seed capsule is framed up correctly, using nature’s top three scientific principles, strategy under VOS, in its essence is just navigating up and down the nodes of the choice trees within this capsule, effectively and efficiently, with an end goal of bringing the imaginative  (and yet rational) possibilities to life.

Virtual Ocean Strategy comes to life, in three steps and three questions, using PURPOSE SEED capsule

As it turns out, all of our firm’s approaches (VOS, Capitalism Plus and VizPlanet), happen to be guided by the same three scientific principles, using this PURPOSE SEED capsule, as well i.e. “birthed” by the energy management principle, “propelled” by the seedal chain principle and “landed” by “balancing the opposites” principle – as outlined in the schematic on the top of the page.

In other words, strategy under VOS is, all about serendipitously discerning the motivational seedal whisper(s) from the seasonal events, and then transforming those whispers into a seasonal choice(s), before executing them as action steps as explained in detail in the VOS article. Simply put, strategy under VOS is a seedal whisper (possibility energy) manifesting as seasonal choices (force) within the constraint of capabilities (power) by answering following three questions, in three steps as outlined in the picture on the top of the page.

QUESTIONS:

1. How FAR would we want to go to find our customers? – Establishing the geographical market boundaries to help answer “where to play to win” question- Scientific Force in Play – Remember Force=Energy/Space
2. How FAST we need to get there, to get their jobs done? – Setting the timeline expectations to help answer “when and what to play, to win” question – Scientific Power in Play ->Remember Power=Energy/Time
3. How MUCH would it take to execute this “FAR” and “FAST” value propositions? – arriving the resource or capability choices to help answer “How do we win” question – Scientific Energy in Play

STEPS:

1. Seedal Motivation Driven Whispers
2. Seasonal Beliefs Guided Choices
3. Sequel type Triune Shared Value (TSV) Focused Actions

Once we frame up these three questions using this “capital/behavior economics balanced MBA lens”, the rest of the shifts, happen to get addressed, automatically, using the same set of three scientific principles as well.

One might ask, why bother using these three principles, in the first place?

Among many benefits, these three scientific principles help us to borrow lots of the insights from the scientific energy management/aeronautical engineering/Physics disciplines, and apply them to value management within the business world, which by itself is a great benefit, as we can analyze the possibilities, with different lenses, with a multi dimensional balancing mindset (value, cost, velocity, growth and purpose), as opposed to the traditional value-cost balancing and/or tradeoff mindsets, that are popular in the modern day approaches.

Now that we have grounded ourselves with a solid understanding of these three principles with a MBA lens, let us dive deeper, and answer our earlier question of how VOS stacks up against other strategic planning approaches, within the context of these five shifts?

STEP 1:  Reveal and Communicate the Seedal Motivational Whispers in the form of imaginative possibilities!

First natural follow-up question is - what does it mean to serendipitously discern the seedal whisper(s) from the seasonal events? In other words, how does this whisper get “revealed and diagnosed” as part of our strategic planning engagements?

Motivational Seedal Whisper (or Purpose Energy driven imaginative possibilities) in a larger sense, is all about uncovering the seedal energies of the PURPOSE SEED with our creative imaginative power, and then look for those data whispers in the form of situational events, behaviors and environmental data points, that are needed to bring those imaginative possibilities to come to life.

• Qualitative/Intuitive whispers (causality based whispers from serendipitous observation or by studying of one sample company or a person over a period of time)
• Quantitative whispers (correlation based whispers from historical data from various geographies)

Once the data whispers are classified as causal (qualitative whispers) and correlation maps (quantitative whispers), they are then fed into the next step, for the seedal chain principle to take its course!

STEP 2: Discern and Diagnose the Seasonal Strategic Choices

The Seasonal Choices (identified as imaginative possibilities) are nothing but the strategic paths that are discerned and diagnosed by the seedal whispers from the previous step, to help us to trickle them down to the final path.

For a moment, if I may, let us a take detour - and look at it first with a spirituality lens – as these seasonal strategic choices, in a way, are equivalent to discerning God’s will for our life - as God reveals His WILL in most religious faiths), just in whispers only. The question, however is - how does predestination fits within these set of whispers? How about the perfect will vs. permissive will?

Now, rephrasing the same spiritual questions, with a strategy lens – does that mean the outcome of our strategic choices, within a company setup, are also caused (or predestined) by the PURPOSE SEED (and its invisible test conditions/instructions)? If so, how do we make sure that the right choices are always made, to achieve the best possible outcome(s)?

Let us answer this question using the board game of chutes and ladders (or popularly called as snakes and ladders in UK/India as outlined in the picture on the top of the page)– which, as we all know, is filled with multiple paths, but usually one path is the perfect path, to reach the final destination. When we take the perfect path, we usually reach the destination without being bitten by the chutes (or barriers). On the other hand, when we take an alternate permissive path, we still might reach the destination, but after being bitten few times by the chutes!

Yet another insight here is, when we are bitten by the chutes (or for that matter even after being lifted by the ladder), the outcomes of those choices are always predestined (as per the purpose seed), however, the choice is totally up to us to take i.e. which path we want to pursue to reach the destination. In the same way, the invisible instructions (test conditions) within the PURPOSE SEED, not only try to validate the outcomes of the choices, but also, try to find a path where there are less number of barriers.

Does that mean the outcomes of the same choice made by two identical companies (background, capabilities, years of operation, culture, etc) will always be the same? Here is where, our Purpose Capsule that is custom designed (with test conditions as per the invisible instructions of the PURPOSE SEED possibilities), comes handy. In other words, the outcome of a same choice, made by two identical companies, not necessarily will be the same, as those outcomes are always personalized, per the “invisible instructions” within the Purpose seed Capsule!

This Purpose seed Capsule, is not only filled with the predestined outcomes for our choices, but also, it is packed with many invisible possibilities, time bound instructions, that gets activated, only when we start navigating through those choices. For all practical purposes, let us imagine that purpose seed capsule, as a set of decision trees, with multiple sub nodes. In my mind, every sub node within the purpose seed capsule has five part invisible instructions.

• Intended Outcomes
• SWOTC (Strengths/weaknesses/Opportunities/Threats/Constraints) with a choice/time bound instruction manifesting from Company’s motivations w/r to competitor’s motivations (chutes) and collaborator’s motivations (ladders). For those of us who chart these things, we usually do it with five charts
• Company’s Motivation growth vs. Market Motivation Growth
• Company’s Motivation growth vs. Relative Market Motivation Share (RMMS)
• ROMCA vs. RMMS
• Motivation Margin vs. RMMS
• Motivation Velocity vs. RMMS

• SWOTC (Strengths/weaknesses/Opportunities/Threats/Constraints) with a choice/time bound instruction manifesting from Company’s market w/r to competitor’s markets (chutes) and collaborator’s markets (ladders) with a “traditional industry structure is irrelevant” mindset. Those of us who chart these things, we usually do it with five charts as listed below and also in the picture below

• Company’s growth vs. Market Growth
• Company’s growth vs. Relative Experience or Market Share(RMS)
• Operating Margin vs. RMS
• Capital Intensity (or Operating Velocity) vs. RMS
• ROIC vs. RMS

• SWOTC (Strengths/weaknesses/Opportunities/Threats/Constraints) with a choice/time bound instruction manifesting from Company’s capability w/r to competitor’s capabilities (chutes) and collaborator’s capabilities (ladders) with the “traditional industry structure is irrelevant” mindset. Those of us who chart these things, we usually do it with five charts.
• Company’s growth vs. Industry’s Total capability (Primarily Capital only for now)
• Company’s growth vs. Relative Capability Share (RCS)
• Operating Margin vs. RCS
• Operating Velocity vs. RCS
• ROIC vs. RCS

•  Missteps (real vs. perceived i.e. and how it will be blown/exploited out of proportion by competitors or take advantage of us)

Now that the PURPOSE SEED capsule is formulated, the obvious next question is - how do all the possibilities, come to life within the context of "Discern and Prescribe" step, as outlined in the schematic on the top of the page?

As we move deeper into the this step of “Discern and Diagnose”, it becomes all the more interesting -as we, now get to play the game of chutes and ladders, as guided by the seedal chain principle. Imagine for a moment – when you are inside the boundaries of this board game, as strategists we will see multiple choices, however, when we are tuned to listen to the whispers of the external events/situations (or the quantitative/correlation insights and qualitative/causal insights), the whispers (further guided by invisible instructions/test conditions), will lead us into one path more than the others, based on the expected results of the test conditions, that are established. In pragmatic terms, it is like planting a seed (time, energy, ideas, resources, insights etc) on certain sets of activities (or people) more than others, which in its due course (season), will help us to navigate into the subsequent steps, to reap the harvest or outcomes within the PURPOSE SEED Capsule.

In other words, the type of purpose seed we sow, ultimately, decides what type of invisible instructions( or test conditions), within the PURPOSE SEED capsule gets executed, which then, ultimately decides the perfect choice (and the corresponding outcomes). Simply put, once we align the PURPOSE SEED with the whispers (correlation and causal chains), the seedal chain principle will take its course of action, to navigate us into the perfect path, in alignment with the principle - as long as the earth remains, the seedal chain principle will remain in action.

Now, what happens if one chooses to take the alternate non-optimal path instead of perfect path? Granted, we will, still be able to reach the final destination, but definitely, not in an optimal fashion- as there might exist one or more chutes, along the way, within those non optimal paths, to slow us down, before we reach the final destination – again the outcomes of even those permissive paths, are also predestined as part of the PURPOSE SEED capsule.

STEP 3: Prescribe and Execute the Sequel Actions, producing Triune Shared Value

Now, coming into the next step - Sequel Actions are, nothing but, set of actions behind the final strategic choice, to accomplish the outcomes from the previous step– which then causes the motivation energies to be continuously reaped/recycled, as part of this closed cultural value loop. Now the question is how all these three steps (Motivational Seedal Whispers, Seasonal Choices and Sequel Values) fit together to produce the Triune Shared Value (TSV) in a close looped fashion?

As proven both spiritually and scientifically, when we intend a particular outcome with a motivational energy, the intentions themselves have an impact on choices, so that the outcome is more likely to occur in the direction of the intentions. An intention is a conscious desire or motivation for a particular outcome as further validated by Solomon “As a man think in his heart, so is he”. This is the reason, we have used the word Whisper (alluding to the way God reveals his intentions for our life) – as whispers can also be equated to Internal gut type motivations, that are guided in the direction of the whisper to help us make the right strategic choices, resulting in better outcomes.

Sure enough, our firm’s PURPOSE SEED capsule, in its rudimentary format, map 1:1 to McKinsey’s Zen of Corporate finance formula ->Financial Value =Profit x (1-g/ROIC)/ (WACC-g)

• Return on Motivation Whisper Choice (ROMWC) is similar to ROIC variable. Simply put, ROMWC is the ratio of - no of whisper driven choices producing positive outcomes divided by all choices made in a period.

• Size of Outcome is similar to the ‘g’ variable
• Amount of threshold purpose seed energy needed to propel (or data whispers in causal and correlation dimensions) is similar to the hurdle rate(WACC) variable 
• Motivational Intent gain is similar to profit variable 
• Motivational value is similar to Financial value

Now, by synthesizing all these variables, we see the following formula evolving

• Motivation driven cultural value= Spirituality driven Motivation gain x (1- Spirituality driven Motivation growth/ROWCA)/ (Motivation threshold- Spirituality driven Motivation growth).

Similarly, we had also proposed another correlation formula, in the form of a hypothesis called societal value formula, with a new metric called WACP - which is nothing but a Weighted average of WACC (weighted average cost of capital) and WACP(weighted average cost of purpose in one of our earlier articles -http://strategywithapurpose.blogspot.com/2010/11/purpose-profit-balanced-sustainable.html.

• NOPAT x (1-g/ROIC)/ (WACP-g)

Now, synthesizing all the three formulas - TSV can be summarized as

• TSV= Spirituality or Emotional energy driven Motivational value (Higher Power based + Shareholder value+ Societal value (With direct linkage to SCCA in the picture above)
    

Granted, two of the three formulas (motivational value and societal value) are just hypothesized, correlation formulas, at this point in time - and so, lot more research, with empirical data needs to be done, before publishing them as causality driven working formulas. However, by carefully studying few sample companies over a period of 10 years (similar to how Jim Collins’s team has studied the 10Xers in his recent book or may be just one company, as suggested by Prof. Clay Christensen), I am positive, that we can clearly establish a causality relationship (perhaps with a 80-100% certainty).

Conclusion:

Framing up the opportunity space, with this MBA lens, not only, helps us to imagine multiple strategic possibilities (with our behavior economics driven cultural/rational filters on), but also, helps us to motivate the strategic planners, with the right set of foundational tenets, from nature’s energy management principle. While this type of motivation driven discovery process, might generate multiple unguarded possibilities in the beginning, our experience suggests that, those shifted mindsets (caused by the motivations, in the form of renewed beliefs, as guided by seedal chain principle enabled data insights, with its test conditions) has the magical power, to lead us into the final choice. Granted, that we might run into few  opposing dilemmas, along the way, however, applying nature’s balancing opposites principle, in conjunction with seedal chain principle, will definitely guide us into the final choice, with 100% certainty, accuracy and speed! 

 

Virtual Ocean Strategy – the way to reset strategies with a purpose driven “industry structure is irrelevant” mindset?

With our Virtual Ocean Strategy (VOS) receiving some great press within the blogosphere, some of our fellow strategy practitioners, have challenged us with a set of follow-up questions - the most notable one being - "how is it different from the popular approaches like Red Ocean and Blue Ocean Strategies?". Instead of answering them all individually, we decided to synthesize them in the form of three questions, to make it relevant for our larger audience -

1. Why another approach now?


2. How does it stack up against the other popular frameworks like Red Ocean (ROS) and Blue Ocean strategy (BOS) frameworks?


3. In spite of having these great strategy frameworks, quite a few strategy efforts, still do not produce its intended outcome - Why?
   

1.Why another approach now?

While the popular Red Ocean Strategy (ROS) and the Blue Ocean Strategies (BOS) have widely been successful in the last decade+ years, we believe that they may not be well equipped, to handle the ever-changing business needs of the 21st century! This does not mean that these two approaches have not lost their former glory; rather, the best way to comprehend our hypothesis is that some of the foundational principles of ROS and BOS, may not be well equipped to handle the seismic shift happening within the social media/digital technology driven, global business environments of the 21st century.

In other words, the right way to frame this “Why another approach question” within the context of this seismic shift being – “what elements of ROS and BOS can be blended together, to form a hybrid approach (with some value-adds), that can, not only help companies to reset their strategies, but also, help them to stay relevant in the 21st century?”

First things first - let us start with some basics. Porter’s ROS is built with the mantra of beating the competition with a unique winning path, whereas, BOS is built with a mantra of entering the deep blue ocean markets, with a “competition is irrelevant” mindset. While there is time and place for each of these worldviews, we believe that none of these approaches, in its current form, are designed to handle the emerging "boundaryless industry structure" mindset of the 21st century. In other words, in the last 5-10 years, the traditional boundaries existing among industrial structures, have started to blur, as evident from some of the recent industry convergence moves by Fortune 500 companies (e.g. Starbucks entering CPG type Juice industry, Google entering travel/media/mobile handset industry, Apple/Intel entering media/paid TV industry etc). What do these strategic moves tell us? Companies have started to look beyond their traditional industry structures for growth opportunities with an “industry structure is irrelevant” mindset, and so, the need of the hour is an approach that helps companies to accomplish that mindset, in a comprehensive way, as outlined in the picture on the top of the page!

While VOS is designed with an "industry structure is irrelevant” mindset, in its essence and spirit, VOS is all about executing those strategies with a collaborative heartbeat. In other words, while competition within a boundaryless industry structure, might be irrelevant during the beginning days (i.e. especially when companies enter the virtual oceans with a first mover advantage), it will catch up sooner than later, as digital and social media technologies have started to shrink the world much smaller, by tearing down the artificial walls, existing among the industry structures, and so, “collaborative execution” is the name of the game in the 21st century!

The implication is that the trade boundaries across industry structures are all being redrawn, thus validating the need for a “strategy reset journey” with an “industry structure is irrelevant” mindset! VOS starts that reset journey, not only, by resetting the purpose statement (with its five parts of vision, mission, values, codes and BHAG with priorities), but also, by balancing them with a multi dimensional balancing process, in value, cost, velocity, growth and purpose dimensions, as opposed to the two dimensional value-cost trade-off in ROS and value-cost balancing in BOS. VOS is the only approach in the market place that is sourced from an “inside-out” energy source called PURPOSE SEED that is manifested in three forms simultaneously -

• Purpose Driven Leadership framework using the “inside-out” emotional energies of faith, hope and love.


• Purpose Driven Strategy framework using the “inside-out” scientific energies of seedal energy, seasonal force and sequel power.


• Purpose Driven Innovation framework using the three value energies (shareholder, societal and emotional/cultural) that are manifested as purpose bundles, purpose models and purpose platforms.
  

Simply put, VOS and its three frameworks are being sourced from the common PURPOSE seed, very much like, how GOD-HEAD in most faiths happen to manifest himself in three forms depending upon the dispensational context, and yet operate as one person. In other words, VOS, although manifests itself in three forms (leadership, strategy and innovation) within the various cultural contexts, it still operate as one integrated approach, when it comes to decision making- which is what makes VOS, a sustainable approach for the long haul.

2. How does it stack up against the popular ROS and BOS?

3. In spite of having great strategy frameworks, still some strategy efforts do not produce its intended outcome - Why?

The essence of strategy, according to Michael Porter, is choosing what not to do, and so, we have developed 5 “WHAT NOT TO DO’s” to answer this question. One might ask - why the “negative” approach? Well, most research suggests that unlearning is the foundational prerequisite of learning, and so, we have identified these 5 “what not’s”- to unlearn some of these decade old mindsets, before learning to use VOS, with an integrated/systemic mindset and to stay relevant in the 21st century!

• What Not #1 -> Do not reset with a single dimensional strategy mindset, as opposed to an integrated systemic approach, in the three dimensions of leadership, strategy and innovation, as addressed by our TPF framework within VOS.



• What Not #2-> Do not reset strategy without resetting the purpose seed, as addressed by our Purpose driven seedal chain/scientific energy management principle driven Portfolio Thread view based strategic planning framework within VOS.



• What Not #3-> Do not go after an existing market, as opposed to going after the virtual ocean market and/or experience pools, which do not exist today with a motivational momentum themes creating experience moments or movements-> as addressed by our Experience Pool Portfolio (EPP) framework and our Purpose Innovation framework within VOS.



• What Not To Do #4->Do not mix up SCA vs. competency vs. capability within organic and inorganic growth strategies, but follow a portfolio approach, in avoiding this “capabilities mix-up trap” – as addressed by our Capability Pool Portfolio (CPP) Framework within VOS.
  o To put things within its context - SCA vs. Competency vs. capability is equivalent to Grandma’s hand trick of sautéing for the right duration with right temperature vs. Recipe vs. Ingredient.



• What Not To Do #5-> Do not execute without a real time performance visibility -> partly addressed by our big data driven real time valuation/Corporate performance management framework within VOS.

Conclusion:

Implementing a strategic plan, in itself is a big challenge for most organizations, leave alone resetting them all the way from the Purpose Seed, as strategy resets, invariably end up introducing lot more structural changes to the organizations, than we think. To manage those changes and to mitigate those execution risks that come along with it, we suggest companies to take a phased approach, and apply our VOS principles and frameworks with an integrated systemic mindset – as guided by our big data driven analytics/synthesis balanced, Corporate Performance Management (CPM) frameworks!

Please feel free to check out our Slide share version of our article for a better visual display as well.

Big Data Driven Real Time Valuation – The next wave in Performance Management Systems?

A recent study suggests that the value gap between the “stock price based market cap” and the “internal cash flow based market cap” of Fortune 500 companies, are constantly on the rise, especially in the last 50 years. The implication is that some companies are either grossly undervalued (up to 25% points in case of old economy style companies) or overvalued (up to 50-100% points, in case of dotcom/entrepreneurial style companies) - and rightfully so, this value gap, seems to be emerging as one of the top 5 issues, keeping the CEO, senior leaders and investors, on the alert.

Let’s face it - the true stock value of a company, in its essence is the combination of its “future cash flow value” and its linkage to “future expectation building abilities” discounted by today’s cost of capital. While there are quite a few valuation models (e.g. McKinsey's Zen of corporate Finance formula, DCF, NPV, IRR) available, to accurately quantify the cash flow value, there are not many proven models available, to accurately establish the causal chain relationship between the cash flow value and the “expectation building abilities” - and so, stock markets, often follow the tread mill effect of trading on mismatched expectations.

Part of the reason for that behavior is that, the so called “expectation building abilities” are often hidden within the “intangible” competitive advantage (CA) enabling perspectives of the company (i.e. learning/growth, customer, value chain and financial perspectives in BSC terminology) and so, they are not well understood by the street, within its right context. “Expectation building abilities”, in this context include, but not limited to are - the earning guidance, product portfolio pipeline for the next 5 years, share repurchase program schedules/dividend payout, management changes and other big ticket capital expenditures - provided by company executives on an ongoing basis, to better manage street’s expectations, and to boost their overall stock prices.

Trading Value vs. Creating Value

The implication is that street, either over reacts to those “expectation building abilities” in the form of higher stock prices, or in some cases, under react (or some might suggest punish) with lower prices – purely based on the way, it interprets the causal relationship between cash flow value and the “expectation building abilities”. As it turns out, this causality interpretation gap seems to be the single most important factor, that drives many company executives and investors, to get into this game of trading value, as opposed to creating them fresh, says Roger Martin.

What do we mean? From investor’s standpoint – while quantifying cash flow is important in making the near term investment decisions, interpreting the causal relationship accurately, is key for them to bet on a stock for the long haul. Similarly, from company’s leadership standpoint – while quantifying cash flow value is critical for making effective near term operating decisions (i.e. achieving Q-To-Q results), framing the “expectation building abilities” accurately, in the form of earning guidance statements, is very important for them to manage the expectations of their investor community, and to stay focused on their long term strategic choices.

How about Valuation in M&A deal scenarios?

As it turns out, this causality gap between “expectation building abilities” and cash flow value seems to be the biggest hurdle faced by leaders within M&A negotiation scenarios as well – as suggested by a recent study. For example in a M&A scenario, if we had to dissect the value components of a product life cycle of a target firm -

• Invisible value of discovering the unmet “Jobs to be done” value + Invisible idea/vision seed value +invisible incubator value + commercialization value(when there is no alternative product available) + commoditization value (when alternate products are available with heavy competition)
  

If we look at this equation, interestingly enough, they map 1:1 to the five value stations of the PTV framework picture above. Yet another interesting insight here is that- it reiterates our earlier point that stock prices are often decided based on the commercialization and commoditization vale components (i.e. financial value station), partly because, street does not have visibility to the unrealized invisible values of the early product life cycles, the primary driver behind those expectation building abilities.

Transparency without compromising the Integrity of Insider information
The follow-up question is how can we provide that end-to-end visibility, without compromising the integrity of the CA enabling insider information? While there is never a silver bullet answer for this type of questions, one of the best answers in our opinion, is to mine those “expectation building abilities, proactively from the tons of data that are often hidden within and outside the four walls of the companies, and integrate them within the performance management systems. Yes, you guessed it correct - that the emerging buzz word for that approach is “Big data”.

As it turns out, even company insides, often do not have visibility to all of their own company data, leave alone the external social media data, and so, the better way to frame the question is – how can this emerging big data concept, help us to establish the causal relationship between cash flow and “expectation building abilities” and provide that end-to-end visibility, without compromising the integrity of the CA providing insider information?

Big data – the panacea for establishing the causality between cash flow and “expectation building abilities”?
Let us face it - the key benefit of any analytics platform (leave alone the Big-data driven analytics platform), is to help make effective decisions with timely and accurate insights. With that definition, if we had to dissect the service components of a Big data analytics platform, it is all about delivering value in the form of “insights” using a set of “analytics services” (as the delivery vehicle), with a faster service delivery time (i.e. latency) than the traditional analytics platform. In other words, the three key service components of big data are:

• Matter or cost in dollars that are needed to create and deliver those insights


• Acceptable Time or latency involved in delivering those insights


• Space or size of the data of the data needed- which is often why the word big is put in front of data.

Big data classified using CLS index
Now that we have defined Big data with the building blocks of matter, time and space – it makes sense to augment our firm’s Experience Pool Portfolio (EPP) framework with some of the value-add features of Big data, to accurately establish the causal relationship between the cash flow value and the “expectation building abilities” that are being hidden within the large amounts of Big data. Speaking of intangibles being buried within big data, the next question is – what is preventing us from quantifying those intangible values within the big data – is it a cost (matter), latency (time) or storage issue (size)?

The answer in our opinion is not using the right set of data sources for the right type of analysis, and so, as a first step, we suggest to classify “Big data” with a new index called CLS index (Cost, Latency and Size), as shown in the chart below.

Depending upon which quadrant the data falls, we see five buckets of big data categories evolving.

• Transaction data producing the value for financial station (structured data with a low CLS mix index)


• P&S Purchase context data producing the value within the value chain station (structured data with a medium CLS mix index)


• P&S Purchase influencer data producing value within Learning/Growth station (structured data similar to IRI/Nielsen data with above average CLS mix index)


• Customer needs & want based data or” jobs to be done” data, producing value within Customer station. (combination of structured and unstructured data with high CLS mix index similar to social media/survey data in the form of opinions, likes etc)


• Purpose or Motivational driver’s data producing value within the central purpose station. (some combination of above four categories, helping us to answer the key purpose drivers question).
  

Big Data comes to life within PTV radial framework
Interestingly enough – this five types of big data map 1:1 to the five value stations of PTV - suggesting the need for four additional virtual exchanges on top of the wall street exchange ( i.e. primarily financial perspective driven)– and link them all together with causality - as outlined in the picture above and explained in detail in our firm’s Purpose driven strategic planning framework (http://www.managementexchange.com/story/strategic-planning-purpose-driven-way-using-nature%E2%80%99s-seedal-chain-principle)

• Job to be done or customer equity capital exchange, based on the formula -> Consumer/customer Value=Jobs-to-be done/Price



• Human capital equity exchange, based on human capital learning/growth, per one of my recent hack at MIX site (http://www.managementexchange.com/hack/reforming-performance-management-systems-%E2%80%93-virtual-purpose-equity-vizpity%C2%A9-exchange-way).
  


• Value chain equity exchange,based on the formula ->ROIC= Margin x Velocity



• Financial equity exchange, which is today’s’ street version based on the formula ->Share holder value= Profit x (1-g/ROIC)/ (WACC-g) - as outlined in our firm’s valuation driven PTV radial framework below.



• Purpose equity capital exchange ,based on our hypothesized formula -> Purpose value= Profit x (1-g/ROIC)/ (WACP*-g) where WACP=Weighted Average Cost of Purpose Capital
  

Providing this type of valuation visibility in these five dimensions, not only will help us to accurately establish the causal relationships, but also, help us to make the right call in M/A deal situations, as we had explained in one of our CPM articles (http://theacademyofbusinessstrategy-businessanalytics.com/2010/05/15/03/)

Conclusion with Implications

While the solution we have proposed is a 18 month solution, let me conclude with some immediate pragmatic next steps, that can help companies to lay the foundation for implementing this Big data driven performance management systems. First and foremost, companies must identify their causal/correlation chain relationships between “cash flow value" and the corresponding “expectation building abilities” impacting their overall stock prices. Some of the practical steps include, but not limited to are -

1. Identify the heavy hitters (top 50-100 investors) who have the “needle moving power” to influence value (and thus stock prices) within this causal/correlation chain relationship using a CPM framework like our PTV framework, as shown in the picture above.



2. Proactively manage the expectations of family owned and hedge/pension fund investors and document what makes them to tick.



3. Establish the causal chain of how they have reacted to the earning guidance and macroeconomic news/factors in the past, and then create a behavioral pattern map for their behaviors.



4. Depending upon those patterns, manage their expectations by releasing right type of insider information to media (and the analyst/investor community) in the right time, with a news staging mindset.



5. When company’s stock price changes, ask why the market moved and zero-in who bought, who sold, and why - with an empathetic mindset i.e. look at those investors with a lens of “alter-ego managers” or “indirect corporate owners”. In other words, learn to empathize with investors with various “what if scenario” options, within the context of the five perspectives of PTV framework.



6. Overhaul investor relations department and make them to actively manage the five big data types, by making them as joint data stewards, especially when it comes to regulatory data and annual reports.



7. Administer the big data registry with a causal map of shareholders and investor road shows, visits by analysts, and conferences; and major presentations to shareholders.



8. Integrate investor relationship management, part and parcel of strategic planning. Together make them responsible for managing the key-account processes to identify movers and understand their behavior. This way one can test all major plans, hypothesis and announcements, for their effect on the price of the company’s shares with various “what if scenario” options, and then suggest modifications to those earning guidance content, to better align with the views of key shareholders, thus becoming the key advisory arm of the CEO and senior leaders/board of directors.



9. Make investor relation leaders (in partnership with Corporate Strategy and Finance) as the people who co-own this big data driven valuation system and make them to proactively deliver the bad news when necessary. They will also have to be experts with “thinking on the feet” type communication skills, capable of handling tough interviews with investors who at times might be pressing them for information that cannot be divulged under SEC regulations or for maintaining CA integrity.




10. In closing, this type of big data driven integrated approach (i.e. structured and unstructured data driven approach) to strategic planning, Innovation, performance management, investor relations/valuation/stock price management and risk management, clearly require top notch talent, including the time and attention of senior management - and failing short on any of those commitments, would definitely leave the CEO, senior leaders and board of directors, in the constant game of never ending stock price guessing. It is a no brainer that no CEO and/or senior leaders/ board of directors, would ever want to be in that type of a guessing game, and so, the million dollar next step question is “What is in your docket ?” – and let that be our last word!