The business case is central to directing investment in most organisations, but business cases are often biased substantially in favor of the outcome desired by their authors. It is the role of a responsible Executive to reject such ‘fantasy’ business cases, but this can lead to hard rules that also reject strategic investments in innovation.
Investment and innovation for survival
One of the biggest challenges facing businesses in the current economic environment is the ever-increasing rate of business change needed to survive and prosper, driven by globalisation, changing legislation and widely varying customer priorities.
Figure 1: Increasing rate of business change
Most businesses are struggling to deal with a rate of change that greatly exceeds the levels their current executive managers handled in their formative years, but which the Millennial generation are familiar with (Figure 1). In the 1980s, it might be expected that major changes only occurred every 2 or 3 years (brown line); by the 2000s, as much time would be spend changing as in a steady state (green line) but currently, successful organisations need to be in continuous change (red line). This means that investment management must be more effective than ever.
If an organization is to be in business in five years’ time, it needs to increase its performance substantially to remain competitive. If it wants to improve its market share, it must improve even faster (Figure 2). Below the lower (red) line, the company will fail, above the upper (green) line, the company will thrive. In between the two lines, it will merely survive.
Efficiency versus Effectiveness
In achieving performance gains, there is, a critical distinction between “efficiency” and “effectiveness”, terms often confused. Vitally, the difference between them is that ‘effectiveness’ relates performance to the achievement of goals, and ‘efficiency’ relates performance to the use of resources (and so money). In business change, there is no point in being efficient if the change is not effective i.e. the goals must be achieved to deliver any benefits.
In recent studies, two types of cellulose micro-fibrils were tested – one was a cheap waste-product from another industry, the other was carefully engineered from raw materials, so more expensive. The cheap material simply wasn’t effective though. The product, when made up, wasn’t stable on the shelf and separated out unpleasantly, and shaking by the customer couldn’t remix it. The engineered material (Exilva) formed a stable formulation, passing all technical tests.
The material that was attractive from an efficiency perspective was a dead end as it wasn’t effective. The more expensive material was effective, so a more detailed evaluation of the business case was worthwhile, and this showed the true costs of using these materials lay not in their direct costs, but the plant changes necessary to use them.
Effectiveness trumps Efficiency
The attraction of using waste materials is two-fold – firstly that they are cheap, and secondly that using a waste product means it isn’t dumped or destroyed, so more environmentally friendly. These only have any worth if the waste meterial does the job effectively, though.
When reviewing investments in innovation, consider effectiveness first, ahead of efficiency. Investment in cheap options is always attractive, but if it has a lower chance of success, can easily end up being wasted money. As the saying goes “Buy cheap, buy twice”.