Strategy October 23, 2018

Investment decisions scale-up leaders face

Investment decisions scale-up leaders face

Making investment decisions for your firm is one of the great privileges of leadership. It's also, however, a responsibility that many business leaders still struggle with. As US business magnate Warren Buffett wrote in a letter to Berkshire Hathaway shareholder in 1987: “The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising because most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration or, sometimes, institutional politics.”

It’s an issue that deserves closer examination, as any business wishing to scale needs not only to invest, but to invest smartly in order to generate a decent return on investment (ROI).

The old “too many eggs in one basket” idiom argues that businesses which over-invest in one area of the business often end up underperforming against the market. Also, over-investing in one area of a business is often a case of disaster relief, piling on money and resources to save a sinking ship that might have been better off with a cannonball to the bow.

Under-investment in a new project, meanwhile, often leads to waste, because if you don’t give a project enough resources to help it find its feet (for example, investing in a software automation tool but not training your staff in its operation) - you’ll have wasted that initial spend.

Of course, making the right investment decisions on the right projects and at the right time is a juggling act between having the right information, strong decision-making and strategic planning. You'll also need to decide whether focus or diversification is your primary objective. Whichever direction your compass is pointing, however, decisions need to be made.

It's all about the talent

A company is nothing without its employees, but your business is never likely to reach its full potential with the wrong people in place. Matching the right talent to relevant roles within the business will often prove significantly more fruitful than investing in new talent to bulk out the workforce; over-investment in talent will almost always lead to wasted staff resources, whereas under-investment leaves you with a half-manned ship.

A strategic talent investment will always reap a strong ROI and this includes investing not just in new talent but in the development of existing talent. Investing in training and development yields an average 50% ROI, and with 21% of Millennial workers admitting to changing jobs within the last year (according to a recent Gallup poll), if you're investing in hiring new talent instead of developing existing talent, you could be essentially throwing money out of the door.

Kirsty McCann, business consultant, designer of numerous leadership programmes and CEO of her own stationery company, & copper scribbles, feels that companies are investing too heavily in talent acquisition, but not enough in employee retention. She asks: “When an employee shows a dip in productivity or a gap in skills, do they throw that employee away for a new one, or do they sharpen them back up again?”

Kirsty believes that the so-called 'war on talent' is a misguided approach to solving the wrong problem; instead of constantly looking for new employees, why not invest in your existing employees and sharpen their skill sets? As Kirsty quite rightly adds: “Talent isn’t talent until it’s developed. You can hire someone with a specific background, but unless you give them the tools and resources to thrive in your environment, you’re not going to realise their full potential.”

International aspirations

The benefits of investment in international growth are plentiful: extend the sales life of existing products by opening them up to a new market; reduce the dependency on your existing market; leverage the seasonal changes and demand cycles of different territories. Whilst the benefits are obvious and encouraging, the costs can be staggering and by over-investing internationally, you could also run the risk of neglecting your 'home base'.

Still, under-investing in a booming market could be just as damaging when you find yourself scrambling for scraps after the big boys have all taken their share of the pie. So try to keep an eye on global markets and see where big things are happening. A report from the World Bank Group, for example, recently found that the Philippines is currently the most investable country in the world, with a 2016 GDP growth percentage of 6.9%.

Philippines - one of the most investable countries in the world

Of course, Brexit will undoubtedly have a major impact on how much investment businesses choose to throw into the UK and vice-versa. However, with the pound currently fluctuating wildly from one month to the next as talks fall apart and the UK government and the EU cast fresh aspersions at one another, currency is currently a grey area for investment for UK businesses.

With the uncertainty facing the economy, many businesses are turning to cryptocurrency. Indeed, a handful of major businesses, brands and e-commerce platforms (everyone from Expedia and Microsoft to Gyft and Shopify) currently accept Bitcoin as payment. But there could be the tendency to over-invest, particularly given the column inches given to cryptocurrency and blockchain right now and how notoriously volatile it can be. Indeed, the temptation to over-invest when something is so relevant will always be there. But remember: trends end.

Marketing (so much more than social)

An investment in marketing is effectively an investment in your entire business, so it will always be the hungry boy at the head of the table when it comes to investment opportunity.

The key with marketing, however, is to understand exactly what to feed it. This comes from strategic planning, not simply pouring a bit of cash into a comms strategy as many businesses are prone to do. Immediately investing in downstream marketing tactics like social media, before looking at the bigger picture - the brand and the strategy - is a waste of resources. Great marketing is still about the 4 P’s - product, price, place and promotion.

As Kevin Stirtz, author and manager of the data analytics strategy team at Thomson Reuters, makes clear: “Too many business owners focus on ads as the only way to generate new business. But, before you buy any advertising, you should know what you’re trying to accomplish. And that goal comes from your overall marketing plan.”

Under-invest in this crucial area of marketing and your efforts are simply a bunch of tactics sewn together by a vague feeling that you should be doing something. Marketing starts with a diagnosis - of the market at large, of competitors and, of course, of your audience. It moves into a strategy, then, finally, the tactics to get there.

Marketing comms is simply one small part of the final part of that process. An experienced, senior level marketing director will understand this. A marketing assistant with two years of social media experience will not. Without a marketing plan, there is no cohesion to the marketing comms you put out there. And, as the 4 Ps suggest, marketing feeds into crucial areas of the business - including product development and pricing. This is, again, not the job for a marketing assistant, so the investment in a senior level marketing person is a good start.

Once you start allocating marketing budget to the tactics themselves, that becomes trickier. One of the key metrics every business should measure is marketing as a percentage of sales, i.e., how much sales income is being spent on marketing. Marketing, after all, is not a cost, it’s an investment. So, what constitutes too much or too little?

According to Robert Stead, one of The Marketing Centre’s regional marketing directors, the sweet spot for B2B marketing is between 4% and 8%: “If your marketing spend is less than 1% of sales, you either have a monopoly or you are missing opportunities. If it is over 15%, it sounds inefficient.”

The point is, there is no one size fits all. But when it comes to investment in marketing, it pays far more to invest in senior level talent first rather than further down the food chain.

Digital transformation

Back in April of this year (2018), Gartner issued a prediction that, by the end of the year, global IT spending is projected to have increased by over 6% to $3.7 trillion; the highest growth rate in over a decade. Barring “unexpected disruption,” the analyst firm says that the software industry “is expected to continue capitalising on the evolution of digital business.” Is it money well spent though? Or a case of businesses throwing enough money at the wall that something somewhere has to stick?

A survey conducted by PointSource suggests that many senior-level executives are confused and conflicted over which tech bets will make the soundest investments. The survey found that an overwhelming majority (94%) of the executives surveyed admits to an increased focus on digital growth this year, but also that they seem unsure “what will be most helpful in driving internal growth and what they’re investing the greatest amount of budget in.”

Under-investment in digital is certainly not a strategy many businesses are willing to risk. But of course, with everyone riding the digital wave, countless firms have invested heavily in as many tech solutions as possible, instead of investing the right amount of capital and resources with the technologies that actually work for them. The report states: “It’s not uncommon for organisations to end up with technologies that are difficult to use or butt heads with other systems. Sometimes, decision-makers aren’t taking the proper steps to support new technology investments. Worse, they may be purchasing flashy solutions simply because they’ve bought into hype or a competitor's move.”

Mobil Barati, CEO and consulting director at MOBIN Enterprise, feels that, when it comes to investing in digital transformation, financial decision making has to change. He agrees that “Choosing which investment to make and creating an environment where the investment can succeed is very challenging.” He also concedes that, in reality, “most of the investments will miss initial targets let alone exceed them.”

However, whilst this might lead to many businesses taking a defensive approach by under-investing in certain technologies and focusing more resources on appraisal (to make sure they don't back the wrong horse), this approach “slows down the growth of even successful enterprises.” So, Barati extols a more pragmatic approach, asking business leaders to design “a decision-making environment in which investments will work and digital transformation will exceed leadership expectations.” A big ask, perhaps, but one that could reap lucrative rewards.

Over-investing in all of the latest flashy tech (be it blockchain, AI, facial recognition or whatever the latest exciting new marvel may be) might work for some businesses, but it certainly won't work for all. The moral of the story here? Choose your lane and make sure your company is prepared before investing too heavily in any drastic digital transformation.

Product innovation and development

New is exciting, new is “innovative” and new is “disruptive,” but is new always necessarily a decent investment? New products are what drive a sector forward: just ask Apple, whose dedication to releasing new products on a regular basis has led to historic and continued growth for both the company and the sector. Indeed, back in July this year, the company posted quarterly revenue of $53.3 billion, an increase of 17% from the same quarter the previous year, and quarterly earnings per diluted share of $2.34, up 40%.

Apple could also, however, be used as a cautionary tale for over-investment in new products, given the sheer amount of products they tend to throw at the market on a yearly basis, hoping at least one will stick. A case in point is the latest line of iPhones, the iPhone XS and XS Max. With the XS offering little in the way of improvement over the previous model, but the Max offering the largest screen in an iPhone yet, the Max outsold the conventional XS by as much as 3-4 times, according to some analysts. This is also undoubtedly due to the soon-to-be-released, more affordable iPhone XR, which is bound to be a more attractive option to those on a budget.

Apple should have read the market and realised a growing trend towards consumers desiring larger phones (or 'phablets'), with most consumers who would have bought the standard XS holding on for the more affordable XR. These failures, however, were not seen necessarily as a result of over-investment, but in a lack of innovation. So, maybe the lesson here is to invest the right amount in products that will lead to genuine market growth, as opposed to stagnation.

Tipping the balance

More often than not, it isn't simply a case of knowing how much to invest in one area of the business, but knowing at what time to invest and investing smartly. Whether it be an investment in talent, international expansion, marketing, digital transformation, new products or overall infrastructure, the real skill is in reading the market and using existing data and knowledge to ascertain when to roll the dice, where to roll them and how many to throw.

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