A couple weeks ago I observed on Twitter/LinkedIn:
Nearly everything I share in such forums is based on actual events/observations, not theory. I didn’t expect any reaction. 82 comments later, I clearly struck a nerve. The interesting thing is the dichotomy of reaction. A portion of people think I don’t understand design thinking, MVP’s, and experimentation. Another portion vehemently agree with my statement. Given the passionate debate, I felt it appropriate to clarify my thinking. The background for this starts with a couple core beliefs I hold.
Belief #1: The job of a business executive is to maximize return on invested capital.
Many companies are myopically focused on growth. Growth is wonderful, but in isolation it ignores the fact that the true value of a business is determined by the discounted value of its future cash flows. The future cash flows ultimately determine what can be distributed to shareholders, and they can be maximized by growth, but also by optimizing profit margins and capital efficiency. I believe Sean Stannard-Stockton, president and chief investment officer of Ensemble Capital, says it best:
Return on invested capital isn’t just an accounting metric. It is the key driver of how much cash a company can distribute to shareholders relative to its earnings. Companies that focus on growing accounting earnings, rather than distributable cash, will not maximize the value of the business.
In order to maximize return on invested capital (ROIC), every “I” decision (investment) ultimately impacts your total “R” (return). This does not mean a company cannot experiment. However, it does put a premium on clarity of thinking and making the tough decisions. Often times the biggest investment in the “I” category is time, not money.
Belief #2: Problems, unlike wine, do not age well. Most problems are not dealt with swiftly because it’s uncomfortable.
Problems exist in every enterprise, every division, and every team. As I remind many that I work with, the company would not need us (the executive team), if there were not problems. Said another way, the problems are the job. Despite this truth, many are not dealt with in a timely manner. Whether its due to incentives, politics, history or pride, they just do not get addressed. I suppose a bit of this is human nature.
These core tenets can be condensed to say that a great leader maximizes all dimensions of ROIC, while addressing all issues/inhibitors efficiently. In every decision that a leader faces, I believe there are 2 scenarios:
You know the right thing to do (and it is likely difficult to deal with).
You don’t know the right thing to do (and you need to iterate).
In the case of scenario A, a pilot is an excuse, that allows you to avoid the tough decision. You dabble, instead of taking decisive action. You experiment, instead having the guts to act. In the terms above, you decide to minimize the returns on invested capital by wasting “I”, when you know what it really takes to drive “R”. It happens all the time, primarily due to the lack of courage to act. Hence, my point on it being a weakness. Most times I see a pilot suggested, it’s in a scenario A situation.
In the scenario B, when you don’t know the right thing to do, a pilot/trial/experiment, may be exactly what you need. This is where an agile approach, using design thinking, focused on MVP’s (and any other word of choice), is appropriate. Ironically, many times, pilots are not used in this scenario.
Anytime you hear someone suggest, “let’s pilot this”, you should quickly assess if this is a scenario A or scenario B situation. If it’s scenario A (which it most often is), a pilot is a cop out, lacks courage, and is not the right thing for the company. It’s a weakness. If you know the right thing to do, go all-in. Often times, poor leadership will disguise a scenario A situation as scenario B. Don’t let it happen.
This all comes back to the role of a leader. As described above, I believe the role is to maximize returns on invested capital while dealing with anything that is preventing that. This is the essence of competition. Al Ries and Jack Trout write elegantly about this in their classic book, Marketing Warfare. They assert that every executive has to decide if they will drive an offensive or defensive strategy, as the tactics are different.
Regarding a defensive strategy:
- Only market leader should play defense
- Have courage to attack yourself
- Strong competitive moves should always be blocked
Regarding an offensive strategy:
- Main consideration is strength of leaders position
- Find a weakness in the leaders strength and attack at that point
- Launch the attack on as narrow a front as possible
Regardless of the chosen strategy, the mantra must be to take action and do it quickly. A pilot rarely accomplishes that.