“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’re 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 even the decision to exit the business. None of these are easy decisions to make, but it is easy to get paralyzed by making the final call.
One of the best tools I’ve found for making tough strategic decisions is the J Curve. A popular blog for mid-size businesses, ShortTrack 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. 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.
Imagine the capital letter “J”. The first phase of the J Curve is an 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 his/her orientation and training and now is moving towards achieving results based on the expectations set for him/her.
The third phase of the J Curve is blue ski. We have moved past break-even on our investment. We’re now moving towards achieving a maximum return on investment (ROI) on this big decision. The new sales rep makes big sales. The new customer places sizable orders. The new piece of equipment doubles our production capacity.
There are several important rules for managing J Curves:
- Measure the depth and width of the valley. Typically measured in either time, money, or both, we commonly underestimate them 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 will 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 in time. Let’s say 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. The average for small business executives is five-seven at any given moment. My guess is that if I sat down at the desk of any client, I would find at least that many strategic decisions in the making. Any more may be problematic. Any less 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 and the status of each one just to keep score.
- 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 suddenly 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. Use your new J Curve vocabulary as you make decisions and discuss it with your key executives. Good luck!