When ‘Strategic’ Means “We don’t have a clue”

I frequently hear people say “This product/service/business isn’t making any money, but it’s ‘strategic’.”

When used in that sense, ‘strategic’ is frequently a code word for something else, such as:

• This thing is losing money –and we don’t know how to make it make money.

• We know it isn’t making money and it never will – but we just don’t have the guts to stop it or to do something different.

In other words, we don’t have a clue.

The only way it’s a valid statement to say “We’re not making money (yet) but it’s strategic” is if you can also say “We do have a clear rationale for why we’re doing this.”

For example:

• We’re doing it to learn certain things; or

• We’re doing it  to create a particular barrier to entry (in other words, it is subsidizing the rest of the business by creating a defensive barrier); or

• We’re doing it because it complements a product or service that our customers buy as a whole.

If you can articulate that rationale, then it may be fine to say, “As a whole, it’s not as profitable as it could be (yet).”   But you must think that through and not just label it ‘strategic.’

The important word in these statements is “yet”.  It is appropriate to invest today in uncertain endeavors with a sense of how it will position you to make money in the future.  In these cases, while a part of a business may not be profitable yet, it is ‘strategic’.

For example:

• A manufacturing client spent a few years in China just trying to figure out how to do business there.  They weren’t making any money at the time, but they had to invest in that learning curve to figure out what to do.   In effect, they were investing in an option for a future business, not necessarily a current business.

• A client who is a distributor serves both a retail segment and a commercial segment.  The commercial segment is much more profitable (technically in terms of throughput or contribution margin).  The question then became:  Why stay in the retail segment at all? Their reasons were two-fold.   One, to be able to get better wholesale pricing by carrying a full line of products from their suppliers and reaching volume thresholds.  Two, the retail segment provided extra convenience for their customers to be able to purchase commodity parts through a one-stop shop.

The lesson here: If you find yourself saying “this is strategic” – but you’re not making money now from a business activity, you need to articulate a clear rationale for why you are doing it and how it links to profitability in the future.  Or else don’t do it.