One Night Stands and Chinese Math
Some while ago, I sat in on a presentation on another management consulting firm’s strategic plan. Perfectly legal – no Watergate tapes here. I was simply present in the room. Basically, the plan was as follows:
“We’ll create a series of presentations to show prospective clients how hopelessly they are managed and how pathetic their performance is relative to the top performers in their market, and then show these to them. Obviously, this will make them fall over themselves to hire us so that we can make them into Olympic athletes too!
That’s good because the size of the market we are targeting is enormous so if we can divert just a tiny, tiny fraction of 1% of its revenues to us to pay for our brilliance, then we’ll be gazillionnaires in no time!
Then, in a few years, we can persuade somebody to buy us for a truly stupendous figure, and we can all retire.”
The strange thing is just how common the strategy reflected by the second paragraph is. I bet you can think of several firms you know that, explicitly or not, follow it. (Hopefully, your own firm is not one of them!) The thinking even has a name: Chinese Math.
Rob May over at BusinessPundit has a post today listing his top postings for 2006. One of them, posted in May, is titled Please Stop With Your Chinese Math.
Says he:
"Investors love companies that can (a) stand on their own two feet early so that they don't require much more investment and (b) have huge market potential. So entrepreneurs try to convince investors that the market is huge, and in doing so they somehow convince themselves (and in turn try to convince investors) that it will be easy to reach cash flow breakeven because of the market size. After all, they only need a small percentage of the market. The name stems from the idea that there are a billion people in China, so if you sell a $1 widget to just 1% of them that is $10 million in revenue. The assumption that is incorrectly applied here is that 1% is easy to get because it is a small number. "
Rob is absolutely right. Here's another example of how stupid this thinking is: As of right now (10:00 EST on 31 December 2006,) there are apparently 6,676,771,700 people on Planet Earth. Assuming that roughly 50% are of the opposite sex, this means that one only needs to secure 0.00000003% of the "market" of available candidates in order to find a marriage partner! So this would make it dead simple, right? Of course not!
Strategy is a precise operation; business development strategy particularly so. It involves identifying with a great deal of focus, exactly the kind of clients that you want to attract, and then wooing them personally and individually by showing them what value they will derive from the relationship. (And then delivering that value!) This does not preclude general marketing approaches, at least to begin with. For instance, if I was wanting to attract clients interested in mountaineering, I might well publish writings on mountaineering, distribute material on mountaineering and speak at conferences on mountaineering. This, in the hope that those that I seek will like what I have to say and contact me and we can explore possibilities further. In romance, this would be akin to "hanging out in the right places." It's what happens thereafter that defines the nature of the relationship!
What I would not do is focus the message on how brilliant I think I am. This is as obnoxious in business as in romance and in both, leads to no more than one-night-stands.
I could go on, but instead let me refer you to a +/- 5 minute video clip on the topic, on David Maister's web site. David is not the first to equate business development with romance, I'm sure, but he does do it particularly well in the context of professional service firms.
Bottom line (in case you don't have the time to view the clip) : If you treat clients simply as a source of interesting cases and revenue, they will treat you similarly. [In my opinion, insulting them by making the whole pitch about how lousy they are, falls squarely into this category.] There is a crucial difference between the skill sets required to be good at one-night-stands, and being good at long term relationships. Only the latter leads to long-term sustainable business relationships.
The firm that I was referring to at the beginning of this post simply didn't "get" this. I don't expect them to be around for long.
The selling one widget to all 1.3 billion people in China (there are probably even more than this) has become such a cliche that I think I only heard it once in the last year and that was at a seminar. The newer China cliche is to sell to 10% of the middle class.
while we have all seen start-ups that misused chinese math in touting an investment chance, I have never seen any investor confuse such with the actual launch being easy.
Chinese Math is merely a condition precedent. If the potential market is not large enough to yield the sheer dollar size of sales and income necessary to make the investment work---forget about it