First, The Market
I was working recently on a divestiture where the company's return on assets was pitiful. The infrastructure (overhead) in the business was just too large for its volume. This led to the obvious questions:
- Should we continue to deploy those assets?
- Should we sell or discard some of the assets?
It's natural at that point to turn to numbers, to percentages and amortization and incremental cash flow. After all, Return On Assets is a financial metric, right?
But all the really important questions are market-based questions. It is the only source of value in business. Everything inside the organization is cost, and those costs only deliver a return when they are organized in a way that brings adequate satisfaction to an adequate number of customers. This means that all internal financial metrics are derived from the amount of money a certain number of people outside the business are willing to give us for the satisfactions we offer them.
When our numbers are weak (however we define that), it's fundamentally due to one of three things:
- Our opportunities in the market are inadequate. There just aren't enough people out there willing to pay enough for what we offer.
- We are underperforming relative to our opportunities in the market. We aren't reaching enough of those people, in the right way, with the right offer, and delivering it the right way.
- We are enduring a temporary lag as we prepare, transition or build to pursue more opportunities in the market.
Depending on which of these situations we believe to be true, we might address the Return On Assets problem - or any other financial problem - in very different ways. The important first step is deciding, consciously and coherently, which it is.
Allow me to generalize about what happens when we don't evaluate the situation consciously and coherently. Faced with a persistent financial challenge, Finance people default to #1: we must not have enough opportunity... so we need to cut. Visionaries default to #3: we just need to get around this corner (and there's always another corner).
But the reality is more likely #2, particularly in a well-established business. The market presents adequate opportunities. We need to get with its program.