How much, How soon, How certain

competing on value book

The best business book I’ve ever read (or at least the best by someone not named “Drucker”) has been “Competing on Value” by Mack Hanan and Peter Karp. Not trendy or full of consultant-speak buzzwords, first published in 1991, it’s simple, direct approach has stood the test of time, even when other more highly touted approaches have come, gone, or back peddled (over half of Tom Peters’ highlighted companies in “In Search of Excellence” were not doing business a decade later). An easy read as well, split roughly evenly between theory and practice, you can be finished with the more significant opening chapters on theory even before your plane leaves the LaGuardia tarmac. (Disclosure: No personal or business association with the authors).

For the purposes of these next three blog posts, the book early on introduces the extremely important sub-topic of: “How much, how soon and how certain” as the primary context in which to make marketing and pricing decisions that allow you to Compete on Value.

Nearly everyone on the planet can do “How Much”; everyone can do the greater / lesser comparison, everyone instinctively knows when they are being cheated out of their fair share. “How much” is the number at the bottom of the invoice, the sticker shock price on the automobile window, your take-home paycheck amount, your bank balance. As complicated as we normally get on Main Street are the price-per-ounce comparisons in the grocery store – not rocket science.

“How Soon” is the domain of finance; the time value of money, discounted cash flow, internal rate of return, net present value. While nearly everyone also understands the concept that a dollar today is worth more than a dollar tomorrow, doing the math takes a bit of work, but still, all spreadsheet applications today build in the required present / future value calculations such that someone with a bare minimum of financial knowledge could use those tools to calculate the value of an annuity or determine their mortgage payment. More difficult than “how much” for sure, but most MBA’s can be expected to do this in their sleep.

Lastly we come to “How Certain”. Another name for risk, and just as intuitive as the time value of money, but not quite as easy to determine. Everyone in business immediately understands the relevance, and those with a statistics background recognize the quantitative aspect of the issue, but beyond that, the “how certain” question is more often than not completely ignored when making a financial decision, not merely simply set aside as being too difficult. As the global economic events of the past eighteen months have shown, How Much and How Soon often pale in comparison with How Certain when it comes to the stability of financial outcomes. We balance our billions and trillions of dollars to the penny each and every thirty days, we compute our IRR to three significant digits, but when asked to quantify the certainty around those numbers, quantify and justify our confidence in the calculations, the best most financial teams can do is shrug and offer a rather checkered history as support for why things will be different this time around.

My aim is nothing less than to completely shake up how ordinary financial decisions are made, to insist that a proper business decision MUST include the "How Certain" component, that simply providing the “How much” and “How soon” answers is not enough. Just as you would never think to overlook the time value of money, so too you should never overlook the risk. Risk is the key third component to all business decisions and there are tools and methodologies for quantifying and addressing this risk, whether you are Competing, Investing or Purchasing on Value.

tags: finance, risk, strategy, value

5 Trackbacks

  1. [...] Category II risks are those where the risk-reward equation comes into play: yes, the risks are there, but so are the benefits, so are the rewards, if the risks can be properly managed. These are the business or operational risks that I have addressed in some of my previous posts, such as “How Much, How Soon and How Certain”. [...]

  2. By I wonder what the king is doing tonight - Value Alley on December 13, 2011 at 10:20 am

    [...] part, with NPV and IRR and TCO, but often have no idea how to assess the associated risk (see my “How Much, How Soon, How Certain” [...]

  3. By Finance in more than two dimensions - Value Alley on February 1, 2012 at 9:20 am

    [...] to get an order of magnitude, you are not doing all of your job.  Of the three components of “How Much, How Soon and How Certain” in every business decision, finance is very good at the first two, but typically neglects the [...]

  4. [...] word I did not use in the above description was “risk”, as risk is relative and specific to the particular competitive situation.  Doing nothing may in fact be [...]

  5. [...] the book and it’s subject matter as a three-part series in this blog way back in 2010: “How Much, How Soon, How Certain”,  “How Certain is that Number in the Window”, and “Making the HOW CERTAIN Decision”.  [...]

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <p> <pre lang="" line="" escaped=""> <q cite=""> <strike> <strong>