Making the Compelling Business Case

Decision-Making Techniques for Successful Business Growth

W. Messner

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137340573
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Providing the necessary background information and hands-on tools to build compelling business cases, this book will increase the reader's capability to champion new business development ideas, take them to senior management, and facilitate the decision process by understanding the key theories and practices of finance and corporate investments.

1

Deciding on Corporate Investments

1.1 FINANCIAL GOALS VS. CORPORATE STRATEGY

The primary objective of a business in today’s world is generating and maximizing wealth for its owners, shareholders, and stakeholders. These are the people who provide time, input, and funds to a business with the clear expectation of receiving the maximum possible increase in their wealth – given the level of risk they are facing by investing. Non-profit organizations, such as charities, museums, and schools, manage for maximum outcome and impact in order to make the most of their funding.

Several decades ago, being just a little more efficient than one’s local competitor might have been sufficient to reach this primary objective of wealth generation. But today, in order to survive, firms compete on a global basis, where the customer has access to reliable information via the Internet. This shift is critical for corporate investment decisions because it short-circuits the business focus on wealth generation; if businesses do not delight their customers with value-for-money products, service which exceeds customers’ expectations, and continuous innovation, customers will simply evaporate and the firms will ultimately die. Adding value to the customer and generating customer delight thus becomes a new strength that companies need to generate; it is the new corporate bottom line.¹

What does “deciding on investments” mean?

One would think that business leaders would give serious thought to their business and how they delight their customers by managing and deciding on corporate investments. But many well-known case studies used in business schools and MBA teaching recount stories about visionaries who thought that they saw the future, made bold decisions, and either got it miraculously right – or got it completely wrong.

Case 1.1 Investment in innovation at Apple

How Steve Jobs (1955–2011) led Apple to renewed success is probably today’s most over-cited example – and at the same time it was an extremely hard study because the subject never sat still for a case portrait, but kept creating and spinning out new innovations. Apple operates in a fast-cycle market in which its innovative capabilities are not shielded from imitation and where imitation can be very rapid and inexpensive; the company thus needs to be able to take the right decisions quickly. Constant innovation plays a dominant role if one is to succeed in such fast-cycle markets. Apple reported net revenues of $36.5 billion in 2009, $65.2 billion in 2010, $108.2 billion in 2011, and $156.5 billion in 2012.

Case 1.2 Investment in a product recall at Johnson & Johnson

Similarly, how Johnson & Johnson pulled all Tylenol capsules off the shelves in 1982 after the medicine had been deliberately contaminated with cyanide and introduced tamper-proof gela tin-enrobed capsules within ten weeks in order to ensure that it remained a trusted and top-selling painkiller in North America is another campfire story of corporate decision making.

In the space of a few days in September 1982, seven people died in the Chicago area after taking cyanide-laced capsules of Tylenol. Johnson & Johnson took the decision to invest $100 million in a recall of 31 million bottles of Tylenol and the subsequent re-launch of Tylenol. “Before 1982, nobody ever recalled anything. Companies often fiddle while Rome burns,” said Albert Tortorella,² a managing director at Burson-Marsteller Inc., the public relations firm that advised Johnson & Johnson. But Johnson & Johnson’s shareholders were hurt only briefly. Though the stock was trading near a 52-week high just before the contamination and witnessed panic selling, it recovered to its highs only two months later.³

Case 1.3 Ford Edsel – A wrong decision and a failed product

And how the Edsel automobile manufactured by Ford during 1958 to 1960 never gained popularity, because it was “the wrong car at the wrong time,” is a pretty much outworn example of a famous corporate blunder.

In the early 1950s, the US economy was recovering from the effects of the Second World War; workers earned more money, moved into suburbs, and spent more money on bigger cars. But many of Ford’s potential customers, wanting to upgrade, could not afford a Ford Mercury car and went to buy a new car from Chrysler or General Motors instead. Ford wanted to fill this gap with the Edsel automobile. A Special Products Division was founded, to be headed by a manager who had originally voted against the project, and generally staffed by employees who were just available (or as one says today, on the bench). Sales of the new car began in September 1957 and everyone wanted to see what the press had been speculating about: the showrooms were crowded. But few cars were actually sold, and the press turned to criticizing the design and the features. Quality issues and a problem with the availability of spares added to the woes. Two re-launches in 1959 and 1960 with significant changes did not help to drive up sales. Overall, Ford invested about $250 million on this attempt to increase market share in the medium price field; but in order to break even, something like 200–300 thousand units had to be sold each year. However, only some 110,000 cars were produced during the entire life of the Edsel experiment.⁴

What is the overarching lesson in business schools from the two success stories (Case 1.1 and Case 1.2) and the one corporate goof (Case 1.3)? Well, it probably is to go with your gut, except when it’s the wrong gut feel.⁵ Obviously, management vision and guru-like gut feel are not reliable techniques for making investment decisions in the corporate world.

Being serious about investments also means deciding between alternatives. Even Apple cannot develop all the product ideas that its leadership team is generating. Johnson & Johnson had to decide whether to recall the product and between several alternatives of how to do it. Ford had to make up its mind whether to pursue the medium price segment at all and how to go for it. Deciding on something therefore not only means to pass a judgment on a number of propositions and choose the right one, but also to cut off others. After all, the origin of “to decide” is the Latin word decidere and the phrase decido caput literally means to “cut off the head.” In an interview, Judith C. Lewent, the former CFO at Merck & Co., explained that “our success or failure in R&D won’t result from quality of our scientists alone; it will also come from the quality of our thinking about where to invest.”⁶

The term investment refers to commitments of resources made now in the hope of realizing benefits in the future. The most basic idea of an investment decision is thus to derive future benefits from costs today – or, if one prefers, costs invested in the most promising opportunity. The standard way of taking investment decisions in the corporate world has expanded this simple idea into a rich discussion of potential benefits, so-called “advantages,” “soft benefits,” or “intangibles.” But how on earth are uncertain benefits suddenly supposed to swing a corporate decision? Furthermore, in business lingo, there is a growing and most unfortunate tendency to equate financial goals with strategy.

A framework for good strategy

Generating and maximizing wealth, outcome, and impact are financial goals, and there is nothing wrong with them by any means: they are important for justifying the existence of any organization. But a coherent corporate strategy does not just set goals; it draws on existing strength and creates new strength through the coherence of its design. Even today, most organizations of any size do not (!) have such a strategy, but instead, they pursue multiple financial goals and unconnected objectives. And worse, sometimes these goals and objectives are even in conflict with each other.⁷

Strategy involves focus and choice. Focus denotes the identification of promising areas in which to search for opportunities; choice means setting aside some goals in favor of others. Many business leaders hope to avoid trick...