The 2nd in a series of 10 devoted to the analysis of the work of an eminent thought leader in value creation in private corporations.
Principle 2: Make strategic decisions that maximize expected value, even at the expense of lowering near-term earnings.
"…A sound strategic analysis by a company’s operating units should produce informed responses to three questions: First, how do alternative strategies affect value? Second, which strategy is most likely to create the greatest value? Third, for the selected strategy, how sensitive is the value of the most likely scenario to potential shifts in competitive dynamics and assumptions about technology life cycles, the regulatory environment, and other relevant variables?"
The first point refers to the ability of management to create choices for their firm. This is something that is often overlooked as management look to fight fires and appear decisive. This is ok if you have sufficient resources to hide your short-sided viewpoint on decision making, but for social enterprises the decisions are often complicated by acute policy and customer shifts. This is where decision tree analysis comes in handy. Yes, you can buy or obtain fancy decision making software–but a piece of paper and a pen work just fine as well. In simple terms, decision tree analysis is the drawing of potential outcomes to a scenario with weights associated to each outcome. The idea is to determine as many possible outcomes as possible to make your tree as robust as possible. The end result is sometimes eye-opening with a myriad of different approaches coming forward. Other times it is a 10 minute exercise to validate your intuition or quick calculations.
The second point is a bit more difficult for social enterprises: value is a combination of mission delivery and financial sustainability. I would recommend to lean towards the financial value creation as it enables you to choose how and when you delivery on your mission. However, some instances, perhaps an acute issue with a mission recipient or simply the desire to stick to your mission at all costs can temper this decision. The trick, which can be explored in the first point above, is to take the time to determine the right balance for your social enterprise. A fundamental approach to value determination, as pointed out in the article, is helpful: take the value of each outcome and multiply it over the expected lifetime of the outcome–that is your value. (You can come up with monetary or other values for your social mission to keep this calculation scientific.)
The third point is most acute in social enterprise. Many social enterprises rely heavily on policy and large quango actions. For those that do, a proper risk analysis should suffice to check your decision. For those social enterprises trading more closely to private sector models, look to your customers (how will their buying be affected by your decision, how will their buying be affected by external forces- interest rates, season, etc.) and your competition (how will they respond, can they respond, will this call attention to your stealth like efforts to draw customers).
It’s easy to say: wow, that sounds like a lot of management consultancy speak. But, it is also easy to make great mistakes in the blink of an eye. Making sound decisions for the longevity of your firm must be focused on creating value and not simply price/cost. Any other view will ultimately lead to the underperformance or demise of your organisation.
Think. Think again. Then act.
Resources:
1. H. Brightman, Problem Solving: A logical and creative approach, Michigan State University Press (PSLCA)
2. Treeage
3. “Delusions of Success: How Optimism undermines Executives’ Decisions” HBR, July 2003, Dan Lavallo & Daniel Kahneman
4. Financial & Strategic Management for NonProfit Organisations, 3rd Edition, Herrington J Bryce, Jossey-Bass Press 2000.
5. Decision-eering
6. Harvard Business Review (Subscription Site)
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