In Stage 1, cost is the primary focus for decision-making for a number of reasons:
- The available resources for spending are limited.
- The time horizon the management team needs to focus on is short.
- Decisions involve areas (customers, markets, people) that the leaders know relatively well.
- Course corrections (wrong person, customer, etc.) can happen quickly with a small team and relatively small commitments.
Many of those characteristics change in Stage 2, and now:
- The company has more resources, and can engage in activities it needs to and wants to do.
- As survival of the company becomes assured, a longer-term horizon becomes more useful.
- Decisions involve areas that the leaders do not know well.
- With more complex organizations and bigger investments, course corrections are harder to manage after the fact.
As a result of all of those factors, it is important for second stage leaders to be focused on ROI, rather than cost.
Key to embracing ROI as a decision tool is a realization that in Stage 1 it is often more effective to act and then assess, while in Stage 2, it is usually more effective to assess and then act (depending on the leader and culture, some companies prefer repeating cycles of Ready Aim Fire and some prefer cycles of Ready Fire Aim – either can work).
Of course, ROI is a much more complicated question to answer than cost is. Forecasting ROI often involves understanding the business’ current situation (including hidden forces and costs) in some depth, clarifying objectives, learning about new subjects, aligning a range of stakeholders – and doing all that in a reasonably uncertain environment. Managing all those factors is hard! And, it takes time and effort.
But the payoffs for the additional effort to understand ROI up front are dramatic. They are most clearly seen when ROI is not used as the basis for a decision. In the work Phimation has done for Stage 2 businesses, we have seen businesses consume 10 to 20 percent of their annual revenues on initiatives that did not get the proper vetting ahead of time – so they spent millions of dollars on R&D, new markets, partnerships, new executives and other important investments with nothing to show for it – or worse, a weakened financial position, lowered staff morale and productivity, or a damaged reputation. That can take several years to recover from.
Using ROI for strategic decisions forces Stage 2 leaders to acknowledge the complexity that is involved in their businesses and in important decisions and forces the leaders to plan out – before a decision is made – how to address that complexity, so there is a clear understanding of how the initiative can be successful…or that it should be abandoned.
The secret to sustainable success as a Stage 2 business is to make every strategic decision go through an ROI assessment.
