Shifting from a Tactical Decision to a Strategic Decsion
What might start as a routine project financial analysis to conduct a ‘sanity check’ can be transformed into a strategic dialog and require a strategic decision. Or, a decision to initiate a project can sometimes shift into a strategic decision. When either situations occur, ‘the perfect number’ becomes secondary. The bigger strategic questions to ask are how the project investment affects either the buyer’s or the seller’s organization. What are other examples when a shift from a tactical project decision to a strategic decision might occur? Here are six ways a project decision can become a strategic decision.
The project impacts the operating mission of the organization
If the outcome of the project has an impact on the organization’s overall mission, then the project’s initiation becomes a strategic decision. Investment in information technology projects, like ERP implementations, are one example. Old business processes must be defined, engineered, tested, and refined to accommodate implementation of the new system. That level of change to the status-quo of business operations can be disruptive and alter the way an organization views its business processes. What started as a simple investment in new software may now require a more thorough and comprehensive analysis to ensure the buyer has reserved sufficient financial and internal staff resources to achieve success.
Investments in new weapon systems by the U.S. Department of Defense are another good example of project decisions that are strategic decisions. The new systems represent innovative means of conducting warfare. However, these new systems will impact the operating personnel and the infrastructure that supports them. Consequently these new systems require collateral investments in updated training, updated maintenance practices, and in some cases updated base facilities. Both of these types of projects have a substantial effect on the operating processes of the status-quo and therefore require a strategic decision.
The project consumes most of the buyer’s capital or investment budget
The absolute size of a project can change the dialog from an investment decision to a strategic decision. Some companies made historic investment decisions that amounted to ‘betting the company’ on the outcome of a project. One famous example was Boeing’s bet on the development of the 747 airliner. Also, smaller projects that consume a very large proportion of a buyer’s research or procurement budget can require a strategic decision. Why? Because the decision to concentrate limited funds into one alternative means the loss of opportunity to invest in other ventures. Projects with large ‘opportunity costs’ require a strategic decision. The organization must define, articulate, and prioritize its values and desired benefits in order to make the strategic decision of which project to fund.
The project poses shared risk for both the buyer and the seller
If the investment is large enough, not only does the buyer bear risk, but the seller might bear some risk too. Staff must be hired, bank financing must be secured, special capital investments may be needed, and key supplier and subcontractor relationships may need to be forged. If the seller takes on too much risk, they may fail. In the early 1990’s McDonnell Douglas (now part of Boeing) almost went bankrupt due to troubles experienced on two very large aircraft development programs, one of which was eventually canceled.
If the project fails, then the buyer loses a vendor to deliver the product and the buyer loses funds that can’t be invested in another attempted project. Is the buyer willing to put their funds at risk in this scenario? They might take the risk in order to develop a new or alternative supplier. The answer requires a strategic decision.
The buyer must pay recurring operating expenses long after the initial investment
A classic business model is the ‘razor/razor-blade’ model. The seller can offer a very low price on an initial razor investment and recoup their investment many times over on razor blade replacements. The same holds true for devices such as printers with ‘consumables’ such as ink and toner cartridges. Investment decisions are often a life cycle decisions that include both the upfront investment and recurring payments to cover annual operating and maintenance expenses over an expected operating lifetime. Oftentimes, the operating expenses can be more substantial than the up-front investment. When those recurring payments represent a large proportion of the organization’s financial resources, then the investment decision becomes a strategic decision. Will the buyer become locked into an OEM’s proprietary system? Can the buyer get support from a third party? Will the system go ‘end of life’ too prematurely and require another investment cycle? A comprehensive view of the entire investment life cycle can help answer these questions.
The project stretches the seller’s existing capabilities
A home remodler that leaps into new home construction is stretching their performance envelope to develop a new capability. There’s risk that the attempt won’t be successful. The seller’s lack of new home building experience coupled with their desire to penetrate a new market may motivate them to compensate the buyer in the form of a lower offer price. But is the buyer taking too much of a chance? The builder may encounter new challenges that weren’t previously encountered or considered. Both buyer and seller are mutually making a strategic decision. The buyer’s decision reflects a risk of receiving an unsatisfactory product. The seller’s decision to both lower the price and attempt to construct a new home reflects a risk of incurring a large financial loss.
A large degree of uncertainty surrounds the outcome of the project
The seller has proposed a novel approach to solve the buyer’s problem. Not only is the seller stretching their capability, they’re stretching the industry state of the art. Is the benefit derived from this new approach worth the risk? Are buyer and seller committed to providing additional time and money to field new technology? The application of untried technology can make a procurement decision a strategic decision for both the buyer and the seller.
How a Strategic Decision Can Shift the Focus of Analysis
In all these cases, price alone won’t drive the strategic decision. Strategic decisions involve a degree of risk and uncertainty. Unless the right questions are asked, there’s a good chance that the focus of the strategic decision may overemphasize price and underemphasize: a) understanding of risk/reward or b) identifying strategies for hedging risk and uncertainty.
For buyers, the shift from an investment or procurement decision to a strategic decision means placing greater emphasis on understanding the magnitude of the investment decision. How does the decision impact operations? Can the buyer sustain a culture of change over the status quo as the project is implemented in execution? Ensuring a comprehensive and whole view of the purchase is essential to answer these questions. The buyer’s analysis should also ensure that the forecasted budget and the expected benefits of each investment alternative are sound and reflect a clear distinction of value. Finally, non-advocate reviews are useful to ensure all alternatives receive an objective assessment.
The seller’s responsibility for projects that might require a buyer to make a strategic decisions are twofold. First, the seller must address how the buyer’s status quo will be affected. Sellers can educate buyers on how their proposed project compares to the seller’s past performance on other projects. Second, sellers should demonstrate to buyers how the seller has controlled and mitigated their own risk. How has risk and uncertainty been planned, hedged, and mitigated on previous projects? Price alone isn’t going to carry through to close the sale. Sellers must demonstrate competency through thorough analysis and planning.
Is everyone drinking the kool-aid of super-low prices and sky-high benefits? Need some outside help evaluating a large purchase decision? Wondering if if your proposal to the client is convincing? Let Valerisys Consulting be your strategic guide. Contact Valerisys Consulting today to schedule a free, no-obligation consultation. Let’s talk about how both buyers and sellers can benefit from viewing an investment decision as a strategic decision.