Five Key Questions a CEO Should Be Asking When Evaluating Strategic Alternatives

If you’re doing things right as the CEO of your company, you will have surrounded yourself with some pretty smart people. Ideally, these are people smarter even than you in their chosen field of expertise. That’s good. What’s even better is when they bring you their product or service offering ideas for growing the business. That means they are being strategic and not just tactical. They are looking beyond just their own operational purviews and their day-to-day decision making to get things done and they are thinking about the market, your customers and the future. This is great news.

Let’s presume, for the sake of argument, that all of the ideas that your team has presented you with are good “strategic fits.” That is, they are consistent with your company’s strategic vision and the direction that you have set. This presumption is unusual, as I will discuss further below, but for now let’s go along with it. Now you sit down with your CFO and she tells you, “Sorry boss, we just don’t have the financial resources to undertake all of these ideas right now, nor should we. We need to pick the best one or two and prioritize.” She’s smart, listen to her. I’ve been a CFO, I know. So how do you do that? I’ve discovered that a good place to start is to ask the owners of each of these ideas to ask and answer the following five questions and be prepared to defend their answers before coming to you. This exercise, if done correctly, will serve as a good screen for what makes it through to your desk and provides a useful framework for determining which ideas are the most compelling.

Question 1: Does it fit?

Does the idea fit and further the company’s strategy and if so, how? Remember that in the scenario I described above, we just assumed that the answer was “yes” for all of the options you were presented and were considering. As a matter of experience and practice, you will find that this is more often not the case. While the product or business idea may be feasible and lucrative, it may also serve as a distraction, draining resources and attention away from your larger, strategic objectives. Demanding an answer to this question will ensure that you and your company stay focused on what’s important and that you don’t get distracted by any pretty, shiny objects no matter how tempting they seem.

Question 2: Can we build it?

Whatever it might be is it feasible and can you produce it? This sounds like a ridiculous question; after all, why would anyone propose something that is not feasible? “Can we build it?” is a shorthand way of asking: given the talents and capabilities of our people and processes, do we have the ability to successfully actualize this idea? You’re not just asking about the project’s technical feasibility. Yes, putting on a circus is technically feasible and potentially lucrative, but if I’m in the consumer products business (or engineering business or anything other than the circus business), what do I know about putting on a circus? This is an extreme example (especially since it results in a resounding NO to Question 1), but I think you understand my meaning. “Core Competency” is not just a fancy two word phrase that people bandy about at the Harvard Business School. It’s a concept that when companies stray too far from, they usually end up failing spectacularly and expensively.

Question 3: What will it cost?

Sounds obvious, right? They are asking for permission to proceed with an idea, they better well tell you what they need in the way of investment to do so. That’s called “The Ask.” But look beyond just the math of the initial R&D and capital expenditures and the ongoing continuous improvement and ask them to quantify the opportunity costs and other intangible costs that any major project entails. Who will be working on this from your existing team? What will they not be doing (that still needs to get done) while they work on your new project? Do you and your team really have the available mindshare to devote to getting this launched successfully without letting business as usual slip? Probing in this way will uncover those other costs that don’t appear in the project’s budget and financial projections. Finally, if you really want to blow their minds, ask them, “What could you do with your existing products/services and customers if instead we invested this money in your current business?” You and they may end up liking the answer to this question even better than the new idea.

Question 4: Is it worth it?

This is another shorthand version of a multi-part question. What you are really asking is, “How big is the market opportunity for this, how much of that market can we capture and what will be our return on the investment you want to make?” The first two parts involve basic market research. The last part involves nothing more than a Return on Investment calculation, taking into account all of the initial investment outlays and projected future income and discounted cash flows, which should of course be included in their business case. Does the ROI clear your hurdle rate—be it weighted average cost of capital or payback period or both? If it doesn’t, then the answer is no, thank you. If it does, make sure you understand and have satisfactorily challenged all of the assumptions underlying the projections (market share, sales, cost savings, etc.) and are comfortable with them. Also, ask what happens if they fall short of their projected sales or cost-savings by 10%, 25%, even 50%. Understand the risks!

Question 5: Can we win?

Finally, given everything you know from all of the answers to the previous four questions, will this new product or service give you a meaningful and sustainable competitive advantage in your market? Will you be the first or will you be better than the other players already in the market? Is this a disruptive innovation or will you be entering an already crowded space with an offering that will be hard to differentiate from that of the existing market leader(s), having to claw share away from the others? Beware of “me tooism.” When he was leading GE, Jack Welch had a rule for his market managers and product divisions which can be paraphrased as: be number one or a rising number two in your market or you’re gone. That rule can be applied in this circumstance as well. If the first answer to Question 5 is no, your next question should be, “Is there anything we can do differently with this idea to turn this into a ‘yes’ answer?” If not, stop. Sometimes the best ideas turn out to be the ones that you don’t pursue.

–NR