The Hidden Secret that Drives Big Firms to Conservative Choices


I struck up a conversation at a conference last month with a C-level staff leader in a publicly-traded firm that has come under some real pressure for being conservative in its approach to growth.  We were able to carve out a few quiet minutes so that she could pick my brain on decision-making processes I see across my client base.

The more we talked, the more I started to discern from her description of the symptom that it was less a problem with the decision making, and more a problem with the fundamentals around how the context was built to make those decisions.  Firms that have grown into the first stages of maturity commonly grow robustly as they niche into their market and find valuable ways to serve specific clients with modest amounts of customization to the core product line.  But there comes a day, when quite subtly, those investments don’t pay off as well.  This turning point is easily missed, and the deeper you get, the more pressure the P&L will come under.

The reason for this is that incremental innovation is locked into many firms through a blind spot that is a variant on the old quip, “those that have the gold make the rules.”  In this case, it could be restated that those with the biggest P&L contribution were taking up more than their fair share of influence when it came to making the decisions on what projects would be moved forward.

This is a significant issue and is not something easily discerned, except to those close to the firm who always understand these unwritten rules.  For instance, I would suspect that the mobile phone team at Samsung has a lot more sway on the display technology than the laptop group.

Not taking this issue on at the corporate level leads to some very significant negative outcomes down the road.  Think about HP’s printer business, which “printed money” for many years, then one day, minor product variations that product managers had consistently been able to use to drive new revenue and ink sales slowed down.  The first wave of bad news is usually bad news for shareholders, followed by downsizing for the support teams and real pressure on the boards of directors.

Because this issue starts subtly, there is usually a delay between the issue and the negative outcome.  Many times the firm has its attention on unrelated (think bright shiny objects) new markets, and ignores degradation of the core market too long.  A current example may well be the Adwords business for Google.  By the time this kind of thing hits the earnings, there are some deeply embedded issues that lead to major disruptions (i.e., layoffs and restructuring) for many really solid contributors that were over managed and under led.

If the leadership team still has control, there are real steps that can bend the curve and get things back on the right track.  The work for this issue starts with the C Suite’s recognition that they have an issue.  If that threshold has been crossed, the next step is usually some diagnostic work to get an objective view of what they are working on from a risk and reward perspective of short, medium and long-range horizons.

The good news is that the diagnosis here is usually pretty objective once you know what to look for.  The first point of analysis is the look at the contribution margin by product or service, usually be customer and geography.  This will quickly identify the return on investment for each significant release.  It is quite common to find that contribution margin has eroded to break even or result in a loss over time.

The second activity is to map out the programs on a risk and reward matrix for the forward-looking investments.  The typical outcome here is that there will be cluster of points near the low risk, low reward quadrant.  By harvesting some of those investments to deploy in areas with better projected outcomes, you can start to move the needle on contribution margins.

Now the Deeper Work Begins

I find that the real work is not in dialing down the influence of the “big dog” P&L owner, but to significantly build the background of the leadership team to be able to assess and make independent contributions to the decision process.  I have been using a three-step process that calls everyone out of the shadows, allows for great, clarifying external opinions and finally enables the team to come to a real, short and workable list of investments that will move the needle.

The basis of this work revolves around two key principles:

  • The first is cycles of divergent and convergent thinking.  In most highly-operational firms, there is an emphasis on “one and done” short listing and decision making.  That works great when everyone is on the same page with the same experiences and data, but breaks badly in the world of new growth decision making.  
  • The second is using monte carlo tools rigorously, in that the price of entry into the decision making room is to have done your individual homework and made a decision based on your own study and viewpoint.  Using this kind of rigor is one of the quick ways to move beyond single viewpoint thinking to accessing the richness of the team’s background and experiences.

These two concepts are strong enough to move the pattern to real risk and reward decisions that will allow the firm to have the returns that all the stakeholders need – not only for investment returns, but also to attract and keep quality talent as well.

What if you are the Founder Owner?

A specific version of this issue occurs when a firm has reached maturity under the guidance of the founder owner.  As the company and the market becomes more mature, the intuition that guided the early work is less valuable, while at the same time, the importance of analysis and pattern matching is becoming more important.

The guidance for this person is to seek out a strong external forum or group – sometimes a board, sometimes a group of geographic peers – that can provide the challenge function I described above.

Wrapping Up

There is an old adage in the strategy business – beware of building your viewpoint on one expert while suspending your own insight, because they can take you right over the edge of the cliff.  To build robust decisions and portfolio of projects, get your full team, fully involved.

If you’d like to talk more, please give me a call at 847-651-1014 or use this link to set up a 20-minute (no strings attached) consult.

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