Strategic Decisions and Finance: I wish it was all about $, but it’s not
As software companies grow bigger, it is imperative to investigate business cases/opportunities. When a business idea is present, it needs to be first translated into a business case and second evaluated as such. Should we pursue this or not?
The ultimate responsibility of C-executives is to dedicate the (almost always) limited resources to the cause with the greatest potential. Since evaluating and deciding on business ideas is nothing else than allocating resources, this becomes paramount.
Let me explain this using an example of a fictional vendor offering an archiving software/solution. The entire solution is built on a specific database platform A. The customer basis is growing healthy. Customers keep asking for more, but they are happy. It is a growing market overall, so everything seems rosy.
On a sunny day a business opportunity presents itself. According to market research, there is a significant market potential on database platform B, which is currently not supported. Competitors are already doing business in this market.
Naturally, C-executives request an estimation of the (development) cost of extending the product’s functionality to database platform B, in order to make a decision.
Here how things might evolve:
- Scenario 1: Due to the prohibitive (development) cost, the project gets a red light.
- Scenario 2: Since the (development) cost does not seem prohibitive, the project gets a green light.
- Scenario 3: On the one hand, the (development) cost does not seem prohibitive. On the other hand, extending the database support is not a simple financial calculation, since it has profound technical and organizational implications. In case of green light, much needed functional features for database platform A would have to be postponed or not implemented at all. The pace of future development would decrease, since every single new feature would have to be implemented and tested on two database platforms. Sales resources would have to get trained in a new field. Considering all these facts and despite the given potential and natural temptation, the vendor decides to focus and capitalize on the market of database platform A. While it would have been great to become competitive in two markets, it is way better to stay competitive in just one, than being left behind in both of them.
There is nothing wrong with any of these scenarios. For mega-vendors such as Google or Microsoft, the implication of such a decision might be negligible. But for the majority of software vendors, this might be indeed a question of life or death.
Successful technology companies understand that the most crucial strategic decisions are not only about finance.