14 Posts Found

Depending on the structure of a company’s investment portfolio, decision makers may need to apply different criteria in order to highlight differences in the value drivers of various investment types. For example, a strict focus on internal rate of return and payback time may systematically favor incremental improvement investments at the expense of larger breakthrough investments that tend to have longer-term and uncertain payoffs.

The process … [ Read more ]

Authors: Sebastian Stange, Ulrich Pidun | Source: “The Art of Capital Allocation” | Original Publication: Boston Consulting Group | Subjects: Finance, Management, Strategy

In theory, there is a simple rule for choosing among competing investment projects: sort the list of projects based on their expected internal rate of return and select those with the highest IRRs until the budget is fully committed. In practice, however, the effectiveness of this approach is constrained by the quality of the assumptions that go into the valuations and by the influence of … [ Read more ]

Authors: Sebastian Stange, Ulrich Pidun | Source: “The Art of Capital Allocation” | Original Publication: Boston Consulting Group | Subjects: Finance, Management, Strategy

One of our clients, an international energy company, which classifies business units as development, growth, anchor, or harvesting businesses, depending on their position in the market life cycle. Each portfolio role has its own performance requirements, and businesses are managed based on specific sets of financial indicators. More important, the role of each business determines its guidelines for capital allocation. For example, coal power generation … [ Read more ]

Authors: Sebastian Stange, Ulrich Pidun | Source: “The Art of Capital Allocation” | Original Publication: Boston Consulting Group | Subjects: Finance, Management, Strategy

As commodity prices increase, suppliers come knocking, pushing through commensurate increases. But what happens when those same commodity prices fall? Too often, purchasers fail to get a break. Consider the situation of an aerospace and defense supplier. As key metal prices rose, the company grudgingly accepted its suppliers’ price increases for machined parts. Trouble is, the company lacked good tracking data on commodity indexes. So … [ Read more ]

Author: Clinton Anderson | Source: “A fresh look at procurement” | Original Publication: Bain | Subjects: Finance, Management, Operations

A profit map, the core analytical tool of profitability management, displays the profitability and cost structure of every product in every customer in the company. Profit maps show exactly where profit is flowing and where it is lost.

A profit map is not especially difficult to develop, but it is completely different from the information developed for financial reporting. Many finance managers make the … [ Read more ]

Author: Jonathan Byrnes | Source: “3 Steps to Turbo Charge Profits” | Original Publication: Business Finance | Subjects: Accounting, Finance, Management, Operations

Within any department there may be dozens of plans and forecasts, and they’re usually kept on desktop spreadsheets that don’t match up with one another. Our research finds that the connections between these various forward-looking activities are limited. Although companies are not completely uncoordinated, gaps routinely occur. (“Manufacturing never knows what promotions marketing is planning until it’s too late” is one common complaint.) The impacts … [ Read more ]

Author: Robert Kugel | Source: “Create a Telescopic Lens for Your Finance Function” | Original Publication: Business Finance | Subject: Finance

Heike Bruch and Jochen I. Menges make a strong argument for starting an initiative to kill initiatives in their April 2010 Harvard Business Review article “The Acceleration Trap.” Far too many “walking dead” projects clog capacity in most organizations. Once superfluous activities have been cut, leaders can allocate resources according to the priority of the remaining projects and initiatives. This requires the application of a … [ Read more ]

Author: Kannan Ramaswamy | Source: “Are You Your Employees’ Worst Enemy?” | Original Publication: strategy+business | Subjects: Finance, Innovation, Management

Always ask people making an investment recommendation to present their second-best choice. It’s rarely better than the first. But both might actually be good, and both recommendations of another business unit might not be. Considering just one recommendation from every business unit will deprive you of many investment opportunities you’d get if you asked for two.

Author: Dan P. Lovallo | Source: “Making great decisions” | Original Publication: The McKinsey Quarterly | Subjects: Finance, Management

Executives at Norwegian oil and gas company Statoil were looking for ways to make it more nimble and more realistic about its goals. So they adopted a new approach to year-end budgeting, which breaks it out into three different sets of numbers. These included targets (“what we want to happen”), forecasting (“what we think will happen, whether we like what we see or not”), and … [ Read more ]

Source: “Listening to employees: The ‘Beyond Bureaucracy’ M-Prize winners” | Original Publication: The McKinsey Quarterly | Subjects: Finance, Management

Simple resource allocation decision rules can help minimize political infighting because they change the burden of proof from the typical default allocation (“what we did last year”) to one that makes it impossible to maintain the status quo. For example, a simple harvesting rule might involve putting a certain percentage of an organization’s portfolio up for sale each year to maintain vibrancy and to cull … [ Read more ]

Author: Dan P. Lovallo | Source: “How to Put Your Money Where Your Strategy Is” | Original Publication: The McKinsey Quarterly | Subject: Finance

A technique for avoiding decision bias is to request that managers show more of their cards: some companies, for instance, demand that investment recommendations include alternatives, or “next-best” ideas. This approach is useful not only to calibrate the level of a manager’s risk aversion but also to spot opportunities that a manager might otherwise consider insufficiently safe to present to senior management.

Author: Dan P. Lovallo | Source: “Distortions and deceptions in strategic decisions” | Original Publication: The McKinsey Quarterly | Subjects: Finance, Management

Rio Tinto institutes checks and balances to manage internal lobbying. We have something called the Investment Committee, which approves sizable investments of any kind and consists of the CEO, CFO, the head of technology and innovation, and the head of business services. In other words, it does not contain any of the divisional heads. The plan is that this committee has enough data to have … [ Read more ]

Author: Guy Elliott | Source: “Breaking Strategic Inertia: Tips from Two Leaders” | Original Publication: The McKinsey Quarterly | Subjects: Finance, Management, Strategy

When Halliburton Energy Services Group, a leading oil field services company, revamped its strategic planning process, senior managers decided that these two processes were in fact one and they designed their strategic planning accordingly. Halliburton now has one owner of strategy and capital allocation, with clear accountability for ensuring alignment between the two. This senior manager owns the corporate-wide strategic managing process and chairs a … [ Read more ]

Author: Phyllis Rothschild | Source: “Strategic Planning Redux” | Original Publication: Mercer Management Journal | Subjects: Finance, Strategy

Keep competitors off guard by avoiding the obvious. For instance, the usual reaction in a downturn is to tighten customer payment terms and increase collection efforts in order to boost cash flow. Instead, consider giving your most profitable customers or target accounts more lenient payment terms in order to capture more of their business. Make terms stricter for less attractive accounts. You’ll likely find that … [ Read more ]

Author: Udo Jung | Source: “Winning in a Downturn: Six Actions to Take Now” | Original Publication: Boston Consulting Group | Subjects: Customer-Related, Finance, Management