Challenge 2008: Creating and Retaining Value in Uncertain Times

By Don Creswell, SmartOrg Inc.

Businesses face the most uncertainty since the dot.com bust and post-9/11.

A downturn is definitely upon us. How long will it last? How deep will it go? How will it affect your business? What impact will the fall elections have on your sales and profits?

No doubt about it; the business climate is as uncertain as anytime in the past decade.

Even in the best of times, 40 to 60% of projects or new products fail. When times get rough, you can bet that this ratio will worsen unless you take action now.

Try to avoid the temptation to cost-cut your way to profitability. Cost-cutting can only go so far. If tough times persist, this is a sure path to a downward spiral in sales and profits. If you must cut costs, focus your activities on preserving value rather than making sweeping budget cuts.

Value needs to be your primary metric. Examine each project in your portfolio. Carefully evaluate the economic value you can expect from each with particular attention paid to understanding how risk and uncertainty can impact this value. This understanding will enable you to take steps to mitigate downside risk but, more importantly, direct efforts toward capturing higher upside values. To avoid draining valuable resources, take early steps to kill projects.

Tornado Charts like the one below help you make decisions about where to apply your resources to effect the highest return. The chart shows the impact of uncertainty on each variable in the business model and its impact on NPV (Commercial Value). In this example, Competitor1 Entry Date has—by far—the most impact on value. Get to the market first and it’s worth some $80 million.

To compare the relative value of each project, you need to answer two questions: what is the probability that we can do it (achieve technical results)? If we can do it, how much is it worth? When you have answered these questions, develop a four box matrix like the “Innovation Chart” below, plotting the Probability of Technical Success vs. the Commercial Value Given Success. The plot will provide information you need to determine which projects to fund, redirect or kill based on the expected value to your company.

In the example, there are many projects grouped in the lower left quadrant (“Low Probability of Technical Success” and “Low Expected Commercial Value”). These projects need management attention: redirecting or killing to free resources to work on more valuable projects. To develop a baseline for comparison, plot each of your current projects on an Innovation Chart. You will most likely see many opportunities for improvement. As time passes, plot the migration of each project to determine if it is gaining or losing value and take the appropriate action to balance your portfolio to provide the best chances for producing the highest possible value.

In summary, it is always best to focus on value as a central measure to guide decision-making. It is essential to focus on value in tough times, when simply cutting costs can drain value and even be lethal to the business.

For a detailed discussion of Value-Based Management review chapters 9–11 of “The Smart Organization: Creating Value through Strategic R&D”, co-authored by SmartOrg founders David and Jim Matheson. The book is available through Amazon.com and from SmartOrg www.smartorg.com or by e-mail to info@smartorg.com.