Business cases and semantics

[Dr Jekyll]

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.

[Dr Jekyll]

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'?

[Dr Jekyll]

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.

[Dr Jekyll]

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]

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..

[Dr Jekyll]

muppetdave said:

Late to the party, but... depending on what is set out strategically (if you're fighting against it or not), I'd maybe even include a 'whatif' scenario...

1 - T/o and profit when established of running existing business + A, same with B
2 - T/o and profit when established if one market fails/is closed etc. Where is the business now etc.

That's a good point. Forecasting on the basis of 'whatever is happening to the markets will continue to happen in the future' makes things look promising. It's when we look at possible scenarios that we look vulnerable.