Three reasons to tackle the hard problems, right now.

Justin Daab Corporate Innovation, Innovation, Strategy

It’s common for businesses to prioritize solving the easy problems while delaying the greater efforts needed to solve the hard problems. It’s usually a low-risk (at least short-term), low-effort and low-cost approach that can return incremental advantages within a single budget cycle. The collective and cumulative effects of that habit are that we usually witness the emergence of parity stop-gap solutions across an industry. Eventually parity leads to price comparisons and margin reduction until some entity finally takes on the risk of investing enough time and treasure to take on the hard problem.

The question here is does it make sense for a business to take on a high-risk/high-reward strategy of taking on the hard problems in our current environment? At this moment in time, making sense of any business risk associated with innovation or change is saddled with the added calculus of considering the impacts of a global pandemic, an economic downturn and potentially massive social change. A short-term perspective might point you away from taking on any additional risk in this environment, but I’d suggest, there are powerful reasons to consider taking the long view and making significant moves, even now.

1. “The best chance to deploy capital is when things are going down.” – Warren Buffet

While Buffet was referring to purchasing a controlling share of corporations, the philosophy applies to an investment in your own enterprise. The underlying driver of buying on the way down is an understanding that markets are cyclical and if there is a sound business model supporting long-term viability, it makes sense to buy/invest when prices are low. 

Today, we can find an historically low cost of capital, supply exceeding demand for externally sourced goods and services (excluding cleaning products, PPE and ventilators, et al), and, given the general slowdown of commerce in most sectors, little in the way of opportunity costs. 

Meaning, in short, your dollar can potentially go a lot farther in a down market and return a much better multiple when markets return. Contraction, or waiting for the markets to return to normal, simply drives your realized returns to zero in the short term, increases the cost of the same improvements in the future and lowers your ROI.

2. If you wait until everything comes back, you’ll be in a long line.

Contraction is happening at an unprecedented level. The resulting and pervasive fear is causing a lot of businesses to simply pause until they understand what’s going to happen next. On the face of it, that sounds like prudent risk management. But there’s a flaw in the logic. There is never a moment when anyone can say with any real certainty what will happen next.

Let’s assume, for argument’s sake, that your market demand will eventually shift back to pre-COVID-19 levels. When that occurs, the impending feeding frenzy amongst you and your competitors will likely be as unprecedented as the great pause that preceded it. It will be a battle for share. There will be competitors whose offerings remained stagnant. There will be competitors who spent the time during the downturn actively responding to changing market conditions, gaining a better understanding of the changing needs of their customers, and improving their offering, their features, or customer experience. We believe the latter will be prepared to take a greater share, command a higher margin, or both. The question every business needs to answer for themselves is which of those future positions is a better bet, today?

3. If the math works, why wait?

I want to be clear that I am not advocating for blindly taking on risk. Just the opposite, actually. What I am saying is businesses should also not blindly avoid risk because general conditions are, at least for the moment, frighteningly bad. Obviously, no matter what potential investment or transformation you might be considering, these are exceptional times and evaluating any investment requires exceptional diligence. 

That being said, when I was in business school, one point drilled into our heads was if you can engage your resources and return even $1 of profit, you should. Unless, of course, there is an alternative opportunity that will return more than $1. They also taught us the time value of money—that a dollar in your hand today is worth more than that same dollar at some point in the future.  

So, for many businesses, now might be the best time to look seriously at options for making major improvements —even if they require a different operational approach, a sizable investment of capex, or a longer-term expectation of market recovery. If you can create a reasonable proforma, based on valid well-researched assumptions, that projects a positive value for your project, why are you waiting? 

We’re practicing what we preach.

For the past two years, Magnani been refocusing the efforts of our firm around helping our clients innovate new products and services, develop digital transformation strategies, and design and build new user experiences that address their most difficult business challenges. Admittedly, in this great economic pause, we are facing a few of our own challenges. But we’re not pausing to wait and see what might happen. We’re working and investing in our people and our business to build new capabilities, explore new platforms and technologies, and create a more relevant offering for the very different market we see emerging over the horizon.

ABOUT US

Magnani is an experience design and strategy firm that crafts transformational digital experiences to delight users and deliver sustainable competitive market advantages for our clients.

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