Leading companies have a good process or tool for screening potential new opportunities. This doesn’t guarantee success of good ideas but, if used properly, should keep the organization focused on the best opportunities and minimize the distraction and wasted effort of pursuing opportunities that are weak or not a good fit at this time. Generally speaking, you can’t chase all the gazelles in the herd…a shrewd hunter has to be selective.
Annual or periodic strategic planning will usually provide the foundational direction and guidance for the organization’s success in the future. However, in the interim along the way, “stuff” happens, things change and opportunities often emerge. These opportunities will get dealt with one way or another – pursued, back-burnered, killed or just ignored.
I have found there is a great deal of wasted investment in companies on chasing ideas that should never be chased or chasing ideas that should have been refined and/or defined better at the front end. It is not uncommon for individuals, teams or departments in organizations to immediately go deep in analysis and spend inordinate amounts of time and money debating, researching and evaluating potential new investments, strategies, and product or service ideas without ever having checked the basics. I advocate that a client should have readily available a “quick and dirty” evaluation tool that guides people within the company to systematically answer some important questions up front before proceeding further down the rabbit hole (or the prospective gold mine).
I have witnessed many times in companies that I have worked in or advised the inherent conflict between individuals in business / corporate development groups, sales groups and marketing groups as well as other areas of the company (including finance). Many people have what they think are great ideas about new products, services, markets, acquisitions, partnerships, etc. and they want to preserve the credit for the ideas. I don't believe any group has a monopoly on great ideas. However, ideas can get pushed down the road a significant distance “in secret” before they are revealed and before they are tested against all the key criteria for a good investment. Ideas sometimes get slammed shut before they see the light of day because they originated from what the organisation considered to be the wrong source.
Personally I think it is helpful for all employees to keep in perspective what their respective roles and responsibilities are and to generally keep from straying into other areas of work. The challenge for effective management is to provide an appropriate channel for bringing creative, innovative and potentially profitable new ideas to the surface quickly and giving employees the tools for ensuring it is a reasonable opportunity without spending much time on it before they go further. I have found that some employees and departments are not familiar with the basics of what makes for a great opportunity for the company. They may understand that it must be profitable in the end, but have not been involved in the evaluation process sufficiently to understand the other dimensions of a good evaluation. I don’t believe there is any benefit to the organization to keep the key elements of such evaluation a “mystery”. I advocate that the CFO or business development group (or whatever person or group is appropriate for a given organization) should provide direction to all employees of the expectation for initial evaluation of a new business proposal.
Even within a business evaluation or project evaluation group, there is sometimes inconsistency in the level of and standards for early screening of projects. Providing an outline of the standard or the criteria by which such proposals will be evaluated is usually appreciated by and helpful to all employees as it gives them guidance to focus their effort. It generally saves a lot of wasted time and effort and provides for a better result leading to more effective decision making.
I have used a fairly standard template for evaluation of new “anything”, whether it be a new product or service, new business line, corporate acquisition, merger, partnership, investment, expansion, or other business proposals. Over my career, I have developed a tailored or modified version of the same for many clients when requested or when I thought it would be helpful for their consideration in terms of a specific decision.
A simplified outline of that screening tool is below. Note that it is not intended that every question in the tool has a hard answer in every situation or business, but I generally find it good business practice to at least consider each and every question to determine its relevance and develop an appropriate response at an early stage of the project. This is not a substitution for a full business case which may be required for approval depending on the policies at a respected company, but is instead meant as an initial “sniff test".
Strategic fit
Must have overall fit with corporate and business strategy
Opportunity is located within the target markets?
Opportunity supports or enhances current and anticipated product/service lines?
Opportunity can be supported by existing, new or improved distribution channels?
Must create some form of competitive advantage (e.g. cost leadership, differentiation) to the company’s core business
Financial
Must contribute to profitability and company value
Opportunity is expected to generate positive cumulative discounted cash flow, including consideration of upfront (pre-commercialization) investment and incremental working capital requirements?
Opportunity is expected to generate returns in excess of other available opportunities (with similar risks) competing for the company’s resources
Break-even point is analyzed
Assumptions contained in the opportunity analysis must be reasonable and supportable
All risk related to the opportunity must be identified and quantified, including for example market and commodity price risk, environmental risk and regulatory risk
Market
Must provide potential growth in the company’s target geographic regions and customer markets / segments
Must provide the potential for a significant and sustainable share of a target market
Target market and identified major potential customers or customer segments for the opportunity have been identified and quantified
Competitors have been listed and details of related market shares and competitive advantages are compared and understood
Pricing strategy has been analyzed
Advertising, marketing, sales and distribution strategies have been analyzed
Potential protection of intellectual property rights (e.g. patents) have been considered
Management and Staff
Existing (or other specifically-identified proven acquirable) resources possess the required skills, experience and knowledge to assure success of opportunity
Deal structure
The legal structure of the opportunity must be consistent with the company’s objectives, particularly related to risk management
Opportunity financing and funding must fit within the company’s targeted financial structure and capital availability
Exit strategy
Must have a viable exit strategy or “choke point” established
A simple screening tool can better focus your resources on the best new opportunities, reduce internal conflict, and aid in development of commercial acumen within your organization. The tool may not provide assurance that you get a gazelle meal today, but it should help ensure you are going after reasonable prospects and not needlessly wasting your energy.
A feature article by Dwayne Coben of Coben Advisory Inc. (www.coben.ca). Coben Advisory is a specialized corporate & executive advisory firm that offers services to help our clients plan, improve, grow and/or exit their businesses.