Driving to Yes or No; How to Reach More Rationale Business Investment Decisions

Business investment decisions and strategy choices get so complicated. At least we like to make them that way. It justifies the large salaries and tremendous amount of time that goes into PowerPoint slides and Excel models. I’m not really that cynical, but when you’ve sat through as many PowerPoint death marches that end with a recommendation to invest and you’re not sure what you’re investing in, you get a little jaded.

 

In my prior life working on corporate and business unit level strategy at 3M several of us got turned on to the work of Rita Gunther McGrath as well as some excellent work from the Corporate Strategy Board in this area, primarily a 2003-4 report entitled “Strategic Assumptions Prioritization” that focused on Air Products corporation. McGrath is well known for her work on entrepreneurialism and growth. Her 1995 Harvard Business Review article “Discovery Driven Planning” proposed a useful (to those of us who bought in) and compelling model for how to think about prioritizing and shepherding a portfolio of growth opportunities to kill/launch decisions.

 

Often, internal capital allocation decisions and “bake-offs” between ideas can lead to PowerPoint template hell. Lots of disconnected slide or excel workbook templates that only apply to certain opportunities, not to others and the resulting desultory compliance in generating useless “analysis”. We asked ourselves: “how do I make the process genuinely useful and also more ‘fair’ as we looked at unlike opportunities (i.e.: a product vs. a service)?”

 

Based on our research and own internal needs, we devised a process based on several key steps. The first was defining a “reverse P&L/income statement”, the second was documenting the most important assumptions that drove economic success in the reverse income statement and third was conducting research to better understand the accuracy of the key assumptions and refining them as you better understood them. McGrath’s article in HBR nicely describes this and I’ll summarize in a minute.

 

The major shift for the business I was in was institutionalizing this at a business unit level and better preparing executives to challenge teams’ assumptions and also be more equipped to evaluate unlike opportunities fairly in a common process.

 

I’ll summarize the challenges, basic principles and then offer a quick summary of my experience with this at both a business unit strategy level as well as

 

Challenges and rationale

1.      Most business evaluations are set to get you to an ROI or NPV type assessment early on. For truly innovative programs, this is almost impossible. You don’t know what you don’t know. The result is that better understood opportunities (i.e.: “easier” ones) always float to the top.  Air Products (the subject of the CSB report) developed a new method for evaluating these more challenging opportunities.

2.      Many losing propositions get launched and fail for what I think of as “knowable unknowns”. You could have found out cheaply if you had really tried.

3.      Knowing what to focus on can be hard. Everything seems important at first.

 

Principles

1.      Define success as specifically as you can up front. This can mean revenue, profit margin, market share etc. Make it tangible.

2.      Write down all the significant assumptions and then rank their importance and “known-ness” (i.e.: certainty vs. uncertainty) to achieve a loose prioritization.

3.      Build a plan and timeline around the most important assumptions.

4.      Focus research and efforts on cheaply and effectively validating and invalidating these assumptions.

5.      Be creative in finding “proxies” for your assumptions.

6.      Pilot/test ideas quickly to learn about assumptions that can’t simply be “researched”, but do it efficiently.

7.      Never, never, never forget that a good plan with a bad team won’t succeed. Planning is no substitute for talent.

 

Benefits

1.      It much more clearly surfaces the key assumptions for everyone involved. Some programs get killed almost immediately once you agree on a key assumption and it doesn’t pass the “laugh test”. Other “far out” ideas become reasonable when you see the assumptions and say “we could do that!”

2.      This process is good at allowing flexibility across opportunities. Assumptions can be very different and get you to “apples to apples” comparisons.

3.      It forces you to more clearly articulate a “thesis” for the opportunity.

4.      It clearly aligns with gate-based decision processes. If you think generically in three phases (idea, pilot and launch) this gets you through them. An initial list of assumptions w/ a reverse P&L for $100 million may need a brief discussion to get $50K in seed funding to increase confidence that yields $1 million in pilot funding and the pilot will give you clarity on the potential $15 million investment required to scale. The process should be systematically reducing doubt as you move through the process.

 

My next post will be on my experience both at the BU strategy level and as an internal entrepreneur going through the process with a growth venture.

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4 Responses to Driving to Yes or No; How to Reach More Rationale Business Investment Decisions

  1. Hey, Phil –

    Thank you for the real-life examples of the usefulness of some of the tools and approaches. You may be interested to know that we have a brand-new book coming out. Discovery Driven Growth links the corporate strategy issues with the more detailed planning approach you cite in your post.

    See the web site: http://www.discoverydrivengrowth.com
    All the best – Rita

  2. Rita – I saw that as I was writing and smiled at the coincidence. A friend of mine who leads strategic planning at a medical device firm and I were just revisiting this work last week as he prepares to refocus his business managers and getting quickly to practical results. We both feel some version of this approach radically improves results if faithfully followed. I teach it to my students here at the Carlson School whenever we are looking at go/no go type decisions for clients.

    Thanks for your thoughts.
    Phil

  3. […] the big questions were and also worked through a reverse P&L as well as assumptions list (see last post).  Among my major assumptions (in no particular order) were that 1) we could develop the skills […]

  4. […] I have seen this at multiple steps in my career. People get too excited about big numbers and fail to dig deep enough to understand key market drivers, assumptions etc. I have written on effective planning techniques to avoid this in past posts. […]

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