“If you are not genuinely pained by the risk involved in your strategic choices, it’s not much of a strategy.” – Reed Hastings, Netflix
How often do you get “stuck” on a big strategic decision? If you are like many small business owners, the answer is “too often”. It may be a key employee hire, a capital decision, the purchase of a large fixed asset, or may just be a decision to exit the business. None of these are easy decisions, and small business owners can become paralyzed in making the final call.
One of the best tools I have found for making tough strategic decisions is the “J Curve”. A popular blog for mid-size businesses, RealTime CEO, said the following about J Curves:
“The process of identifying, prioritizing, and managing J Curves is the most important determinant of entrepreneurial success.”
By definition, a J Curve investment is any strategic decision to spend money today for a benefit tomorrow. J Curves are found in every facet of business. Any hiring decision is a J Curve. Any significant new customer is a J Curve. Any major allocation of capital resources is a J Curve. A marketing decision such as the offering of a new product or expansion into a new market is a J Curve. The list goes on and on…
Imagine the capital letter “J”. The first phase of the J Curve is the “investment”. How much will we need to spend in time or money on this investment? If it’s a new piece of equipment, this would include the cost of the new asset, set-up and training time, and any costs associated with ramping up the new equipment.
The second phase of the J Curve is “catch up”. We have now moved beyond the bottom of the curve, and we are trying to move towards break-even as quickly as possible. We again measure this phase in time and money. If it’s a new hire, the employee has completed orientation and training and is now moving towards achieving company expectations and getting results.
The third phase of the J Curve is “blue sky”. We have moved past break-even on our investment and we are now moving towards achieving a maximum return on investment (ROI) on this big decision. The rookie sales rep starts closing big deals. The new customer begins placing sizable orders. The fresh pieces of equipment have doubled your production capacity.
There are several important rules for managing J Curves:
- Measure the depth and width of the valley. It’s typically measured in either time, money, or both. My experience is that we very commonly underestimate both of these as they relate to the decision. We expect the new sales rep to deliver new customers in three months and it takes six months. We anticipate the new customer to place an initial order of $100K and instead we get $50K.
- Do not become emotionally attached to your J Curve. You may need to abandon it at some point in time. Your newly hired CFO has grossly overstated his qualifications for the job. Are you prepared to wait a year to see him grow into the position or cut him loose and start over?
- Watch the number of J Curves you have at any given time. The average for small business executives is 5-7 at any given moment. My guess is that if I sat down at the desk of any of my clients, I would find at least that many strategic decisions in the making. Any more than that may be problematic. Any less than that is a cause for concern, as well. I suggest you keep a J Curve register on your desk. A legal pad with a list of your current J Curves just to keep score. What is the current status of each one?
- Is there a plan for moving from Phase 1 to Phase 3 for each J Curve? There needs to be a unique course of action for moving efficiently through each phase.
- Watch out for “W” curves. You have reached Phase 3 and all of a sudden you find yourself back at Phase 1. What happened?
It’s time to get “unstuck” on your big strategic decisions. Thinking of each one as a J Curve is a great first step. Good luck!