I'm a big fan of League of Legends (affectionately known as "LoL"). There's a saying that man can live on potato chips and toilet paper alone - I could live on playing LoL, and toilet paper would be optional. LoL is a game in the MOBA genre, which is an acronym for Multiplayer Online Battle Arena. In this particular MOBA game, you select a character to play based on their abilities, your knowledge of their play-style, and your opponent. Additionally, you can customize some of their stats to, for example, deal more damage or to regenerate your health more quickly so that you (hopefully) don't die if your opponent "goes all in."
I'm a morning person so on the weekends when I wake up (before anyone else in the family), I like to make my cup of coffee, turn on Twitch, and watch my favorite morning LoL streamer, SoloRenektonOnly. (You owe me for any new subscribers, Mike.) On one such occasion, SRO/Mike was talking about the customization process and said that people often ask him if one stat boost is better than another. His response was quite profound - he said (paraphrased), "everything is an opportunity cost. Don't think about what you get for taking this stat boost but instead think of the other stat boosts you could have gotten instead and consider whether the one you're choosing is better than the others for the game you're playing." I would add to that and say that, after the match is finished, you determine whether your choice was the correct one to make.
In other words, apply the Deming Cycle.
The Deming Cycle is often referred to the PDCA cycle (which stands for "plan, do, check, act" [and then repeat]). Created by W. Edwards Deming, it was used in quality control but quickly found its application in other areas, such as ITIL and Six Sigma due to its inherent feedback loop which enabled something called Continual Service Improvement, i.e. the "check" from the last iteration is taken into consideration for the next iteration (the "act"). This concept is applicable in other areas too, whether we are talking LoL, planning your weekly dinner menu for the kids (if they don't like your broccoli casserole this week then don't make it next week heh), etc.
If you were to summarize PDCA without using the words that make up its definition, it would probably sound something like this: choices are not things to be made in isolation. There is no "see what I can do now?" in life. Instead, everything should be viewed through the lens of "see what I chose not to do because I made this decision?" This is especially important in corporate strategy. There are finite amounts of resources (staff, money, time) and so choosing to go in one direction means you are unable to go in another direction, at least at the velocity you would if time and resources were infinite.
So how do you create a list of initiatives you could start as a company? To answer that, you'd need some sort of metric that provides an equal basis for comparison. While ROI is the typical metric used, each project will take a different amount of time to complete, cost different amounts of capital, and provide different amounts of benefit. This lack of consistency is why financially savvy people tend to gravitate to one of two financial metrics: NPV and IRR.
NPV, or Net Present Value, is the value of a project to be completed at some point in the future in today's currency. In other words, it takes into consideration how much the capital that you would spend on the project could return if invested elsewhere. It relies on the concept of Discounted Cash Flows (DCF) that reduce the benefit by a fixed percentage (the Discount Rate) every year until the project is completed.
As you can imagine, NPV is useful for examining a single project, but when comparing multiple projects it's still an apples-to-oranges comparison since there is no single consistent frame of reference for making the comparison. This is where IRR, or the Internal Rate of Return, comes in. I'm going to catch a lot of flak from the financial people for saying that IRR is a risk-adjusted view of the value of a project expressed in terms of a percentage. (In reality, the actual definition of IRR is that it's the discount rate that would need to be applied so that NPV equals 0; higher numbers indicate that the project is a better quality investment.)
In other words, you can calculate the IRR for any project and you'll always get numbers on the same scale (percentages). This is useful for comparing multiple projects, since the one with the highest IRR will be, all else remaining equal, the one with this highest value from a quality of investment perspective.
I italicized "all else remaining equal" for a reason, however: there are aspects to any project that cannot be accounted for in any financial model. Unsurprisingly, the biggest ones are the cultural impact that any large initiative will have, the rate of adoption, and the amount of pushback you get from both senior leadership and the general masses. Not unlike the challenges that you hear about with DevOps, this innumerable but tangible characteristic of any project can doom any initiative before it gets a real chance to be successful.
"Wait, Larry," you say. "You just basically said that we should compare multiple projects using a fixed-reference, financially based model to choose the one that's the best, but then you said that the assessment may be completely invalidated by things that are immeasurable?" Much like the comment by SRO/Mike, any decisions you wish to make cannot simply be done by looking at the raw value of that decision but much be considered in the broader context of what else would happen if you make that decision.
Therefore, the development of any effective corporate strategy should not only be prioritized in terms of the potential raw impact to the business but instead should take into consideration the associated risk of each item on that list. While this won't be a formulaic approach to creating a fool-proof strategy, it will certainly increase the chances of success by simply highlighting the potentially negative aspects so that you are fully aware of the risks and can proactively develop contingency plans for mitigating any negative impact that may occur.
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| League of Legends gameplay |
In other words, apply the Deming Cycle.
The Deming Cycle is often referred to the PDCA cycle (which stands for "plan, do, check, act" [and then repeat]). Created by W. Edwards Deming, it was used in quality control but quickly found its application in other areas, such as ITIL and Six Sigma due to its inherent feedback loop which enabled something called Continual Service Improvement, i.e. the "check" from the last iteration is taken into consideration for the next iteration (the "act"). This concept is applicable in other areas too, whether we are talking LoL, planning your weekly dinner menu for the kids (if they don't like your broccoli casserole this week then don't make it next week heh), etc.
If you were to summarize PDCA without using the words that make up its definition, it would probably sound something like this: choices are not things to be made in isolation. There is no "see what I can do now?" in life. Instead, everything should be viewed through the lens of "see what I chose not to do because I made this decision?" This is especially important in corporate strategy. There are finite amounts of resources (staff, money, time) and so choosing to go in one direction means you are unable to go in another direction, at least at the velocity you would if time and resources were infinite.
So how do you create a list of initiatives you could start as a company? To answer that, you'd need some sort of metric that provides an equal basis for comparison. While ROI is the typical metric used, each project will take a different amount of time to complete, cost different amounts of capital, and provide different amounts of benefit. This lack of consistency is why financially savvy people tend to gravitate to one of two financial metrics: NPV and IRR.
NPV, or Net Present Value, is the value of a project to be completed at some point in the future in today's currency. In other words, it takes into consideration how much the capital that you would spend on the project could return if invested elsewhere. It relies on the concept of Discounted Cash Flows (DCF) that reduce the benefit by a fixed percentage (the Discount Rate) every year until the project is completed.
As you can imagine, NPV is useful for examining a single project, but when comparing multiple projects it's still an apples-to-oranges comparison since there is no single consistent frame of reference for making the comparison. This is where IRR, or the Internal Rate of Return, comes in. I'm going to catch a lot of flak from the financial people for saying that IRR is a risk-adjusted view of the value of a project expressed in terms of a percentage. (In reality, the actual definition of IRR is that it's the discount rate that would need to be applied so that NPV equals 0; higher numbers indicate that the project is a better quality investment.)
In other words, you can calculate the IRR for any project and you'll always get numbers on the same scale (percentages). This is useful for comparing multiple projects, since the one with the highest IRR will be, all else remaining equal, the one with this highest value from a quality of investment perspective.
I italicized "all else remaining equal" for a reason, however: there are aspects to any project that cannot be accounted for in any financial model. Unsurprisingly, the biggest ones are the cultural impact that any large initiative will have, the rate of adoption, and the amount of pushback you get from both senior leadership and the general masses. Not unlike the challenges that you hear about with DevOps, this innumerable but tangible characteristic of any project can doom any initiative before it gets a real chance to be successful.
"Wait, Larry," you say. "You just basically said that we should compare multiple projects using a fixed-reference, financially based model to choose the one that's the best, but then you said that the assessment may be completely invalidated by things that are immeasurable?" Much like the comment by SRO/Mike, any decisions you wish to make cannot simply be done by looking at the raw value of that decision but much be considered in the broader context of what else would happen if you make that decision.
Therefore, the development of any effective corporate strategy should not only be prioritized in terms of the potential raw impact to the business but instead should take into consideration the associated risk of each item on that list. While this won't be a formulaic approach to creating a fool-proof strategy, it will certainly increase the chances of success by simply highlighting the potentially negative aspects so that you are fully aware of the risks and can proactively develop contingency plans for mitigating any negative impact that may occur.