During the past 3 months, we have developed and evaluated a set of business renewal alternatives. Now you must align your leadership team behind the new direction and actually make the best renewal decision.
There are two steps to choosing the best renewal alternatives. First, evaluate how each of your alternatives rates on each of the value measures you care about. Second, obtain leadership commitment to the chosen direction.
Evaluating your renewal alternatives
For the most part, organizations need little help with the quantitative evaluation of their opportunities. Whether through the use of spreadsheets or financial evaluation packages, management knows how to calculate financial metrics such as short- and long-term cash flows, Net Present Value (NPV), Return on Investment (ROI), and Economic Value Added (EVA).
But there are two topics that are critical to the evaluation of renewal alternatives that are typically less well understood. They are the impact of uncertainty and the evaluation of non- financial value measures.
Impact of uncertainty
Organizations crave certainty. The problem is that the future consists of uncertainties. Study it as much and as long as you like; you’ll never come up with an absolutely infallible answer as to what the future holds. All you can do is understand the true range of the uncertainties you face.
Consider what goes into engineering cost estimates. The typical standard for accuracy is plus or minus 10 percent. If the actual cost comes in within that range, you have done your job. Organizations can lock in quotes on materials and equipment to further reduce uncertainty. So getting to within plus or minus 10 percent is within the realm of possibility for routine cost estimates.
But the same is not true for estimating marketing uncertainties. Suppose you introduce a new service. It could be a dud and sell almost nothing, or it could skyrocket. The underlying uncertainty is no longer plus or minus 10 percent. Instead, it might be plus 300 percent on the upside and minus 85 percent on the downside. If that is the real range, how could you give a plus or minus 10 percent estimate on projected sales and keep a straight face?
Companies often underestimate the risks that go along with their renewal initiatives. Because they underestimate the uncertainty they face, they also undervalue flexibility and contingency planning.
Incorporating the impact of uncertainty is particularly important for renewal decisions because such choices have wider ranges of risk than do operational uncertainties. You have years of accumulated data and relevant experience to reduce your uncertainty on operating estimates. But you probably have little or no relevant data about your renewal alternative.
If you think about uncertainties (both on the upside and on the downside) as ranges rather than specific answers, you’ll change the questions you ask. The answers arising from these questions lead to new insights. For example, consider the following:
- Given the renewal uncertainties you face, should you add capacity before it is needed so you can handle fast growth, or should you hold off and add it only after demand has been demonstrated?
- What can you invest in today at modest cost that would enable you to triple your investment six months faster than you otherwise could if the renewed business really rakes off?
- How long will it be before your renewed line of business is made obsolete by competitors launching products with more attractive value propositions?
Take for example, a family-owned company with professional management. Draw a table with 6-10 rows and four columns. In top row insert the players. In this case, it could be family owners, executive team, next generation and workforce. In the rows insert the wants of each player, starting with the most important on the top row. Typically, you can define 5-7 wants of each player. (For owners, it can be steady cash flow, be there for the next generation, don’t tarnish the family name etc)
Note that not all wants are consistent, either between players or even within a single player.
Once you have identified the players’ objectives you can use the criteria to revise your choices so that they deliver more of what people wants.
It is a hard truth that not everyone will get all of what they want, and in some cases, they will not get any of what they want. For example, the workforce wants job security and competitive pay. By competitive pay, they mean wages that compare favourably with those of other Sri Lankan workers in the industry. But if the organization is now in direct competition with Chinese or Indian labour, competitive pay may not mean what workers think it means.
Use your decision criteria to evaluate your renewal alternatives. This will involve both quantitative and qualitative assessments. Some criteria (such as cash flow and competitive pay and benefits) lend themselves to credible quantification. Other criteria will be more difficult to quantify and are best ranked qualitatively. In our example above these include the ability to build competitive advantage, the ability to attract and retain top talent, the balance between authority and responsibility, and work/life balance.
Preferred renewal alternative
By this point you have developed and evaluated a set of renewal alternatives. Now you must align your leadership team behind the new direction and actually make the renewal decision. Like the Commit decision made between Rethink and Reinvent, you must make the renewal decision a high-quality choice. Remember our red-yellow-green method! Before you choose your renewal path, each of the seven attributes that are part of this decision need to be green.
As a final test before committing to a renewal alternative we suggest you think about the following list of common decision traps:
Anchoring - Did you “fall in love” with your first idea for renewing the company! Have you let this blind you to other ideas?
Settling - Did you consider the full range of alternatives from mild to wild, or did you just stop at mild plus?
Confirming evidence - Did you see only what you wanted to see? Have you collected “evidence” that supports only your favourite idea for renewal?
Groupthink - Did you listen to dissenting points of view, or did you staff the effort entirely with those who already think the same way as you?
Unintended consequences - All decisions create new problems. Have you tried to envision the kinds of problems renewal might create?
Sunk cost- Are you moving forward simply to protect all the time and money you have already invested?
If you have fallen into one or more of these traps, go back and rectify the situation before committing to a renewal alternative.
The decision about how to renew your business is a rational one, but it must take into account emotional and cultural perspectives as well.
If you neglect the rational perspective, you will have trouble selling your solution to your board and the market.
If you neglect the emotional perspective, you will obtain surface agreement but not the deep commitment you need for successful execution.
And, if you neglect the cultural perspective, you will have a difficult time getting everyone to pull in the selected direction.