Business cases and semantics
Discussion
Suppose you are trying to choose between two possible projects. Both are worth doing according to payback, IRR, or whatever criteria your firm uses, but you can only do one and project A is expected to show a better ROI than B.
One the other hand project A makes you even more dependent on a market you are already very dependent on, while project B will set up an income stream from a totally separate market.
If you want to press for project B would you say that while A has the better business case B is worth doing for strategic reasons? Or would you regard the benefits of diversification as part of the business case?
The firm in question historically goes for project A in these situations, regarding ROI as an inexorable force compelling them to pursue existing markets even when everyone can see they need to diversify.
One the other hand project A makes you even more dependent on a market you are already very dependent on, while project B will set up an income stream from a totally separate market.
If you want to press for project B would you say that while A has the better business case B is worth doing for strategic reasons? Or would you regard the benefits of diversification as part of the business case?
The firm in question historically goes for project A in these situations, regarding ROI as an inexorable force compelling them to pursue existing markets even when everyone can see they need to diversify.
bga said:
If diversification is a strategic objective and the company will support it the option B is a good opportunity. If, however there is not full support for diversification then IMO it would be hard to justify option A.
I don't think it gets much simpler than that.Only other altering factor could be the boss/board/CEO having an appetite for risk and adventure. Do they want to try something new or are they happy plugging away. Never underestimate the appeal of some excitement.
Dr Jekyll said:
Suppose you are trying to choose between two possible projects. Both are worth doing according to payback, IRR, or whatever criteria your firm uses, but you can only do one and project A is expected to show a better ROI than B.
One the other hand project A makes you even more dependent on a market you are already very dependent on, while project B will set up an income stream from a totally separate market.
If you want to press for project B would you say that while A has the better business case B is worth doing for strategic reasons? Or would you regard the benefits of diversification as part of the business case?
The firm in question historically goes for project A in these situations, regarding ROI as an inexorable force compelling them to pursue existing markets even when everyone can see they need to diversify.
It would depend upon a lot of factors that you haven't mentioneed here, for example exactly what your exposure to market A currently is and what the longer-term opportunity in market B might be. This is combined with the probability that market A will cease to be profitable.One the other hand project A makes you even more dependent on a market you are already very dependent on, while project B will set up an income stream from a totally separate market.
If you want to press for project B would you say that while A has the better business case B is worth doing for strategic reasons? Or would you regard the benefits of diversification as part of the business case?
The firm in question historically goes for project A in these situations, regarding ROI as an inexorable force compelling them to pursue existing markets even when everyone can see they need to diversify.
Whist operating in diverse markets is positive, and becoming reliant upon one market or customer can be folly, there are many other factors that are market, segment and industry specific.
Are you able to provide more details?
Is B in the same expertise, merely a different market?
Without knowing enough detail, or wishing to sound too risk averse there's a lot in the saying "know your knitting". I've worked for two previously successful companies who diversified into unknown waters & paid the ultimate price.
In double hindsight a separate company for the new venture would have been the way to go.
Without knowing enough detail, or wishing to sound too risk averse there's a lot in the saying "know your knitting". I've worked for two previously successful companies who diversified into unknown waters & paid the ultimate price.
In double hindsight a separate company for the new venture would have been the way to go.
13m said:
It would depend upon a lot of factors that you haven't mentioneed here, for example exactly what your exposure to market A currently is and what the longer-term opportunity in market B might be. This is combined with the probability that market A will cease to be profitable.
Whist operating in diverse markets is positive, and becoming reliant upon one market or customer can be folly, there are many other factors that are market, segment and industry specific.
Are you able to provide more details?
I'm not asking which to do, it's much simpler than that. I'm just saying that if I'm writing a report which (rightly or wrongly) backs B, should I say the business case supports B once the benefits of diversity are considered? Or should I say the business case is undeniably for A but strategic considerations should be allowed to override it? Or to put it another way, is 'business case' purely financial 'what does the most business' or can it be wider IE 'what's best for the business'?Whist operating in diverse markets is positive, and becoming reliant upon one market or customer can be folly, there are many other factors that are market, segment and industry specific.
Are you able to provide more details?
Dr Jekyll said:
13m said:
It would depend upon a lot of factors that you haven't mentioneed here, for example exactly what your exposure to market A currently is and what the longer-term opportunity in market B might be. This is combined with the probability that market A will cease to be profitable.
Whist operating in diverse markets is positive, and becoming reliant upon one market or customer can be folly, there are many other factors that are market, segment and industry specific.
Are you able to provide more details?
I'm not asking which to do, it's much simpler than that. I'm just saying that if I'm writing a report which (rightly or wrongly) backs B, should I say the business case supports B once the benefits of diversity are considered? Or should I say the business case is undeniably for A but strategic considerations should be allowed to override it? Or to put it another way, is 'business case' purely financial 'what does the most business' or can it be wider IE 'what's best for the business'?Whist operating in diverse markets is positive, and becoming reliant upon one market or customer can be folly, there are many other factors that are market, segment and industry specific.
Are you able to provide more details?
I'd say that the diverification factor is part of the business case.
So, I'd basically be saying something like, "short-term profit favours option A, however when diversification into a new market is taken into considertion, option B appears the more attractive option".
13m said:
Gotcha.
I'd say that the diverification factor is part of the business case.
So, I'd basically be saying something like, "short-term profit favours option A, however when diversification into a new market is taken into considertion, option B appears the more attractive option".
Thanks.I'd say that the diverification factor is part of the business case.
So, I'd basically be saying something like, "short-term profit favours option A, however when diversification into a new market is taken into considertion, option B appears the more attractive option".
Strategic objectives can't over-ride a business case, they should be at its heart... everything n a company should tie back to strategic objectives, that is why they are strategic!
This is a business case, not a financial case. The problem with financial models is that they are very numbers based, yet business success is often as predicated on people internally and externally as on figures, so diversification could inspire staff, could hold onto a customer base which would otherwise leave, could change brand image - all of which could prevent financial loss, or create financial gain...
This is a business case, not a financial case. The problem with financial models is that they are very numbers based, yet business success is often as predicated on people internally and externally as on figures, so diversification could inspire staff, could hold onto a customer base which would otherwise leave, could change brand image - all of which could prevent financial loss, or create financial gain...
Yeah, you need to assess the business cases against the strategic objectives. If diversification isn't a strategic objective, then maybe the strategy needs to be looked at first. If the businesses cases are silent on any elements of the strategic objective, either go back and ask, "How does this project support our strategy for diversification or whatever." Or draw your own conclusions.
It sounds like you want to go for option B, but you know the business will go for A. In that case, your only hope might be to get the author of A to acknowledge that it doesn't fit the strategic objective for diversification.
It sounds like you want to go for option B, but you know the business will go for A. In that case, your only hope might be to get the author of A to acknowledge that it doesn't fit the strategic objective for diversification.
akirk said:
The problem with financial models is that they are very numbers based, yet business success is often as predicated on people internally and externally as on figures,
This is exactly the situation.I'm really trying to play devil's advocate. At the moment the argument made is not 'diversification is risky' but more 'The figures tell us the return is better in the current main markets so what choice do we have? We can't argue with the numbers.'
Not put that baldly of course but that's the gist.
Incidentally the projects in question are promotional, the products sell in both markets but most people in the potentially larger market haven't heard of us. Historically our promotions do have better return in markets where we already have a significant presence.
Dr Jekyll said:
This is exactly the situation.
I'm really trying to play devil's advocate. At the moment the argument made is not 'diversification is risky' but more 'The figures tell us the return is better in the current main markets so what choice do we have? We can't argue with the numbers.'
Not put that baldly of course but that's the gist.
Incidentally the projects in question are promotional, the products sell in both markets but most people in the potentially larger market haven't heard of us. Historically our promotions do have better return in markets where we already have a significant presence.
of course you can argue with the numbers - the numbers will be based on a set of assumptions (e.g. time over with ROI is expected)I'm really trying to play devil's advocate. At the moment the argument made is not 'diversification is risky' but more 'The figures tell us the return is better in the current main markets so what choice do we have? We can't argue with the numbers.'
Not put that baldly of course but that's the gist.
Incidentally the projects in question are promotional, the products sell in both markets but most people in the potentially larger market haven't heard of us. Historically our promotions do have better return in markets where we already have a significant presence.
e.g. if market A gives you £1m return every 5 years and market B gives you £500K return in the first 5 years / £1m in the second 5 years / £3m in the third 5 years then you have two choices:
- short term market A is better
- medium to long term market B is better
It then gets more complicated as risk is harder to assess over a longer time period (which is why so many businesses focus on the short term), so the risk is that the expected pattern for market B is interrupted by a change to the market (e.g. competitor coming in...)
Many listed companies have shorter timescales as they have to match investment timescales.
There isn't necessarily a wrong answer, but the answer needs to match the company's direction / strategy / way it is managed / way it is run / etc.
So on the information we have been given, either could be the right answer it is never simple enough to say either ROI is higher in market A or potential ROI is higher in market B - that is to miss out all the other dynamics you need to consider:
- risk to the business
- attitude towards risk
- style of leadership
- company ownership and their views
- etc. etc.
Diversification is rarely a good strategy. If you are already known in a particular market then it's usually best to stick to it. Unless of course you have 100% penetration.
Cranfield's BGP often state that 80% of growth business achieve this through market penetration. Have a look at Ansoff's matrix.
Cranfield's BGP often state that 80% of growth business achieve this through market penetration. Have a look at Ansoff's matrix.
Normally I would've expected better ROI from diversification if the company already has the market sewn up for what it currently does. If it's not reached or even reaching that point, it's perhaps best to concentrate on the core market.
If I were an employee proposing project B and it was rejected though, I'd be inclined to leave the company and pursue it myself if I were that enthusiastic.
If I were an employee proposing project B and it was rejected though, I'd be inclined to leave the company and pursue it myself if I were that enthusiastic.
Clearly something is a bit borked if on the one hand "everyone knows" the firm needs to diversify, yet people are making their decisions by slavishly following the ROI that some model is predicting.
On what basis does "everyone know"? Is it glaringly obvious that the firm is exposed to a single inherently dangerously volatile market? When comparing the projects have you tried to quantify the risks so that you can actually compare the expected ROIs? If they aren't both risk-adjusted, why do people think they can be directly compared to each other?
On what basis does "everyone know"? Is it glaringly obvious that the firm is exposed to a single inherently dangerously volatile market? When comparing the projects have you tried to quantify the risks so that you can actually compare the expected ROIs? If they aren't both risk-adjusted, why do people think they can be directly compared to each other?
To give a bit more background without identifying the firm.
They sell luxury consumer goods, sold worldwide but especially popular in Japan. Sales elsewhere are often to Japanese tourists.
The items are often bought as presents and the Japanese customers are surprisingly price sensitive. If they decide the recipient deserves a 20,000 yen present they look for something with that price tag. If the yen drops then suddenly Singapore etc find their Japanese tourists spending fewer Singapore dollars.
So there is an acknowledged weakness here and everyone agrees it would be good in principle to get more rest of world customers or at least encourage the ones we have to buy more often.
What bothers me is that when it comes to promotional efforts, rest of world initiatives aren't being rejected because of the risks of diversification, but purely on the basis of expected ROI. The attitude seems to be 'we know we are over dependent on the Japanese market, but when we advertise to Japan we get much more money back than if we advertise to the US, so what can we do?'
There may be very good reasons for continuing to concentrate on the Japanese market. But the decisions aren't being made for those reasons..
They sell luxury consumer goods, sold worldwide but especially popular in Japan. Sales elsewhere are often to Japanese tourists.
The items are often bought as presents and the Japanese customers are surprisingly price sensitive. If they decide the recipient deserves a 20,000 yen present they look for something with that price tag. If the yen drops then suddenly Singapore etc find their Japanese tourists spending fewer Singapore dollars.
So there is an acknowledged weakness here and everyone agrees it would be good in principle to get more rest of world customers or at least encourage the ones we have to buy more often.
What bothers me is that when it comes to promotional efforts, rest of world initiatives aren't being rejected because of the risks of diversification, but purely on the basis of expected ROI. The attitude seems to be 'we know we are over dependent on the Japanese market, but when we advertise to Japan we get much more money back than if we advertise to the US, so what can we do?'
There may be very good reasons for continuing to concentrate on the Japanese market. But the decisions aren't being made for those reasons..
Dr Jekyll said:
The attitude seems to be 'we know we are over dependent on the Japanese market, but when we advertise to Japan we get much more money back than if we advertise to the US, so what can we do?'
So the expected ROI is based upon a previous advertising campaign? Was it significant, is there anything could be learned from it to make future advertising more effective, is there any reason to believe it might not be comparable, etc?Gassing Station | Business | Top of Page | What's New | My Stuff