performance zone | Human-Centered Change and Innovation

Another Tough Challenge

Allocating Resources to Solve Horizon 2

GUEST POST from Geoffrey A. Moore

We’ve known about this problem forever—how do you find a principled way to allocate budget across three different horizons of ROI.

Horizon 1 pays off in the current year and equates to the funding needed for you to make your operating plan and meet or beat investor guidance.
Horizon 3 pays off downstream, typically by making a speculative bet on an emerging category or market that would come to fruition in the out years. Since it is still early days, these bets are relatively small and can be measured by and managed to venture milestones.
Horizon 2 is the troublemaker. It calls for a material investment in gaining power in the near term in order to compete effectively in the mid-term. That investment will come out of Horizon 1, either from the Performance Zone trying to make the number or from the Productivity Zone trying to supply the needed support to do so, and most likely both.

In short, both internally and externally, Horizon 2 investments are not popular, even though everyone recognizes that they are critical to long-term success. So what is the process by which one can do right by them?

The key is to recognize that the ROI from Horizon 2 is measured in units of power, whereas that from Horizon 1 is measured in units of performance, and that the two must not be mixed. Now, to be clear, performance creates the funding for power, and power creates the foundation for performance, so they are deeply intertwined. But each has its own metrics of success, and the time lag between them says they cannot be blended.

Power always precedes performance. To underfund power is to jeopardize your future performance, the ultimate result being the liquidation of your franchise. To underfund performance, on the other hand, is to jeopardize the cash flow that you need to fund power, putting your market cap at risk, the ultimate result being to attract an activist investor who will oversee the liquidation of your franchise. There is no safe path to take, only a precarious middle way to traverse.

Now, again to be fair, in good times when your category is enjoying secular growth, you get to have your cake and eat it too. That is, you produce amazing cash flow, have a fabulous market cap, and have resources aplenty to invest as you choose. My colleagues still refer to the period leading up to the first tech bubble as “ the time of the great happiness.” Be that as it may, for most of us in 2024 (our friends in GenAI being a notable exception), this is not such a year. We have to make tough choices, and we have to make them now.

So, back to process — and CFOs, take note because you’re likely the one to be leading it.

Separate strategic planning from annual budgeting by at least one quarter.
Charge each business unit to pitch a strategic plan that would create returns substantially above and beyond their current operating model. Included in this plan is a ballpark estimate of the funding that would be required to implement it.
Facilitate an Executive Leadership Team review of the overall portfolio of opportunities, culminating in a rank-ordered list.
Consult with the CEO to determine how much of next year’s operating budget can be allocated to strategic investments, and in that context, which investments should be prioritized for funding. This funding will be allocated in advance of the operational budgeting and ring-fenced to ensure it is spent as intended.
Most strategic investments will be funded as nested incubations, meaning they will be managed within an existing business unit, and are funded as part of their operating budget. However, you must insist that these efforts be isolated, measured, and accounted for separately from the core business, as they are intended to deliver power outcomes, not performance outcomes, and need to be held accountable to different success metrics. (If you do not do this, their operating budget funds will drift away to supplement Horizon efforts to make the number, and the strategic initiative will falter for lack of sufficient investment.)
Truly disruptive incubations, on the other hand, need to be funded outboard of the current business unit structure, in a corporate Incubation Zone, governed by an Incubation Zone board managing a ring-fenced Incubation Zone fund, following the operating model of venture capital. This is covered in detail in Zone to Win.
At this point budgeting can turn its attention to Horizon 1 and how best to allocate funding to hit the current year’s financial targets.

This process solves for two perennial missteps in annual budgeting. The first we might call “the leftovers approach.” First, you allocate all the resources needed to make your Horizon 1 commitments, and then you look to what’s left to fund strategic initiatives. There will be some resources in the kitty, but not as much as there could be since Horizon 1 managers want to reserve some contingency funding. The result is a bias toward modest investing in incremental innovations that do not create future power but rather extend the current footprint.

The second misstep we can call “the variable approach.” Here you allocate half the resources at the beginning of the year and make the second half allocation contingent upon meeting the Horizon 1 plan for that period. The problem here is that strategic initiatives require sustained investment throughout their time in the J-curve. If you flinch and pull back at any point, you lose momentum, never to be regained. This is a big advantage venture-backed companies have over in-house efforts and one of the reasons why VCs love to invest in a downturn.

That’s what I think. What do you think?

Image Credit: Unsplash

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Back to the Basics of the Performance Zone

GUEST POST from Geoffrey A. Moore

As the global economy gropes its way to a new normal, with buyers still looking to regain their confidence to invest, most companies are dealing with sluggish performance—not terrible, but not great. In such circumstances, management attention gravitates to the Productivity Zone, where the focus is internal on ourselves, and the goal is to optimize our processes to prop up our operating margins. All good, but only half the solution.

The other half is to reengage with the Performance Zone. The goal of this zone is to not to improve–it is to win the game. There is no process for doing this (if there were, then Germany would win the World Cup every year), so internal focusing will not help. Instead, we need to reexamine our relationship with others, specifically with our customers and our competitors. Strategy begins, in other words, when we divert our attention from us and put it on them.

Investigating our Customers

In a doldrums economy, we know that existing budgets are tight, so if we are to find growth opportunities, we need to detect where new budgets are emerging. In other words, we are looking for forces at work in our target markets that are changing the investment priorities of our target customers. The key unit of examination here is the use case.

Use cases live at the intersection of our portfolio of offerings and customer value realization. We already have libraries of established use cases, but those are the ones that are under budget constraint. We are looking for emerging use cases, typically gnarly problems that are possible to solve with our stuff, but only with net new innovation and additional attention from us. Such use cases are at odds with our Productivity Zone focus on efficiency, but they are key to finding growth opportunities in trying times.

Each use case is a shorthand representation for a mini-TAM (Total Addressable Market). We are not looking for big here, we are looking for urgent. We want use cases that will activate customers to invest now, even when budgets are tight, keeping in mind that even the most highly focused use case with the smallest immediate TAM is normally a harbinger of bigger things to come. First-mover advantage in an emerging use case is like winning an early primary election—it is modestly valuable in itself, but even more so in terms of its impact on later competitions in bigger venues.

To detect these opportunities we need to interrogate our customer-facing teams in sales, solution engineering, and customer success to extract from them anecdotal evidence of novel use cases, regardless of who the vendor is. We also want to hear stories about customers struggling with problems that no one is solving. The question we are trying to answer is, what does the world really want from our company now? What would cause prospective customers to line up to spend money with us today?

To be sure, pursuing net new use cases requires investment at our end, and we too are under budget pressure, so there can be no “spray and pray” here. We need to stack rank whatever opportunities we detect on a risk/reward gradient and focus on the top one or two only, the limiting factor being that whatever we do fund must get “all the way to bright.” Adding even just one more opportunity than there is budget to fund results in all opportunities getting underfunded and nothing getting over the finish line. It is the most common cause of companies losing their way and drifting into irrelevance.

Learning from our Competitors

Here again we should divide up the landscape into legacy versus future competitors, as we will treat each differently. The legacy group are competing for the same constrained budgets as we are, using tactics we are now quite likely to be familiar with. This is the realm of execution, not strategy. It rewards campaigns led by the Productivity Zone focused on extracting the best returns we can from what is a low-yield, but also a low-risk, situation. Our customers are not going away, but they are going to sweat their assets and consolidate vendors wherever they can. Inertia here is our friend, and we need to leverage it as best we can by eliminating any sources of friction that would diminish our returns.

On the other hand, our future competitors do warrant strategic attention, for any number of reasons. For example, any recent wins they may have had could signal an emerging new use case, one that we too should be checking out. Alternatively, we may learn they are attacking our own target use case, in which case we need to differentiate quickly and dramatically in order to block them out early (a mini-TAM is too small for more than one winner). A third possibility is that we may be getting blindsided altogether, our installed base under some whole new form of attack, potentially jeopardizing the future of our entire franchise. It’s a wake-up call nobody likes to get, essentially forecasting an existential threat, but that is often what it takes to prod an established enterprise to adjust to a changing market landscape.

The standard unit of work for investigating future-oriented competition is the win/loss analysis. Again, we need to bring in the customer-facing teams to get their anecdotal evidence. Analyst reports don’t help much—they tend either to track us and our legacy competitors in established markets, or to glom onto the next potential disruptive technology and make extravagant extrapolations of its future returns. Instead, we want to look closely at the new use cases, regardless of whether we have won or lost, to see what the customer ended up prioritizing and why that drove their buying decision. As always, we prefer to win, but it is imperative regardless that we learn.

Changing the Narrative

Once we have focused on others, once we have revised our understanding of what the world wants from us, and who we are going to be competing with, we can now legitimately focus our attention on ourselves and our stakeholders. These include our installed base, our ecosystem partners, our investors, and our employee workforce. Our new strategy calls for a change in our course and speed, and we need everyone in our boat to row in the same direction. This can only happen if we change the narrative.

It is hard to overemphasize this point, so let me put it another way. If we do not change the narrative, nothing new will happen. No one will change course and speed. Even if we make clear the course corrections we are making, things still won’t change. That’s because everyone always assumes that things will be more or less the same, and that goes especially for established franchises. Getting stakeholders to turn a big boat requires a big signal.

The structure of the successful new narrative is always the same. It is never about you. Nobody cares about you (well, except your mom, of course, God bless her). Stakeholders have plenty on their own plates to worry about without taking on stuff on yours. What they do care about, on the other hand, is what is happening in their world, how it impinges on their hopes and plans, where it is creating risk for them, and what, if anything, you might be able to do to help them mitigate that risk. That’s what your new narrative must be all about. It’s a new you because it is a new world, and you are rising to meet the occasion. Not only does this change people’s focus, it energizes those whom it attracts, giving a real boost to the team at a time when everyone can use one.