NPV is not Enough: Manage your Risks

Evaluating projects using NPV is not enough: take control of your project risks. Financial analysts need to dig deeper in order to understand the returns of corporate projects. Solely relying on classical financial analysis, such as Net Present Value (NPV) and Internal Rates of Return (IRR), is not sufficient to indicate if a project is viable or not. It is necessary to go a step further and appropriately manage risk in order to understand the viability of a given project.

Before Jumping to Conclusions
MBAs love to crunch numbers. This is our forte and our weakness! Give us a spreadsheet full of data and within no time we will came out with all sorts of corelations, rates of returns and indexes. We love digging data and finding the obvious, the oblivious and not so obvious.

But, in reality, jumping directly into calculations can be major distraction and hide major issues in the analysis of a project at hand. Doing a quantitative analysis before looking at the qualitative aspects of a business problem is equivalent to processing a pile of documents without looking if these documents need to be processed in the first place.

Managing your Risks
In order to do an appropriate analysis, consider risk management as one of the most essential elements of your evaluation process. Before starting your analysis, plan your work and find out how risks will be identified and managed.

• Start early: include risk management at the early stages of your analysis. A risk registry, i.e. a simple list of risks, can make an enormous difference when evaluating the project.
• Define a methodology: establish simple and concrete rules on how you will manage risk throughout your analysis. Simple ground rules will help you move faster when analyzing complex projects.
• Qualify before quantifying risks: Look at the qualitative elements of your project first. What is the economic environment? How other projects in the organization can affect this analysis? What is the corporate culture? Has this been done before? Qualitative elements should be considered first before trying to assign numbers to risks and before jumping into a deeper financial analysis.
• Iterate, iterate, iterate: Check the results of your final financial analysis against your risks identified. Revisit your figures once you identified risk mitigation plans and evaluated your results. Understand your risks in order to avoid archiving a project because of extreme risk aversion issues.

Crunch your Numbers, but, First, Consider Risks
When doing the financial analysis of your next project, do your number crunching. But, consider risk from the beginning and incorporate risk management throughout your evaluation process. I am sure you will have much stronger decisions with that.

Corporate Risk Related Articles
Here are some interesting references related to Enterprise Risk Management. They describe a bit more how not considering risks can affect your financial decisions.

• What Is Your Risk Appetite? by Alan Gemes and Peter T. Golder
  Well-considered risk taking is critical, not just for the success of individual companies but also to enable a properly functioning economy.
• Dynamic management: Better decisions in uncertain times by Lowell Bryan
  Companies can’t predict the future, but they can build organizations that will survive and flourish under just about any possible future. (Premium membership required)
• How to Develop a Risk Management Plan by wikiHow
  An example of how to colect, analyse and quantify risks.

Ad? Which Ad?

Have you seen this window frame ad before?

Probably not…
And probably you are not alone. I found this billboard in the back of a side road of South Vancouver, in middle of an empty industrial park. I didn't notice it at first. But something remarkable brought it to my attention. Why would someone put an ad in a billboard at in such a remote location?


Know Your Target Market
You probably have not seen this ad because you are not one of their target customers. Driving a few meters forward in the same empty road, I found one of the recycling facilities of the city of Vancouver. Then, I realized why the company was placing the ad in that location. Looking carefully at the queue of cars waiting their turn to enter the recycling depot, I noticed that the majority of them were construction contractors driving small vans full of recyclable construction materials. This was the only road that led to that site and anyone who would be driving through that road would not miss the billboard.

This was quite a smart move, I must admit. Knowing where their potential customers and decision influencers would be, the company placed an ad just in front of their eyes. This strategy would not work so effectively if they were advertizing a new brand of wine, but it worked well because they knew that influencers, such as construction contractors, could mention to their customers about the new type of window frames he saw recently in that bilboard.

Know your Target Market before Advertizing
Think smart! In the case above, advertizing in a billboard in the outskirts of the city is a fraction of the cost of advertizing in a high traffic area and, I bet, ten times more effective to reach their target audience.

Pause for a second before committing funds to your market campaign. Put yourself in your customer shoes and ask: If you were one of them, would you really read that publication? Will that campaign bring the right people, the customers you are interested, to your door? Or is this going to just increase the number of inquiries, give you a lot of work and not reach your target audience?

Keep your customers in mind when running marketing campaigns. Look for evidence that your potential customers will see your campaign in the event you are sponsoring and the publication or billboard you are buying. This will greatly increase your chances of success and attract more qualified customers.

Strategize, but no so much!

Developing strategies for startups is a completely different experience than creating strategies from large organizations. Startups survive based on their ability to sell and adapt to change. Large organizations survive based on their ability to coordinate effectively their resources and have processes that work efficiently.

Startups are Dynamic

Small organizations that excel on what they do have dynamic strategic plans. The people in these organizations are good in communicating to each other and use the strategic plan as a framework to make sure things are aligning all together in the big picture. This doesn’t mean that they change their direction every week, but it means that they keep their strategic goals simple and use the strategic plan as a framework to develop their business and assess new opportunities. This way they know they have a true North and they are able to speak the same language.

Large Organizations are Complex

Large corporations and mature businesses have naturally a larger degree of internal complexity, and therefore, more complex strategic plans. Creating strategies for this type of organizations requires a more detailed understanding of the business, in a way that is possible to orchestrate their multiple aspects involved. In other words, the strategic plan serves a blueprint to help the business to organize itself and align the effort of many different units and departments.

How far should you go in your strategy?

Creating an initial plan is the most difficult thing in most of the cases, either in small businesses or large organizations. Creating the awareness that there is a plan is something not everyone will buy at first and will take time to synch in the heads of many of your employees.

My rule of thumb is that if you are spending more time discussing details than coming up with relevant information for your strategic plan, it is time to stop and reevaluate if it is time to stop drilling down.

If you own a small business, think of your strategic plan as the skeleton or the framework of your business. Keep it short, concise and update it regularly.

If you own a large organization, use the strategy plan as a tool to optimize your organization’s internal processes and align these processes to the current market environment.

Strategize, Don't Create more Bureaucracy

Keep in mind that smaller organizations excel in their ability to adapt and grow fast. Larger organizations need drivers to improve their internal processes. Both of them need strategic plans, but both don’t need more bureaucracy.

Guy Kawasaki's 10 Questions to Ask Before Joining a Startup.

This is an extremely relevant article if you are planning to join a startup company:

• Guy Kawasaki’s 10 Questions to Ask Before You Join a Startup

Yet, I would add an 11th question:

11. How would you explain your business to my 80 year old aunt Ruth? The more experience I gain advising businesses, the more convinced I am that keeping things simple is an art. Keeping a company's vision succinct and in sharp focus can be a major differential for startups. Not being able to convey a simple message to customers, investors and employees is an indication that some work is needed in fine tuning the company's product offering. In short, ask "how can you explain your business in simple terms?"

Babies Don't Carry Credit Cards

One of the most important elements of a marketing strategy, besides knowing the benefits of your product, is determining your target market. I have a simple analogy to explain how it works. This is simpler than you can imagine. Here is an example.

Baby Food is Sold to Mothers not Babies
You may not realize but baby food is sold to moms, not the babies! Babies don't carry cash or credit cards on their dippers. The ultimate decision to buy something comes from the mother who is browsing the shelves looking for something that is healthy and is not going to hurt her little baby.

Find Out Who is Actually Paying for Your Product
The same is applicable to that special product you are selling. The ultimate user may not be the final decision maker that will swipe the credit card and buy your product. For instance, if you are selling a super complex software helps PhD’s in R&D labs to do solve complex calculations; you may want to have a simplified down-to-earth one pager explaining what your product does, so the CFO of the company can understand what this product can bring as an advantage to the organization. Your end user/consumer may not be the one who is actually purchasing your product.

Learning who are the potential decision makers and appropriately communicating to them is an art by itself. But with little effort to fine tune your communication can help you close the loop in the sales cycle and, most importantly, close more deals.

Who Carries the Credit Card ?
Here is a note to you: before defining your target market, verify who is carrying the credit card. Then, make sure this person is clearly included in your marketing strategy.

Making Changes Stick

These are times of change. The company you are working for right now is not the same as it was eighteen months ago. It probably has changed quite a bit with all macro economic swings that are going on around the world.
I had very good mentors in times of change. Based on what I have learned from them, here is my advice for you who is trying to manage a team in volatile times:

Give People a True North
Drive the change process by providing a clear vision. let people know where they fit (if they fit!) in the organization. Keep the message simple and clear. Even if your organization does not have a vision, build a vision for your department and stick to it. You and your team will be rewarded by results, not by speculating about the future. Having a clear direction will help you get better results.

Take the Context into Consideration
Understand the situation you are in. Some things are not worth fighting for, but others are! Your context will say the leadership style you will need to use. For instance, if things are slowing down, maybe it is time to revisit that shelved improvement project you were dying to implement, but never had time to deliver it. Or, if your ship is sinking, maybe it is time for quick and assertive action, to save whatever is left from your department. In any way, remember to consider the context you are in.

Communicate, Communicate, and Comunicate!
People may not absorb all the information you pass them in one go. It will make an enormous difference if you repeat the message you are conveying to people. Remember that things are changing and consider recurring meetings to address any gaps of understanding your staff may have. It is better to know through you, rather letting them find out information in the water cooler. In times of change there is no such a thing as over communication.

Be Remarkable
Be human. Understand that on the other side there is a living being. Everyone has a place in the world and is capable of something. Help people indentify their new place in the organization and contribute to the new direction. They will appreciate your help on that.

In my professional life, I've worked with people I consider true leaders of change. I will never forget them. It is your chance to inspire your team and to effectively change your organization. Go for it!

Who moved my market?

Often I hear interesting stories while working in the business trenches. These stories teach me a lot about the art of doing business. Here is one that I like in particular.

Karl had an idea and decided to create a business with it. He had lots of professional experience and a long career working for many large organizations. He thought it was time to sharpen up his entrepreneurial skills and start his business. Looking at the right places, he found useful information that allowed him to build his business plan.

The elaboration of the plan wasn't easy; soon he realized that he needed some deep understanding of his competitive landscape. After spending a couple months researching his target market, Karl thought he finally got all the information required. With that, he was able to derive his financial analysis, forecast sales and staffing requirements.

Time passed and he suddenly got very busy setting up his venture. If finding the right people was a difficult task, never mind convincing them about joining his business initiative. Getting money to start and stay in business was also a time consuming effort. But he was positive and overcame these obstacles one by one.

A year later, things were starting to happen and, finally, the first version of his product was almost ready. So much effort and time was invested to get to this point. Now it was time to go out to the streets and get the product sold.

Karl had an unpleasant surprise. In reality his market research done many months ago was outdated. Times have changed dramatically and the product he designed wasn't in demand any more. His market had evolved and moved.

Speaking to an industry advisor, he learned that another company had entered the market three months before. Using an aggressive positioning strategy his competitor had captured many of his potential customers. Karl was shocked with the news.

While working on his product, he didn't realize that his market was shifting and that new competitors were entering the market. It was too late to back up and chose a different approach. Had he leaned about the competitive landscape earlier, he could have adapt his strategy and competed head to head in his market.

Watching Your Market
In a recent conversation with Karl, he provided me useful advice to avoid his situation:

• Always check your plan against reality: don't disconnect yourself from the market place and this may cost you your business.
• Use an agile product development cycle: don't wait to until you have a final product to get feedback from potential customers, interact with them as you go.
• Have good advisors: talk to people who have been around your industry for a while. They will tell you what happened in past economic slowdowns and help you get prepared.

Indeed, markets move with time. Revisit your business plan occasionally. Verify if your market has changed. Aligning your strategy with your target market is the best investment for your venture.

Interview with Hal Varian on how the Web challenges managers

The McKensey Quarterly brings an interview with Hal Varian, chief economist at Google, providing his views on a more and more integrated and networked world. Varian mentioned that "Managers need to be able to access and understand the data themselves. You always have this problem of being surrounded by “yes men” and people who want to predigest everything for you. In the old organization, you had to have this whole army of people digesting information to be able to feed it to the decision maker at the top. But that’s not the way it works anymore: the information can be available across the ranks, to everyone in the organization." Indeed, in a positive way, I believe large amounts of data are flowing to managers in corner offices and to their staff located around the world. Many knowledge workers are celebrating that they are finally getting access to data which will help them achieve their goals. Others are just confused with the fact that they are becoming statisticians, a subtle new role they thought they never had before. Hal Varian's interview is definitely worth watching.

Selling like Water

Last week, while traveling in the interior of Minas Gerais, Brazil, I stopped at a gas station to refuel my car and get something to drink. While waiting in line, a person in front of me asked for a bottle of carbonated water. The owner of the gas station promptly put a bottle of Bonaqua on the counter. Then, the person replied, "Oh, sorry. Could you please give me a bottle of H2O instead?" The owner politely replaced the bottle of water with the other product, as requested. Looking at the bottle, I asked the person if this was a new type of soft drink. She answered, "It's not pop, it's water with a bit of lime in it... I hate pop. I would never buy this if it was pop!" I was astonished...

Positioning: Carbonated Water or Soft Drink?
I was surprised to learn that Pepsi had introduced a new type of soft drink called H2OH! in the Brazilian market. It seems to be a diluted version of Seven Up positioned as flavoured water instead of carbonated beverage. In my opinion, Pepsi just provided me with a great example of how to smartly position a product in a jam-packed market place.

Instead of fighting the competition and adding yet another pop in a crowded market, Pepsi called its new product “H2 Wow!” (direct translation of water in Portuguese). A superb move because selling water to locals is much easier than competing against Coke's Sprite, the absolute market leader in the carbonated lime juice segment in Brazil. Indeed, the idea seems to be working quite well: even people who are not a fan of carbonated drinks are buying this new soft drink! (I mean water!)

Product Positioning Matters
If your products are often mistaken for a competitor's products or you find yourself in an endless price war with your competition, you may want to revisit your positioning strategy. Clear positioning helps you differentiate your offerings from other products in the market. Investing in a sound positioning strategy not only helps you capture the right market segments for your products, but also helps your customers understand that your product offering goes beyond price and features.

While creating a positioning strategy, you need to contemplate some important aspects. In Pepsi's case, for instance, they may have decided to position the product as flavoured water and then used clear bottles to mimic sparking water. In addition, they may have considered the potential for bottled water customers to try the new product and expand their sales potential by adding a new type of customer to their target market – bottled water drinkers. On the other hand, Pepsi may have considered the implications of calling something “H2O” when it is, in fact, not water. Evidence of that possibility can be seen in the number of notes in small print on the label. In my opinion, the end result of this positioning strategy worked really well.

Perception is Everything
A common misconception when dealing with positioning is to focus solely on product features and to compare them to the competition. The problem with this approach is that when you position your product against a competitor’s products, your product doesn’t have its own set of perceived values. In the end, you are positioning yourself in the same workspace as your competition and losing the ability to differentiate yourself.

Creating a positioning strategy has more to do with identifying how your product is perceived by your customers and less to do with the actual product features. For instance, your customers may perceive your products as easy to use regardless of how complicated and complex your features are. If you resolve problems quickly, you can actively change how your product's complexity is perceived. In fact, customers may prefer working with you because they trust you to help them when problems arise, an inherent characteristic of your brand that is positively perceived. With that reputation, you gain an opportunity to provide something intrinsically different from anything else in the market.

Take Control of your Marketing Positioning Strategy
Take a look at your products and determine if they are more like cola or more like water. Instead of letting your customers decide by themselves, actively plan your marketing campaign by making sure you have a clear positioning strategy. Help your customers understand what your product does, but, go even further and help them understand what your product is. I assure you that your sales team will thank you.

Happy New Year!

Hi Folks,

Happy New Year everyone. I wish everyone a great and prosperous 2009 with lots of new business ideas and accomplishments!

I would like to take this opportunity to thank everyone who has been helping me shape this blog. It is hard to believe that this initiative started with a small posting and is finally taking full shape now. I never thought I would make it this far, but your emails with feedback and comments have been a great source of motivation. You guys are awesome! I must say this has been a great experience and I enjoying writing every word here. I am constantly looking for stories from the trenches that may help you one way or another.

Happy 2009!

R. Caetano