Strategic Planning - part 2, key definitions to understand how I think

So I was thinking, “a dangerous past time I know…” some will get this reference other’s won’t. Anyway, back to my thoughts, machinations or schizophrenic apparitions. After I wrote the last blog entry it occurred to me that flipping, wholesaling etc. could be considered a strategy based on the context of how the term is used and how the individual is working to accomplish their long term goal. Or, it could be considered a tactic which, when defined, states it is an action or strategy carefully planned to achieve a specific end. It all depends on where it falls within the grander strategy that one develops. By the way, if you want a good book on strategy, Good Strategy Bad Strategy: The Difference and Why it Matters by Richard Rumelt is a great book to read.

Now, back to the subject at hand, completing the definition of terms I use when developing my strategic plan. As a review of the terms, they are below and I left off at End State.

Current Operational Environment (COE) – combination of the conditions, circumstances, and influences which will determine the use of resources and help an investor make decisions

Ends – Goals or Objectives

Ways – Actions taken expressed in verbs

Means – Resources and Requirements

Goal – Long term end result, broad in scope, general in nature

Objective – Short term, narrow in scope, specific results, measurable

End State – Primary goal; conditions that establish completion of the primary goal

Decision Point – A point in time and space where the leadership anticipates making a decision concerning a specific investment course of action

Critical Requirements (CR) – Essential conditions, resources and means

Critical Vulnerabilities (CV) – CRs or components that are deficient or vulnerable to neutralization

Strategy – A plan of action(s) or policies designed to achieve a major goal

So let’s finish this up and discuss the last four terms, first up, Decision Point.

This is really fairly simple and will be interspersed throughout your plan. In essence, it is an event that occurs based on your planned sequence of events that warrant a decision to take an action. Below is a diagram to help you understand this concept.

If you will notice, this decision point is based on time i.e. if the house has sold within three months of being on the market I make a decision what to do next if it sold or what to do with it if it has not sold. There can be multiple sequels within a decision point or, there can be a branch plan which is basically a contingency plan. Now, there is a difference between a branch and a sequel. Let me put it in simplistic terms as the definitions are very similar.

Branch plan – contingency option built into the basic plan and is basically a change in the mission or direction of the plan.

Sequel – a major operation that follows the current major operation and is based on possible outcomes of a plan.

Sound like the same thing? See the illustration below.

In this illustration we are completely changing our direction and mission from an active flip methodology to a buy and hold methodology. This constitutes a branch or contingency plan. In the sequel, I am now buying two houses based on successfully selling the one I just did a rehab on so I am executing another major operation that follows the last major operation. Could renting the house be a sequel? Absolutely but, only if I follow it up with another major operation that supports the main plan. So, if you take the two bubbles with “Buy Duplex” and “Rent Duplex” and change those to reflect the bubbles above you have changed it from a branch plan to a sequel. Remember, a sequel is based on possible outcomes and is designed to address the outcome in a manner that will allow you to continue on with your base plan. 

A branch plan  on the other hand, completely changes your path. In the example above I decided to change my plan from flipping to buying and holding to reach my goal. If I just rented this house but then went out and bought another house to flip I am still moving forward with my primary plan and have NOT change my direction. Another way to think of both of these concepts is exit plan/strategy. Both are ways to structure your exit strategy based on your COE and risk tolerance. 

I know I went into a couple of terms that were not on the original list but I think it was important to cover them so that you understand how I think. Moving on to the next two terms, Critical Requirements and Critical Vulnerabilities or CRs and CVs.

Again, I will try to keep this simple and translate them both into real estate investment terms or examples. A CR has one primary word in the definition, “essential.” In short, if this condition DOES NOT exist, you cannot move forward. For example, you want to start real estate investing and live in a small town. You want to keep your investments local so a CR would be properties available for sale. If there is not a single property that is available for you to buy you cannot execute your plan. A CR for my plan was Education. I can’t begin to execute any type of investment plan if I was not educated enough to know what I was getting myself into, what methodologies existed to buy and sell homes and a profusion of other things that I felt were required for me to know. Each CR may be different and they are defined by your COE as well as your tolerance to risk. This doesn't mean that you and I can't have the same CR, on the contrary we may have some that are exactly the same but, we will also have CRs that are completely specific to our situation. 

So what then is a CV? As the definition says, “deficient or vulnerable to neutralization.” In the previous paragraph I provided the CR of properties available for sale. If there are no properties available it is a CV by way of being deficient. If there are very limited properties available and it is a sellers market, it is a CV by way of being vulnerable to neutralization. In other words, the CR or component could change to a deficiency. Now, when developing CVs you must look at it realistically. Would my CR of education perhaps qualify as a CV? Nope, there are way too many books, blogs, podcasts, videos etch out there that are available. So what would be a good example of a CV? Many military courses offer the example of the Greek mythological story involving Thetis and Achilles.

“Thetis the goddess took her son Achilles and dipped him in the River Styx, to make him immortal. The current was so fast she was forced to hold him by the heel, which remained untouched by the magic waters. So by the heel alone could Achilles be wounded by ordinary mortals.” (Understanding Centers of Gravity and Critical Vulnerabilities, Dr. Joe Strange & Richard Iron, http://www.au.af.mil/au/awc/awcgate/usmc/cog2.pdf)

I never met anyone who didn’t at least understand the term Achilles heel as it implies a critical weakness or vulnerability. I think if we were to apply this to real estate we could say contractors can be a CR AND CV! Consider the fact that even if you have a contractor, something could happen that causes them to quit in the middle of your project. This is definitely bad juju! The importance of both a CR and CV is to help you develop risk mitigation strategies by playing the “what if game.” In other words, you list contractors as your CV, here are the “what ifs:”

What if the contractor quits in the middle of the job?

What if the contractor tries to charge for out of scope work?

What if the contractor doesn’t show up?

You can go on and on and create a laundry list of “what ifs” but, as stated earlier, you do need to be realistic. Once you have viable “what ifs” identified these are now your risks. When you know your risks, you can plan for them and develop tactics to eliminate or minimize the risk from occurring or when it occurs. This will exponentially increase your chances of success  and will help you sleep at night.

This brings us to the last term, Strategy. I mentioned the term tactic earlier, what’s the difference? Scope. A tactic is normally associated with smaller actions intended to achieve intermediate objectives. Remember the stair step illustration of my last blog? I laid out intermediate objectives (IO) that got me from my COE to my ultimate goal. Let’s take “Buy a House.” This is my IO but how do I accomplish this? Let’s list some tactics I can use.

1. Find and use a realtor

2. Search public records for floreclosures

3. Pay a service to provide probate leads

4. Drive around neighborhoods looking for distressed properties and send the owner a letter

These are all tactics that I can use to achieve my IO and they can also be called strategies but at a low level. For my purpose, a strategy is the way I accomplish a major goal. Think of a chess game, a player’s strategic goal is to win. The moves he makes during the game are tactics to achieve his overall goal of winning. These tactics may support specific IOs that he has e.g. take out the opponent’s knights or take out the opponents rooks. Now, expand the player’s strategic goal to winning a tournament. Now his IOs are to win games against other players and he creates minor strategies for each opponent and varies his tactics based on how his opponent plays.

Strategy for me encompasses all of the tactics and sub strategies that are developed and executed to achieve my major goal. What is important to understand is that although my strategic goal may not change, my strategy to achieve it might. A strategy is like a road map, it guides you along the way, is measurable so you can see your progress and, most importantly, is adaptable as things change. Don’t get fixated on a single approach that you think you cannot waiver from. Remember the discussion of branches, sequels and decision points? These are all potential changes to your overall strategy. Ultimately, if a developed strategy isn’t working, it is time to re-evaluate it and adjust it. This may require that you re-look your COE as things may have changed but, as the saying goes, the definition of insanity is doing the same thing over and over again and expecting different results. Don’t let yourself become this definition.

This finishes up the list of terms that I consistently use when I develop my strategies and can serve as a reference for you as I delve into the next piece of my journey, defining my COE and End State. Please feel free to ask me any questions or argue anything I have written. Dissension is only negative if it cannot be discussed. I enjoy a good discussion from a different point of view and although we may in the end still disagree, we have still gained an important education in how someone else may think and feel. This ultimately makes us better and smarter as we strive forward in our lives.