Reasons for Doing Things
Years ago, I worked in an internal consultancy group for Pearson, who at the time owned Alton Towers, the UK’s leading theme park. One day they sent up a request to spend a very large amount on a new rollercoaster ride – bigger, faster, scarier than anything previously seen in the UK. The Group FD threw it at us and asked us to advise on whether he should say yes to it.
There was a difference of opinion in our group; not about the merits of the proposal, but about how to take the decision. One view was that this was an investment decision; we knew how much the new ride would cost, so it was a question of what extra revenues it would generate, and whether therefore it gave an acceptable return on investment. The other view was that return on investment was irrelevant. This investment was a cost of staying in business; if you wanted Alton Towers to keep its position as the country’s leading theme park, then it had keep offering the public rides bigger, faster and scarier than anything seen before.
Reflecting on this, I think there are three reasons for doing anything, and plenty of scope for creating confusion by looking at the wrong one. The three levels are, from the most compelling downward:
Values and Identity
Cost of Staying in Business
Return on Investment
Values and Identity means “we do this because that is who we are.” This would include (for most organisations, we hope) acting legally and ethically. For organisations like HP and Apple it would also include regularly launching new products.
Cost of staying in business means what is says. We improve, upgrade, invest because if we don’t the organisation will decline over time and ultimately die.
Return on investment is the method we use when we have the option of remaining in a steady state but could, if we wished, make an investment to improve matters.
All sorts of things can go wrong here:
- We can take the decision at too low a level. Calculating an ROI for the Alton Towers ride and basing the decision on that would, in my opinion, have been that sort of mistake. It was a cost of staying in business. Basing the decision on ROI would have been making the false assumption that leaving things unchanged was sustainable for more than a year or two.
- The opposite error to 1. would be to justify an investment with poor ROI by calling it a cost of staying in business when in fact it was no such thing.
- We can often be bad at recognising and implementing projects with good ROI. Partly it’s timidity, partly it’s because numbers have no emotional power. A substantial, secure ROI is a great thing to have, but it’s very hard to get excited about it.
- It’s important to have values, but you can have too many, or values that aren’t really values. This seems to have been one of General Motors’s problems, a reason for its much-remarked-on rigidity. Peter Drucker expressed it by saying “policies became principles.” The same problem nearly killed Intel in the mid-80s when it ceased to be competitive in the memory business but took far too long to leave it. Because Intel had started, and had great early success, in the memory business it had come to think of itself as a “memory company.” Leaving memories and throwing everything into the new but highly promising microprocessor business therefore became not an investment decision (although the case was compelling), not a matter of survival (although it clearly was) but a question of identity. Very hard to deal with. How does Intel see itself now? A microprocessor company, or a leading-edge semiconductor company? If they ever need to leave microprocessors and move to the next thing, we’ll see.
Here is a very simple routine that could dramatically improve the quality of your next decision. Ask yourself, or better still ask someone else:
- At what level am I justifying this decision?
- Is that the right level?
- Could I be making any of the four mistakes above?