Category Archives: Business

Products for Starting a New Business

Starting a business is an incredibly exciting time for any entrepreneur; however it can also be stressful with so much to do in so little time. The start-up phase is also characterized by significant expenditures against a backdrop of uncertain income. However, there are a number of products and services that can help you maximize your chances of success while also saving you considerable time and money. This article aims to introduce you to some of the less obvious ones that are available via the Internet. These products and services can help you set your business on the right path from Day One. While these recommendations will not be appropriate for all, those who need to bootstrap and build their business the hard way will benefit the most.

1. Create a website

Regardless of whether you intend to sell online or not, all new start-up businesses should secure a domain name and create a website as soon as they can. Thankfully, the cost of getting a site set up has fallen significantly over time and there are now a host of different packages and providers to choose from.

2. Download a profile of your industry

On another level, the phrase “dog grooming London” had only 81 searches in April 2006, according to the Overture search, so the U.S. affection for this service clearly hasn’t reached UK shores yet. Half of the searches were for dog grooming courses, so any thoughts of opening a new dog grooming shop in London would need some more clear-cut evidence of demand, given the preliminary findings of this rough and ready search. By analysing the search terms for your idea with these tools, you can assess potential market demand, get ideas for appropriate names for your good or service, and use the findings as one reference point in your analysis.

If the intention is to set up a local service, then familiarity with the local area will be as powerful a resource as any Internet search method. The lesson here is also that ‘entrepreneurs’ don’t necessarily have to be inventors, merely people who can spot opportunities to do something better or more cheaply than others, or provide a local version of a business run elsewhere. Having decided upon the good or service to be provided, a wantrapreneur must research the opportunity to ensure familiarity with some of the key issues. You can search for sample plans from similar ideas on www.bplans.co/uk or look at Business Opportunity Profiles from Cobweb at www.scavenger.net to help you understand your specific business. Savvy entrepreneurs will back up online research with face-to-face conversations with potential customers and other business owners. Finally, an extensive search of Google is recommended to ensure that your market research is as up to date as possible.

The ‘Bricks to Clicks’ model

You can also do an analysis of incumbents in the various markets of your potential interest to see if there are inefficiencies or unnecessary costs in the process of getting the goods to the consumers. It is pretty obvious that the Internet has enabled a more efficient means to showcase product wares to a much larger audience (and also a more geographically dispersed one). It is also clear that more traditional retailers with high street stores carry a much higher cost burden. Providing you can configure your business accordingly, there are opportunities here to undercut the traditional behemoths. An online store can take the place of the high street store in many instances and offer the same good or service at a much more competitive price level. Glasses Direct (www.glassesdirect.com) is one such example, where the young British entrepreneur James Murray Wells decided to set up his own online optician as a direct response to the prohibitive cost he believed he paid for glasses while he was a student. Without the overheads of the likes of Specsavers, Glasses Direct is able to undercut the standard retail prices by significant margins while still being very profitable.

The growing rental market for DVDs, spearheaded by the likes of Amazon and ScreenSelect, is similarly targeting the long-standing high street players such as Blockbuster.

They both recognise that ultimately, the consumer just wants to be able to choose a DVD and play it, and this can be facilitated without a costly store infrastructure. If you think something is bad value and you do some research regarding the industry structure, competition, distribution, product components and so on, you may stumble across a brand new idea for improving the overall offering by replacing the most costly elements, such as the overhead on a high street store. Finally, a popular way to dip your toes into entrepreneurship is to set up an eBay shop. eBay even has a facility called ‘eBay pulse’ http://pulse.ebay.co.uk/ which can help you to assess the potential demand for any product by enabling you to see what the hot products selling on eBay are. No prizes for guessing that PlayStations, DVDs and iPods are amongst the most popular.

The branch out strategy

While setting up in business always contains elements of risk, there are ways to reduce the levels of inherent risk. The most obvious one is to branch out into an area in which you have previously worked. For example, a Manchester-based nursery school teacher deciding to open her own nursery in Cheshire is a considerably less risky proposition than if she moved overseas to France to open up a boulangerie. Indeed, branching out is how many people start up. After spending a number of years in a particular industry or firm as an apprentice, they decide to go it alone. This is undoubtedly a sensible strategy, particularly as you are a subject matter expert who understands the market and you may have an existing base of clients who will follow you to your new company.

The acquisition

Another option to consider is acquiring an existing business. The key here is to have a clear idea of the sorts of industries and geographic locations in which you want to work before you start. Sites such as those run by BusinessesforSale.com (http://uk.businessesforsale.com ) have a database of 1,000s of businesses that are for sale and that may be of interest. While not a low-cost method of going it alone, there are advantages in that the business will already be trading and there will be a record of how it is performing and whether there is room for improvement. One of the critical elements in this option is setting a value for the business. Valuations for a particular business can vary wildly and there is no generally agreed method for valuing a business objectively, although there are several standard calculations which are often used in conjunction. The key challenges are assessing the current cash-generation capability of the business, and realistically assessing its future capabilities. In short, acquiring a business is best left to the more sophisticated entrepreneur who has a team in situ looking for undervalued businesses with strong growth potential.

The franchise

According to the British Franchise Association (www.thebfa.org ), “Business format franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.”

Franchising is an increasingly popular route to going it alone. As with the acquisition option, franchising requires that you have capital to invest and are looking to introduce an existing ‘winning formula’ into your own area. There are a number of franchise websites and magazines, such as whichfranchise.com (www.whichfranchise.com) which contain further details regarding the benefits of franchising. Again, once you have decided that franchising is something you want to pursue, you’ll need to decide in what industry you want to franchise. Past personal experiences and franchise coverage in your area should play a role in the decision.

The add on

By observing successful products and growing trends it is also possible to piggyback on the successes of others at very low cost. As the saying goes, “success breeds success”. For example, when I searched for “iPod” on eBay (May 2006) I found in excess of 50,000 ‘solutions’. While the iPod has been a phenomenon in its own right, it has also resulted in major successes for the likes of Belkin, which creates cables, cases and chargers for the iPod, Bose, which produces speakers, and Griffin Technology, which produces iPod accessories such as the iTrip, an FM transmitter. In other words, one new product can create a whole raft of opportunities in ancillary products and services. Is there a new product that you can exploit with a complementary device that makes the whole experience of using the core product a better one?

Although the above examples may relate to larger companies, there are also thousands of smaller eBay-based companies benefiting from identifying the success of one item and offering all optional complements to enhance the user’s experience. Indeed, even eBay itself has been the target for one such company, iSold It (www.isolditonline.co.uk ). iSold It is a nationwide chain of eBay drop-off stores that makes it easy for anyone to sell their wares on eBay. The lesson is simple. Once something becomes successful, it is likely to spawn a myriad of resulting opportunities. The key is to identify them before anyone else does.

4. The plan

Having decided upon the business you want to pursue, the next challenge is to create a business plan to exploit the opportunity you have identified. Creating the business plan is a very important part of the process as it forces you to consider the opportunity in a holistic manner. You need to give some thought to everything from sourcing raw materials, to competitor analysis, to pricing, to distribution. If you are replicating an existing business, the scale of research required is not as rigorous, as there will be some existing players which you can study. If completely pioneering an idea, your task will be more difficult, but the rewards will be potentially greater. Regardless, a plan will force you to do a thorough analysis of a range of issues and commit them to paper. There are extensive resources available at www.bplans.co/uk to aid you in the business planning process.

5. The implementation

Finally, once the plan has been drafted, you must put it into action. Perhaps it will be used to secure funds, or communicate an idea more widely. Either way, to bring the idea to fruition, the plan must be turned into concrete actions. Create a small team with clearly defined roles, and undertake the less attractive components of starting up, such as legal obligations, red tape, etc. Again, help is at hand with websites and start-up books from the likes of Pearson.

6. Conclusion

The path to entrepreneurship is varied, with a range of different options available to the ‘wantrepreneur’, all with different risk/return profiles. While never easy, entrepreneurship is rewarding and the Internet has reduced the risk of starting up even further. The key to a successful start-up is to prepare a robust business plan and get a solid team in place to put it into action. While the odds are stacked against all start-ups, you can improve your chances by carefully managing certain key areas. Cash flow is the life blood of any company, and all entrepreneurs must guard against the dangers of insolvency by careful forecasting and appropriate financing. A second, related area that is often the cause of failure is over-estimating demand for the new product or service. All forecasts predicting demand levels should be conservative with a capital ‘C’. That vital characteristic of all entrepreneurs, ‘excessive optimism’, needs to be reined in while revenue predictions are being discussed.

Do You Need a Business Plan

For me this scene encapsulates perfectly the problems of not having an over-arching goal and plan for your business. Without a plan, or using a cookie cutter business plan template a business is essentially rudderless, and day-to-day activities are likely to be haphazard and reactive, in stark contrast to those businesses implementing a well thought out business plan.

The following represents a list of my top five reasons a firm needs a business plan.

1. To map the future

A business plan is not just required to secure funding at the start-up phase, but is a vital aid to help you manage your business more effectively. By committing your thoughts to paper, you can understand your business better and also chart specific courses of action that need to be taken to improve your business. A plan can detail alternative future scenarios and set specific objectives and goals along with the resources required to achieve these goals.

By understanding your business and the market a little better and planning how best to operate within this environment, you will be well placed to ensure your long-term success.

2. To support growth and secure funding

Most businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by free cash flows alone, and the business must seek external funding. However, despite the fact that the market for funding is highly competitive, all prospective lenders will require access to the company’s recent Income Statements/Profit and Loss Statements, along with an up-to-date business plan. In essence the former helps investors understand the past, whereas the business plan helps give them a window on the future.

When seeking investment in your business, it is important to clearly describe the opportunity, as investors will want to know:

  • Why they would be better off investing in your business, rather than leaving money in a bank account or investing in another business?
  • What the Unique Selling Proposition (USP) for the business arising from the opportunity is?
  • Why people will part with their cash to buy from your business?

A well-written business plan can help you convey these points to prospective investors, helping them feel confident in you and in the thoroughness with which you have considered future scenarios. The most crucial component for them will be clear evidence of the company’s future ability to generate sufficient cash flows to meet debt obligations, while enabling the business to operate effectively.

3. To develop and communicate a course of action

A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other options are effectively marginalized and the company is aligned to focus on key activities. The plan can assign milestones to specific individuals and ultimately help management to monitor progress. Once written, a plan can be disseminated quickly and will also prompt further questions and feedback by the readers helping to ensure a more collaborative plan is produced.

4. To help manage cash flow

Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple–many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). While the break-even point–where total revenue equals total costs–is a highly important figure for start-ups, once a business is up and running profitably, it becomes less important.

Cash flow management then becomes more vital when businesses pursue investment opportunities where there are significant cash out flows, in advance of the cash flows coming in. These opportunities need to be assessed against any seasonal variations in the business and the timing of the flows. If you are a “cash-only” business, you can bank the income immediately; however, if you sell on credit, you receive the cash in the future and hence may need to pay some of your own expenses before that income hits your account. This will put a further strain on the company’s solvency and hence a well structured business plan will help you manage funding requirements in advance.

5. To support a strategic exit

Finally, at some point, the owners of the firm will decide it is time to exit. Considering the likely exit strategy in advance can help inform and direct present day decisions. The aim is to liquidate the investment, so the owner/current investors have the option of cashing out when they want.

Common exit strategies include;

  • Initial Public Offering of stock (IPO’s)
  • Acquisition by competitors
  • Mergers
  • Family succession
  • Management buy-outs

Investment decisions can be taken in the present with one eye on the future via a well-thought-out business plan. For example, if the most attractive exit route appeared to be selling to a competitor, present day management and investment decisions could focus on activities that would increase the company’s attractiveness to that competitor.

Given that valuing firms is notoriously difficult and subjective, a well-written plan will clearly highlight the opportunity for the incoming investors, the value of it and increase the likelihood of a successful exit by the current owner.

Be an Entrepreneur

In a world increasingly affected by globalisation, increased competitiveness and maturing products, the need for creativity and entrepreneurship has never been greater. Luckily, the attractions of becoming an entrepreneur have never been greater either, especially since a shift from a predominantly manufacturing- to a service-based economy has lowered the cost and barriers to entry for entrepreneurs. The British government has moved entrepreneurship (and support for it) to the top of their domestic agenda. Meanwhile, entrepreneurship has become a hot topic, with conferences, exhibitions, and even TV shows, such as “Risking it All” and “The Dragons’ Den” evidencing the popularity. But while the environmental conditions may be attractive, entrepreneurs still need a workable idea that is commercially viable. This article endeavours to assist wannabe entrepreneurs (wantrepreneurs) in coming up with ‘the plan’ so as to enable them to finally take the plunge into the world of entrepreneurship.

2. The environment

Before deciding on ‘the idea’ it is worth assessing the landscape thoroughly so as to consider the broader context and the impact that trends or changes may have on it, i.e. whether it is future-proof, etc. There are three main trends to look at – global trends, national trends and local trends.

Keeping up to date with global developments via The Economist or the BBC will certainly give you a good base to start from. However, to gain a more in-depth understanding of global changes from a business opportunity perspective, websites such as Trendwatching (www.springwise.com) are very useful. In an increasingly homogeneous global economy, it is obvious that what works well in one market can easily transplant into other ones with the minimum of localisation. Between them, these sites give a more in-depth insight into some of the latest emergent business ideas and can be considered in tandem with macro trends affecting us all, like environmental challenges, the increasing cost of oil, volatile currencies, etc.

On a national level, there are a number of trends that we are all familiar with in the UK: increased ubiquity of broadband access, the fact that as a population we are aging, increased expected life spans, growth in the number of single-person households, and so on. The key with all of these trends is to focus on the opportunities associated with these demographic shifts and trends. For example, it is safe to predict that an aging population will increase the demand for certain goods and services, such as home-help services, medication, nursing, and glasses, and that the growth in single-person households will increase the demand for convenience food products and more economical white goods such as smaller fridges and washer/ dryer all in one’s.

On a local level, there are also numerous resources we can use in assessing the local environment and, in particular, the likely demand for our goods or services. Websites such as ACORN (www.caci.co.uk/acorn) and UpMyStreet (www.upmystreet.com) provide extensive free demographic data about areas based on UK postcodes. These enable you to build up profiles of the local population and are ideal when you are looking to set up a shop or service to serve the local community specifically. Of course when it comes to local opportunities, these need to be assessed in conjunction with plenty of ‘on-the-ground’ research: walking in and around the area targeted for the new enterprise.

3. The option

The big idea

Whilst the majority of new businesses are replicas of existing businesses, some entrepreneurs will strive to create something completely unique. One of the most powerful things the Internet enables us to do is to search for solutions to problems more efficiently than ever before. Goods and services are designed to fulfill the needs of people. In other words, goods and services solve people’s problems; and while your proposed solution may be unique, it is likely the problem is not. Hence, an Internet search focusing on the problem your solution is trying to address is likely to highlight substitutes and competitors, which may all help to shape the nascent idea.

Using the Internet, you can often assess the potential demand for your service by gauging the number of people who search for a term related to the problem that your good or service satisfies. For example, our company, Palo Alto Software, produces business planning software. One way people find us online is by searching for help for their problem: their need to write a business plan. Using the Key Word Assistant on Overture, we can find out how many times “business plan” and other related terms were searched for in the previous month. This data can help us assess whether business planning is a significantly more popular term than “business plan”? If so, we might consider renaming our product “Business Planning Pro” instead of  Business Plan Pro.

Important Budgeting Tips

Managing the budget numbers can be simple, but managing a budget takes people, not spreadsheets. While budget numbers are simple, budget management isn’t. To make a budget work, you need to add real management:

  1. Understand that it’s about people: Successful budgeting depends on people management more than anything else. Every budgeted item must be “owned” by somebody, meaning that the owner has responsibility for spending, authority to spend, and the belief that the spending limit is realistic. People who don’t believe in a budget won’t try to implement it. People who don’t believe that it matters won’t worry about a budget either.
  2. Budget “ownership” is critical: To “own” a budget item is to have the authority to spend and responsibility for spending. Ideally a budget management system makes plan-vs.-actual results visible to a group of managers, so that there is peer pressure that rewards budgeting successes and penalizes budgeting failures.
  3. Budgets need to be realistic: Nobody really owns a budget item until they believe the budget amount is realistic. You can’t really commit to a budget you don’t believe in.
  4. It’s also about following up: Unless the people involved know that somebody will be tracking and following up, they won’t honor a budget. Publishing budget plan and actual results will make a world of difference. Rewards for budget success and penalties for budget failures can be as simple as peer group managers sharing results.

Your budget and milestones work together
As you develop your budget, keep in mind your business plan milestones. That’s where you set specific goals, dates, responsibilities, and budgets for your managers. It makes a plan concrete. Make sure your budget matches your milestones.

Ideally, every line in a budget is assigned to somebody who is responsible for managing that budget. In most cases you’ll have groups of budget areas assigned to specific people, and a budgeting process that emphasizes commitment and responsibility. You’ll also need to make sure that everybody involved knows that results will be followed up.

The ideal plan relates the budgets to the Milestones table. The Milestones table takes all the important activities included in a business plan and assigns them to specific managers, with specific dates and budgets. It also tracks completion of the milestones and actual results compared to planned results.

The right organization for mergers and acquisitions

Internal organization that manages a company’s M&A processes has always been a major contributor to the success of its deals. Today, as companies increasingly choose to manage their M&A processes internally, without the support of financial advisers,1it’s all the more important to have the right team in place. This team must not only be skilled at screening acquisition targets, conducting due diligence, and integrating acquired businesses but also have the size, structure, and credibility to influence the rest of the company.

Admittedly, most of the best practices for designing an M&A organization are well known. But, in our experience, many companies fail to put them into practice. M&A teams include members with unnecessary skills as often as they lack members with essential ones. Too little capacity is a common problem, but inflated teams frequently create issues as well. The effect on a company’s ability to capture value from its deals is notable. According to our 2015 survey, high-performing companies2are significantly more likely than low-performing ones to report that they have the necessary skills and capacity to support essential predeal activities. Moreover, nearly two-thirds of underperforming companies lack the capabilities to integrate their acquisitions

Most senior executives understand the importance of strategically shifting resources: according to McKinsey research, 83 percent identify it as the top management lever for spurring growth—more important than operational excellence or M&A. Yet a third of companies surveyed reallocate a measly 1 percent of their capital from year to year; the average is 8 percent.

This is a huge missed opportunity because the value-creation gap between dynamic and drowsy reallocators is staggering (exhibit). A company that actively reallocates delivers, on average, a 10 percent return to shareholders, versus 6 percent for a sluggish reallocator. Within 20 years, the dynamic reallocator will be worth twice as much as its less agile counterpart—a divide likely to increase as accelerating digital disruptions and growing geopolitical uncertainty boost the importance of nimble reallocation.

Boost earnings without improving returns

All the measures of a company’s performance, its earnings per share (EPS) may be the most visible. It’s quite literally the “bottom line” on a company’s income statement. It’s the number that business journalists focus on more often than any other, and it’s usually the first or second item in any company press release about quarterly or annual performance. It’s also often a key factor in executive compensation.

But for all the attention EPS receives, it is highly overrated as a barometer of value creation. In fact, over the past ten years, 36 percent of large companies with higher-than-average EPS under-performed on average total return to shareholders (TRS). And while it’s true that EPS growth and shareholder returns are strongly correlated, executives and naïve investors sometimes take that relationship too seriously. If improving EPS is good, they assume, then companies should increase it by any means possible.

The fallacy is believing that anything that improves EPS will have the same effect on value creation and TRS. On the contrary, the factors that most influence EPS—revenue growth, margin improvement, and share repurchases—actually affect value creation differently. Revenue growth, for example, can increase TRS as long as the organic investments or acquisitions behind it earn more than their cost of capital. Margin improvements, by cutting costs, for instance, can increase TRS as long as they don’t impede future growth by cutting essential investments in research and development or marketing.

For example, to improve EPS, managers at one company committed to an aggressive share-buyback program after several years of disappointing growth in net income. Five years later, managers had retired about a fifth of the company’s outstanding shares, increasing its EPS by more than 8 percent. Yet the company was merely retiring shares faster than net income was falling. Investors could see that the company’s underlying performance hadn’t changed, and the company’s share price dropped by 40 percent relative to the market index.

Share repurchases seldom have any lasting effect on TRS—and that often comes as a surprise to managers and investors alike. Given how often we hear executives advocate share repurchases because of their effect on EPS—and make the occasional argument for taking on debt to execute them—it is worth exploring the relationship between buybacks, EPS, and shareholder returns. We’ll begin by examining the empirical evidence and then look at the logic behind so many decisions to repurchase shares.

Global Survey results

For the first time since 2014, executives in emerging markets are more optimistic about their home countries’ prospects than are their peers in developed markets—and Latin America is a particular bright spot, according to McKinsey’s latest survey on economic conditions.1Respondents in the region,2long the most downbeat on economic conditions at home, report increasingly positive views on the state of their countries’ economies and are among the most bullish on future conditions.

At the same time, executives in Latin America report increasing concerns over political issues at home—none too surprising, since Brazil’s Senate voted to impeach President Dilma Rousseff the same week the survey was in the field. Political risks (specifically, leadership transitions and domestic political conflicts) also top the overall list of threats to domestic growth. Despite these risks, respondents predict stability in the global economy in the coming months, with emerging-market respondents again more positive than developed-market executives.

Newfound optimism in emerging markets

When asked about economic conditions in their home economies, executives tend to say conditions have stabilized and will hold steady in the months ahead. The largest share of respondents (44 percent) say domestic conditions are the same now as six months ago, and 38 percent expect conditions at home will stay the same—or improve—over the next few months.

On the whole, emerging-market executives report a more positive outlook than they did in June and relative to their peers in developed markets (Exhibit 1). This is the first survey since December 2014 in which emerging-market respondents have been more optimistic than their peers about their countries’ prospects.

Answering the hardest questions of resource allocation

The challenge of resource allocation is determining where the resources will bring the most value, how much money and talent to redistribute, and how to put those shifts effectively into action.

I recently listened to a CEO client lament his company’s low growth and the difficulty in shifting resources from a mature business to new fast-growing ones. The challenge he faced is all too common: unit presidents protective of legacy businesses, strenuously arguing that reducing resources would endanger the company’s biggest cash cows. Would the returns from investing in the new businesses justify this risk? And how much is really needed to get those businesses onto the growth fast track?

These are essential questions when trying to ensure that the organization’s money is working as hard as it possibly can. As I pointed out in my last post, the problem with resource allocation isn’t ignorance of its importance—83 percent of executives we polled named it as the most critical management lever for spurring growth. The challenge lies in determining where the resources will bring the most value, how muchmoney and talent to redistribute, and how to put those shifts effectively into action.

Those overarching questions represent the three major phases of the reallocation process. Only by answering them with empirical rigor will you be able to get your team on board and embed the process into the organization.

1. Where to reallocate resources

The first step is to create an analytical foundation on which you can build a strong case for resource shifts. This is essential to overcome resistance from losing parties and counter individual biases rooted in self-interest or mistaken assumptions. To identify and prioritize areas where boosting investment would generate the greatest impact for the whole organization, start by assessing the profitability and resource projections for every meaningful business cell.

Managers tend to easily identify the opportunities with the biggest growth upside, but as I explained in an earlier LinkedIn post, growth doesn’t guarantee value creation. To have a comprehensive view, you need to understand projected economic profit (the difference between ROIC and the company’s weighted average cost of capital) for each business cell or, in some cases, build a full investment plan and calculate the net present value (NPV) of future cash flows. Then compare that to the resources needed to deliver the projected ROI

This analysis will indicate that some cells with high projected ROI are obvious candidates for acceleration. Others may be actually destroying value, suggesting it’s time to reduce their resource share or even exit the business entirely. In between are businesses with positive but modest economic profit. A large organization may not need to closely analyze every one of these mid-range performers but it should at least look at ones that absorb a lot of resources. Are there better ways to optimize their return on investment?

Now managers will realize this process will influence their budgets, so they will be tempted to inflate their projections or forecast stabilization after a period of decline. Accordingly, any discussions of their proposed strategic plans should start with the question: Why do you believe this improvement will happen?

The best way we overcome the “hockey stick” pitfall is to create a baseline scenario based on objective data, looking at a business’s performance track record and carrying that forward for several years to develop a “momentum” case. Factoring in management assumptions (where valid) and additional market and competitive insights can further refine the scenario—which often ends up looking very different than the manager’s initial view.

2. How much resources to reallocate

Determining the right magnitude of action is often harder than identifying the targets for it. The relationship between investment and return is not linear, as capturing some opportunities requires a major investment (in new IT systems, for example, or establishing a direct sales force). Conversely, if you want to lower your capital investment, you may still be stuck with some “maintenance” costs.

Managers want to know the return on the marginal dollar but this non-linearity makes that impossible. In my experience, a pragmatic alternative is to approach resource shifts differently depending on whether they are candidates for increase or decrease.

For underresourced cells, ask yourself: Is there additional market upside we’re not capturing? It may be that ROI is high because you have a strong leadership position and to grow more you would have to increase the overall market demand—which may be possible in some areas but not in others. If there is upside, how much money and talent would you need to apply to tap it? Is the business case still attractive when you’ve factored in all the risks, such as a change in competitive dynamics or regulations? Would it be better to boost resources dramatically to drive a higher level of return or to be incremental? In some cases, gradual increases may suffice while other opportunities require big bets to gain meaningful market share.

For overresourced cells, start by analyzing what’s behind the low performance—is it an industry-wide issue or your company’s problem? If your business is performing a lot worse than its peers, you need to understand what is holding it back. In rare cases, you may discover that the issue can be addressed by injecting more resources, with potentially high rewards. More often, it’s a market problem or the company is facing a structural competitive disadvantage. If so, it’s time to ask whether lower investment levels would bring the unit to an acceptable ROI—and if not, consider divestiture.

Think about the economy

Every quarter since early 2004, McKinsey has asked executives from around the world about their expectations for the global economy, national economies, and their own organizations. Since September 2008, as these topics have grown in urgency, we have added additional questions, including some on customer demand and company profits.

This interactive feature will allow you to explore how different regions, industries, and types of companies have been affected by recent changes in economic conditions, and what executives expect to see in the future.

Admittedly, most of the best practices for designing an M&A organization are well known. But, in our experience, many companies fail to put them into practice. M&A teams include members with unnecessary skills as often as they lack members with essential ones. Too little capacity is a common problem, but inflated teams frequently create issues as well. The effect on a company’s ability to capture value from its deals is notable. According to our 2015 survey, high-performing companies22. “High performers” are defined as respondents to the global M&A capabilities survey who reported that their companies meet or surpass cost- and revenue-synergy targets in their transactions (n = 464). “Low performers” are defined as respondents who reported that their companies achieved neither cost- nor revenue-synergy targets in their transactions (n = 302).are significantly more likely than low-performing ones to report that they have the necessary skills and capacity to support essential predeal activities. Moreover, nearly two-thirds of underperforming companies lack the capabilities to integrate their acquisitions.

Experience on the CEO transition

Moving fast, infusing the right culture and values, and targeting performance and skills—these were among the early priorities for the former CEOs of Aetna and Covidien. In a pair of video interviews with McKinsey’s Simon London, former Aetna CEO Ron Williams speaks to the importance of building a leadership team with the right values, and former Covidien CEO Jose Almedia (currently the CEO of Baxter International) reflects on divestitures and acquisitions and the moves he and his team made to reallocate capital. What follows are edited transcripts of their conversations.

Our pace of change always had to be rapid but measured. Our business is truly a technology business, and one of the things you learn is to never take apart anything you do not fully understand. Because when you snip the wires, you may never get them back together, and our customers will suffer. So we have to be in control of the inputs and outputs and customer-service levels. We often made very dramatic changes and important strategic moves, such as when we built our own pharmacy-benefits-management company up from nothing and later sold part of it, but we made sure it was extremely controlled so that we didn’t end up with a mess on our hands.

A decision I always look back on was the failure to pursue the strategic advantage when we had it. We had committed a lot of resources to develop an important, innovative product that made us recognized as an industry leader. One of the mistakes we made was we let our competitors get into that space. If we had made acquisitions and taken other approaches, we would have had a very strong lock on a very important and growing product category. We had a lot of debate about it, and the notion was, “Well, we have the capability, why spend scarce capital on acquiring more?” Often, the fact that you keep a property out of another entity’s hands is a poor rationale for an acquisition. In this case, it would have been a good rationale in retrospect.

Moving on values

I spent a lot of time on culture and values. Our senior team would go offsite and really talk about what kind of company we wanted to be. What was our vision? What kind of culture do we want?  What kind of values? How did we align our strategy, our culture, our technology, our executional capabilities, and our financial aspirations to really set the standard in the industry? The CEO has to infuse the culture and the values into the organization, and that means you must select a leadership team that believes in, articulates, and lives by those values. The technical skills and competencies—you can find those in lots of people, but your team has to have leadership skills as well.