With objectives set for the year, businesses need to have a solid plan of action before execution begins. How do you determine what would be the best course of action? Which initiatives do you invest in to achieve the optimal return on investment?
Ideas for action are abundant. But causal actions are more effective in delivering the target result.
Let’s use an example to illustrate how to identify causal actions from others that are loosely associated with the set objectives.
A software company has a goal to improve profit margin. There are many ways to increase revenue and reduce expenses.
To increase revenue, the company could:
- sell more to existing customers
- expand into new geographic markets
- sell more high-margin products and services
All three options require manpower, marketing campaigns, and support from different departments. Each option has an effect on profit margin. But which ones are causal to improve margin?
Selling more certainly increases revenue but not necessarily the profit margin. Selling more to existing customers requires less effort than expanding into new geographic markets. Additional sales reps and significant marketing investment are necessary when entering new markets.
On the other hand, selling more high-margin products and services are causal. Every dollar of revenue brings in higher margin. This option is most effective.
To reduce expenses, the company could:
- reduce operating budget across the board
- decrease headcount for non-customer facing activities
- shorten software implementation process
A generic initiative to reduce the operating budget across the board is certainly a way to reduce expenses and improve margin. This could have unfavourable impacts when a department needs to hire more people in order to support specific initiatives. In reducing the budget, employees would be taking on additional workload which could hammer productivity and quality of work.
The second option to decrease headcount is a common tactic. For the software company, the non-customer facing areas include accounting, legal, human resources, and other support roles. These areas are quite lean already. Further headcount reduction might lead to low morale and voluntary departure of great talent.
The last option to shorten the software implementation process helps to reduce staff time required to work on-site with customers. It is directly related to the profit margin per installation. It is causal to improve profit margin, and hence, the most effective approach.
For the software company, it could choose to take on all the options in tackling the margin improvement goal. That would keep everyone busy, stressed, and potentially frustrated. The outcome might be less than satisfactory.
Actions are not equal. Some are more impactful than others. To optimize return on investment, it is essential to understand the causality effect. By distinguishing actions that are causal to the outcome you aim for, you filter actions that seem logical but ineffective. In return, the efforts yield better results.By distinguishing actions that are causal to the outcome you aim for, you filter actions that seem logical but ineffective. In return, the efforts yield better results. Click To Tweet
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