Shareholders, analysts and the financial media demand innovation and almost perpetual growth. Senior executives are increasingly judged by their ability to simultaneously convey vision, initiate innovation, generate new projects, identify and create new market opportunities, guard against adverse market trends and react swiftly and decisively to aggressive competitor moves.
As a result, many organisations push through bold strategies that leave observers scratching their heads. The risks are significant when executives can’t effectively explain their ambitions.
The danger is not about failing to effectively market a great idea but rather, when tight deadlines and forceful sponsors prevent gaps in the analysis being picked up, debated and addressed.
How can you sense check a strategy so that success is likely but costly errors avoided? Managers can use as a constant touchstone the following simple, but powerful, question as a formal decision tool: is the’ why’ greater than the ‘how’?
Firstly, we must be sure our proposal falls within the direction the organisation is heading. We should make sure we have fully understood our latest strategies, priorities and targets. This helps prevent fundamental errors early on. Reviewing strategic thinking could even reveal larger opportunities than we first considered.
This is easier if the organisation’s leadership is good at effectively communicating strategy. But even when this is accessible, they can often be broad or high-level. We should therefore ensure we have tested our understanding with relevant colleagues. A good indicator of future success is an organisation’s current operational performance and recent track record. Senior management’s perception of their own success or failure will also make a difference to their mindset and appetite for new projects.
What if we have not done as well as we would have liked? We should speak to the individuals directly involved as well as those with unbiased knowledge to try and understand what worked and what could hinder our project. A complex project may require our very best people and a greater amount of their focus than can be spared. There could be too many competing initiatives. Or, perhaps, while our proposed acquisition is a strong fit with long term potential, other factors might make it too risky to proceed. Provided the target is not being courted by competitors, perhaps it is better to add it to our watch list.
Will the results please our customers? This obvious question is often bypassed. There are three basic ways to create value: earn more, spend less or do things more efficiently. We must decide what to focus on and be able to explain why our project will do something meaningful towards that. Ask the following: is the problem big enough? And, when solved, will our solution involve us selling more to existing customers, or pitching to entirely new ones? What if the benefits are less tangible at this stage? Proceeding in order to gain market and product knowledge, develop new capabilities partners and test possible models is perfectly valid. The challenge then is to articulate the benefits effectively.
What exactly will we gain? We must be able to articulate the ideal outcome. It’s almost certain we’ll fail to interest others unless we’re convinced ourselves. Once we’ve projected the possible benefits, we must examine whether those outcomes are realistic when the available financial and human resource inputs encounter risk factors. In many ways, the most straightforward projects to assess are those that use some traditional corporate finance measurement to assess return on investment. However dynamic slides and complex financial models often prevent weak industry knowledge and risk weighting being challenged. Further, those with specific, relevant knowledge are often far removed from decision-makers or don’t feel confident challenging senior colleagues. What if the benefits are intangible? If we are proposing experimentation then it is harder to use a traditional justification. We may be able to effectively gauge potential opportunities, point to competitor moves or trends, but approval will largely depend on the budgetary headroom and vision of the leadership and the energy and credibility of the sponsor.
Why act now? We should be able to explain why failure to act now will threaten our current market position. There is often less risk in not being first to market. Competitors can react quickly and effectively, simply learning method and replicating gains without making large investments. The net result then could be restricted to temporary market share gains and, potentially, lower long-term industry prices.
Even if we are seeking to respond to a new functionality launched by a competitor, we must still be sure of why we can’t wait to see their market reception before initiating action. If the additional revenue gains are not large enough to win sufficient internal support over other opportunities, we may be able to point to other reasons that compel action now. Finally, if we can’t persuade others of the risks of not pursuing this course of action now, we should secure agreement to watch certain indicators and reconvene if things change.
Often, the source of innovation is not where the execution ability sits. We should identify which internal departments need to be involved – in any event, if our project proceeds, they are likely to hear about it if it impacts them. It’s better to learn from their perspective and insight early on. This is also important if we need both central corporate and local divisional sponsors, and it is unclear where the full cost should appear. Should we also consider which teams are best placed or required for the deal execution and post-merger integration? Do we have the necessary specialist local HR, finance and legal resources to flag issues and support the commercial deal team?
We should ascertain whether we have the necessary skill-sets internally to achieve the optimum outcome. It is expensive and risky to create an entirely bespoke platform unless the opportunity is large enough. Can we outsource some of the components involved? If, instead of developing our own systems, we can license underlying technology, it would allow us speed, flexibility and scalability. We may also immediately benefit from the network effects that develop around a well-established third party provider. However, it may be that we need to develop certain internal capabilities and these can’t be delegated for strategic reasons.
In a competitive trading environment with constant pressure to innovate, the project generation, review and approval process often involves only a few individuals. This may help focus, but it also removes valuable alternative perspectives. Project sponsors should actively seek alternative views and ensure relevant experts are consulted. It is useful if project sponsors show they have thoroughly considered alternative organic growth strategies to buying the target under consideration. The outcome will be to better demonstrate why those are suboptimal and a purchase as now requested is necessary.
We clearly need to have a strong project manager with a detailed plan and clear objectives. We also need sustained senior level engagement to ensure internal cooperation, regular coaching and even direct intervention when unforeseen challenges arise. An internal established but flexible structure to ensure all good projects are considered and execution supported by the senior managers who approved the project will help maximise the chances of success. Direct sponsor and, to some extent, senior approver accountability will help ensure the project benefits are not overstated.
Ideally, organisations should only do as many things as they can do well. Managers should ensure that they are exploring all opportunities that create value for the organisation. However, once a growth area is identified, the key as to which is the right decision depends on many variables and estimates as well as the judgments of senior executives. For example, large entrenched firms rarely shy away from buying small dynamic organisations to build capability quickly, acquire key staff or consolidate market share. However, we are constantly reminded that it is not easy (or certain) to improve your organisation’s position simply by buying another one. Managers would do well to use these simple questions to ensure they keep focused on what’s important and to help build their explanation as to why this is the best use of capital of the available options. This should help test and refine the underlying proposition, clarify the narrative of the pitch, assist in firing up an audience’s imagination, anticipate and handle possible pessimism and ultimately persuade others why they should invest scarce resources in you and your idea.
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