Opportunity Evaluation - Pennies, Nickels & Dollars

Recent­ly, we shared the 4 Forces of Growth mod­el from my upcom­ing book The Grav­i­ty of Growth to help you to get per­spec­tive on where you spend your time and ener­gy, in a busi­ness that aspires to keep grow­ing. The mod­el helps you to mas­ter how to pri­or­i­tize and focus on what mat­ters most.

To keep a com­pa­ny grow­ing, you need to put some ener­gy into growth think­ing and growth activ­i­ties, and those are nor­mal­ly found at the inter­sec­tion of oppor­tu­ni­ties and courage. Seeing:

• New oppor­tu­ni­ties for exist­ing cus­tomers or
• New cus­tomers in exist­ing mar­kets or
• New mar­kets for exist­ing prod­ucts or ser­vices or
• New prod­ucts and services…

…and then hav­ing the courage to test the mar­ket, see how it responds and con­tin­ue to iter­ate based on what you learn.

We now want to help you decide which of the oppor­tu­ni­ties you should actu­al­ly spend the time chas­ing – either in the growth or improve­ment quad­rants of the busi­ness – which we like to look at through the lens of Pen­nies, Nick­els and Dollars.

The Per­spec­tive

The chal­lenge for many lead­ers is that when we get very busy, we become very pas­sion­ate about prob­lems or oppor­tu­ni­ties that we see and lack or lose per­spec­tive to dis­cern the mag­ni­tude of the impact of these issues. We can be pulled into think­ing that all prob­lems need to be solved and all oppor­tu­ni­ties are wor­thy of being pursued.

Unfor­tu­nate­ly, we often find our­selves step­ping over a dol­lar to pick up a nick­el, not real­iz­ing what we are doing. Ide­al­ly, we want to step over the nick­els to focus on the dollars.

Ener­gy and resource allo­ca­tion — cap­i­tal or human — is one of the most impor­tant jobs of a leader. It’s very chal­leng­ing, some­times impos­si­ble, to get right — unless you have the tools to make bet­ter choices.

One of the hard­est parts of our job is to have the right per­spec­tive and tools so that we can step over the pen­nies and the nick­els and to make sure we’re pick­ing up the dol­lars. That’s not to say that some­body should­n’t pick up the nick­els, but we need to make sure peo­ple don’t miss the dol­lars because of their obses­sion with nick­els and that those don’t take a dollar’s worth of effort.

One CEO I spoke with recent­ly said that some of his peo­ple were look­ing at try­ing to man­age their line item of rent. After the CEO did the math, he said that if they allo­cat­ed the exec­u­tive time to come up with a strat­e­gy to sup­port more work at home and oth­er ini­tia­tives, they might have a sav­ings of half of 1% of rev­enue – and that might be a notable sav­ings. His stance was that they would be bet­ter off using same amount of orga­ni­za­tion­al ener­gy in ini­tia­tives to grow rev­enues by 10% or 15%. In this case, they’d be far bet­ter off not work­ing hard to save the mon­ey on rent, if it takes exec­u­tive ener­gy away from the more impact­ful effort of increas­ing sales.

Now it does depend on the con­text of your busi­ness, but the key is to get the dis­ci­pline to break­down the ideas to know if they are worth a pen­ny, a nick­el or a dol­lar before peo­ple get too excit­ed and invest pre­cious resources in them.

All Oppor­tu­ni­ties Are Not Equal: Like­li­hood & Impact

Oppor­tu­ni­ty eval­u­a­tion using the the Pen­nies, Nick­els and Dol­lars Mod­el helps you to eval­u­ate an idea by look­ing at the like­li­hood of suc­cess, and the size of the dol­lar impact:

• Pen­nies box ideas should gen­er­al­ly be ignored because there’s a low impact and low like­li­hood to cap­i­tal­ize. These are the ideas we ide­al­ly stop or ignore and nobody in your busi­ness should invest more than 30 sec­onds of time here. Now, if some­thing in this quad­rant hap­pens with no effort or on its own, excellent.
• Nick­els quad­rant ideas have a high like­li­hood but a low dol­lar impact — some­thing a CEO or exec­u­tive shouldn’t spend any time on. Sav­ing mon­ey is great dis­ci­pline and these should be dealt with by the right peo­ple in the orga­ni­za­tion based on the mag­ni­tude of the impact.
• Dol­lars quad­rant ideas have a high impact and high like­li­hood of suc­cess. They’re good invest­ments that obvi­ous­ly need some work and due dili­gence to prove their worth. Just make sure that you’re just not kid­ding your­self if, in real­i­ty, they are riski­er than anticipated.

For exam­ple, a CEO who spoke to us about inter­na­tion­al expan­sion said they’ve been think­ing about it for a few months, and talk­ing to lots of peo­ple who have expand­ed into the same coun­try. He need­ed a few more months to con­sid­er if the busi­ness was actu­al­ly capa­ble of make it work, and if he was per­son­al­ly up for the chal­lenge because he’d like­ly have to move.

A dis­ci­plined approach is need­ed to con­firm a high like­li­hood of suc­cess – and wor­thy of drop­ping into strate­gic plans for key lead­ers in the busi­ness to dri­ve. But only if there’s enough return to jus­ti­fy the exec­u­tive team’s effort. This is where you want to focus.

• R&D dol­lars quad­rant ideas are very high impact but low like­li­hood, and often peo­ple step over these because they don’t know how to make them hap­pen. These can be some of the biggest wins for com­pa­nies, but they require a lot more work and test­ing – like in the min­ing world when they drill test holes to see the con­cen­tra­tion of what’s under the sur­face, to deter­mine if an oper­a­tion can be profitable.

In many ways, this is what needs to hap­pen here. It can be very, very high val­ue for lead­ers to spend time doing addi­tion­al R&D — to ded­i­cate a per­cent­age of their bud­get to explore and find ways to decrease the risk of these high risk/​high reward programs.

Jim Collins describes this as the need to shoot a num­ber of lit­tle bul­lets — a num­ber of micro-tests they can afford to not work, in terms of orga­ni­za­tion­al ener­gy or cap­i­tal – in order to learn more and find how to make these poten­tial­ly come to fruition. These are often big wins on which peo­ple don’t spend enough time because we’re so focused on short-term results and don’t have enough time for strate­gic think­ing exploration.

Key points:

• Use the Pen­nies, Nick­els, Dol­lars Mod­el to eval­u­ate the ideas that excite you most
• Make sure that the appro­pri­ate ideas, get the appro­pri­ate invest­ment of time and resources from the right people
• Make sure the most senior peo­ple spend the right amount of time on Dol­lars and R&D Dollars,

and a mech­a­nism (week­ly or month­ly meet­ings) to con­tin­ue to evolved their think­ing and progress on these ideas

To pull this togeth­er, with the 4 Forces of Growth model:

If you’re real­ly seri­ous about growth, you want to con­cen­trate your cap­i­tal and human cap­i­tal allo­ca­tion to some degree (depend­ing on your busi­ness) on the Growth quad­rant, where the best work hap­pens. You want to be fur­ther onto the right-hand side of the quad­rant for the R&D dol­lars to have the biggest impact – and to bal­ance it with Improve­ments, as needed.

You have to have enough ener­gy and win fre­quent­ly in order to keep that growth going. And, you can­not let pen­nies con­gest the sys­tem because we can so eas­i­ly get stuck chas­ing pen­nies or nick­els, and then won­der why growth isn’t happening.

Final thought

We often start a new project based on a hypoth­e­sis of how things will work and what the ben­e­fit will be. That’s why a rear-view, after-action review process is crit­i­cal to eval­u­ate your ear­ly think­ing of what you thought these oppor­tu­ni­ties and ben­e­fits were. Look back and see what you actu­al­ly man­i­fest­ed, quar­ter on quar­ter or even a few years down the road, ver­sus what you ini­tial­ly thought, to improve your think­ing and your abil­i­ty to make bet­ter choic­es going forward.

The Chal­lenge

• In which Dol­lar-sized oppor­tu­ni­ties (or prob­lems) do you need to invest more orga­ni­za­tion­al energy?
• In what Pen­ny- or Nick­el-sized oppor­tu­ni­ties (or prob­lems) do you need to have peo­ple stop or min­i­mize their energy?