market share | CorporateIntel

If you’ve ever been in a planning meeting with me, you are familiar with this question: What does winning look like? This is how I like to frame decisions around initiatives we are considering. If we can define success in advance, we will know if we achieve it. If we have no idea what winning looks like before we commit resources to a project, how do we know if it was worth it once we deliver the work product?

We all know what winning looks like in sports. If one team has a higher score than its opponent, that team wins. Simple enough, but is it also winning if there were so many injuries in the latest game that half the team can’t play in the next game? What if the team’s coach coach delivers the win, but on a series of controversial decisions that damage team morale for the rest of the season? What if someone cheats? Some of winning is straightforward, but not all of it.

Let’s consider a working example in business.

Let’s say we have an idea for a new set of features we think we want to create for our e-commerce platform. One way to decide what winning looks like is a simple ROI (return on investment) calculation. Suppose the project cost is a million dollars. The first thing we want to do is get back that million dollars through incremental profits. Remember always that revenue is not profit. We have to take all our fixed and variable costs out of sales before we achieve a contribution to earnings. A million dollars of revenue does not pay back a million-dollar investment, but if our contribution margin on those sales is 20%, then we need an incremental $5m of revenue to produce $1m of incremental cash (presume that general and administrative costs are unchanged to simplify things).

Let’s say then we’ve articulated the minimum payback to break even we need on $1m of investment is $5m of incremental sales (that is, revenue we would not have received without the new initiative). Of course, no one wants to break even in business, we want a multiple of that investment back. Do we want 5x, 10x, or more? A lot of that depends on the scale of the business, but let’s say we want 5x our investment to call it a win. That’s $25m of sales generating $5m of cash for a 5x return.

The next question we might ask is how soon do we want that return. Some of that will depend on the numerous initiatives competing for investment. If two potential initiatives are evaluated to deliver the same 5x return, but one can do it in six months and one can do it in a year, I’d say we go with six months. So the cash we produce is important, but so is the time we have to wait to get it back.

Does winning end there? Is selecting an initiative solely based on return on investment and time? Seldom are those the only factors in play. We need to think about the strategic value of our initiative. Does it lift our customer count? Sometimes that is even more important than the incremental cash we are producing, particularly if we are focusing on the lifetime value of a customer. In this case we might set a goal that the new initiative increases our customer count by 5% in no less than a year. If we know what those customers are worth to us in the long run, we might go back and pick the initiative with the one year return on investment over the six month time frame if the additional customers we are acquiring are all the more valuable.

Another factor in winning might be market positioning in the competitive environment. Let’s say we’re convinced the feature we’re considering is something our customers have been requesting in customer service feedback, because no one else does it very well. Winning in this instance might be about acquiring market share above other metrics. When we launch the feature, if we see our online orders increase by 5% while a competitor’s volume stays the same or declines, we might call that winning, particularly if we can translate that gain in market share into higher customer count or improved lifetime value.

The point here is not to enumerate all the ways we might factor winning, but to force a robust dialogue ahead of committing to an initiative that builds a consensus around the work we will do together. If we collect data in advance, set goals for the improvement of key performance indicators (KPIs), ardently debate the relative merits of the various initiatives before us, and then make an informed choice, we can clearly measure the success or failure of the initiative. If we just reach to heaven for inspiration, how can we know if we won or lost?

Wise business leaders know that if we discuss upfront what winning looks like and then fail to achieve it, there is no blame to be assigned. We haven’t failed at all, we have learned in an experiment that mattered and held consequence. The argument is for better process management, to spend the time in advance discussing what winning looks like so we know it when we see it or don’t see it. Failure to invest that time ahead of committing resources to an initiative is indeed a form of failure, even if the initiative happens to succeed (how you know it succeeded when you didn’t address that in advance is another story entirely).

Don’t move forward without deciding what winning looks like. Crafting a thesis of the change you are trying to affect and the benefits you intend to bring establishes a benchmark for measurement. Insisting on this step early in product development will not only improve the odds of success, it will improve the teamwork and ability to share in the success a team creates together.

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Photo: Pixabay

You may have heard recently that Amazon is pulling back a bit on hiring and warehouse space. With all their vast resources in strategic planning, the executive team there overshot on leasing square feet their forecasts no longer support. I suspect they will manage through this just fine in the long run with little impact on earnings, but it is a powerful reminder of how difficult it is to predict future business both when you’re in an up-market and a down one.

We all get this wrong now and again. It’s normal and usually navigable. The problems come when balancing present challenges heavily compromises a company’s future, or betting only on the future sours a company’s current performance to the point where no one cares about the future.

I am often humbled by the nagging paradox of making tough business decisions every day at the relentless pace of 24x7x365. Running a company in response to everyday circumstances in the present will always be difficult, Running a company for an opaque future will always be daunting.

We have to do both well to accomplish our current goals and set the table for the next generation of growth prospects. Favor either the present or the future too heavily and the question becomes whether you want to lose now or later. While that’s not an option any leader wants to consider, if we don’t see the delicacy in how one affects the other, our intentions can be undermined by our outcomes.

We often hear about the pressures of being a public company, how corporate leaders make choices to focus on quarterly earnings from which they financially benefit immediately over building strong companies for the long haul. I do think this happens at some companies where short-term stock performance can dramatically impact executive compensation. Too often those companies fall prey to what Clayton Christensen famously has called The Innovator’s Dilemma and allow their long-established norms of success to be fully disrupted by more nimble competitors.

There’s a more ironic take on this notion, where equity markets sometimes forgive emerging companies for failing to produce earnings at all in the near term in the hope that someday they will have gained so much market share that they will prove invincible. This all-or-nothing strategy has paid off handsomely for companies like Amazon that didn’t produce earnings for years, reinvested heavily in their growth, and today reap the benefits of that bet. Sadly, this example has been exploited by too many newly public companies that don’t even consider near-term profitability a goal, allowing lazy business models to overshadow unfounded optimism that someday their customers will reward them with enviable positions.

A company that bets only on the future, never becomes economically successful, and runs out of cash can be train-wrecked just as decisively as a once successful company that fails to address The Innovator’s Dilemma. If the executives steering either of those failures happen to be selling shares along the way to a company’s demise, a feast of lawyers will follow.

Inflation and rising interest rates make the cost of doing business higher for everyone. We painstakingly decide how much of these costs we pass along to customers and how much we absorb. The benefit of preserving current operating margins is always tempting, but the rewards of long-term customer loyalty and lifetime value speak for themselves. How do we decipher the balance between current and future financial results? Data will often shine a light on the path, but there are no conclusive textbooks with clear answers to these calculations.

It truly is hard to run a company both for today and tomorrow. We have to consider the staff sizes we need, the leases we’ll require, the stability of our supply chains, price elasticity, and the promise of our brands. We also carefully must watch cash flow, our balance sheets, compensation, incentives, technology advancements, and investments in future product cycles. What works today may or may not work tomorrow. It is seldom that what works perfectly in one set of conditions works just as well in another.

There are no perfect answers, but the fluidity of making a decision now for its short and long-term impact usually weighs heavily on those who wrestle with the impossible crystal ball.

Covid-19 has been a good reminder of how difficult and daunting decisions can be. We were all blind during Covid and it was easy to misread fluctuating data. No leader had substantial experience with stay-at-home working conditions. No one knew how long the pandemic would last, how it would impact supply and demand, or how it would impact investor sentiment. If that wasn’t enough of a challenge, most of what we thought going into Covid proved to be wrong, and most of our assumptions about how employees, customers, and investors would behave post-Covid have been equally wrong.

If you want to be humbled, try making decisions that address the unknown with this level of frequency. You’ll likely realize you’re wrong more than you’re right, but the less tangible skill we develop is how to rethink and react quickly when we discover we are wrong. That’s why the rewards for creating a company that is “built to last” are immense, but the odds of lasting fifty years are long.

When it comes time to decide short or long, know you have to do both, and do your best you to keep dialogue and debate flowing among diverse opinions. The decisions we make have an impact we might be able to see today, but unless you know someone who has a gift the world has never seen, we are almost always speculating on the impact a year or more from today. Sometimes it’s decades before we find out if we were right or wrong.

We choose to sign up for the difficult and the daunting. The longer I do this, the more humbling it is.

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Photo: Pixabay