Handy Value-Matrix Makes Decisions Easier

Value may be the most devalued word in our vocabulary, today. We have value pricing – a concept that leaves me scratching my head, value-days, valurama, and quality-time (an implicit promise of value). A rock song has the boy who has been dumped by his girlfriend sing, “I gave you value, didn’t I?”

What does value mean? To answer this question, I checked the dictionary (the one at hand today is a beat-up paperback called The New Merriam-Webster Pocket Dictionary, first printed in 1964). The fine folks who put this book together defined value as “1: a fair return or equivalent in money, goods, or services for something exchanged. 2: the worth of a thing: market price, purchase power, or estimated worth.” There are more definitions, yet these delve to the heart of the matter: value is what we use to measure a transaction. Not radical. Not new.

MAKING KNOWLEDGE FROM DATA

Before we embark on any transaction, we have to define value. For each transaction, we have to make a series of decisions that help us decide what constitutes a “fair return.” This proposed return is the value-proposition. We have already defined value, and proposition is simply “1: something proposed for consideration: proposal 2: a statement of something to be discussed, proved, or explained.”

The value-proposition answers the marketing questions of “so what, who cares, what’s in it for me?” To act, you must understand the value proposition presented to you.

At first thought, this should be easy: a no-brainer. Yet, everything provides us value – from the cheap junk that breaks before it is out of the box, to timepieces priced in the same range as a new Mercedes Benz. Were we unable to distinguish the value proposition of each, perhaps measure the item’s value in relation to ourselves, these two things might seem equally good buys, as would all the goods between these extremes.

To clarify and judge our value-proposition, we need to develop our value-choice questions. We have to sweep out the dross and focus in on the primary questions that are so powerful that anyone one of them could be the deal-killer. After we have the questions, we need to learn the answers. This is probably easier than it sounds. Either the answers can be derived from information readily available or you cannot get to the information. If we cannot possess the information, then it does not exist, and it is the same as a “No” answer.

When we know the questions and the answers, we need a tool that will put several equally weighted considerations into a format that allows us to move from the chaos of indecision, to the clarity of decision.

CREATE A VALUE-DECISION MATRIX TO AID YOUR DECISION-MAKING PROCESS

I find that it is easy to become lost in the process of making a decision. After I have asked all my value-choice questions, and assigned a time frame for realization of the value, I still can become lost in the process. When I am lost, I go over the questions to weight each choice to create a hierarchy.

A while ago, I developed a tool, a matrix, that fixes the various value-choices with numeric values based upon delivery of the value. Each of my value choices is measured against the time frame of when I find it acceptable to receive the values. I found that three time frames, that cover the range of time I might be willing to wait, work best. More than three time frames needlessly complicates the issue, and does not change the value-score.

DETERMINE WHAT THINGS ARE MOST IMPORTANT

Any number of value choices works, however the list must include only the primary “go/no go” issues. Secondary issues only cloud the process by diluting the primary issues, and I received useless results. This is no substitute for research and analysis of the problem to define the primary “go/no go” issues. These issues can be very specific, such as “additional net profits in excess of $500,000”, or general, “more net profits.” In the example, general considerations are used.

This will take time, but as you define your criteria, you may find that selecting the primary issues becomes almost obvious. If you are working with a board of directors or a committee, the committee as a whole chooses the primary “go/no go” issues. This may be the hardest part of the process, but it is worth doing right and coming to a lasting consensus.

The numeric value that you assign each of the “Yes” possibilities over the time frame must always be an even number. To keep it simple, I use 6, 4, and 2. The value of “No” at any point in the time frame before a “Yes” is always the same odd number. It must be less than the “Yes” value for the two shortest intervals, and greater than the value of the third time frame. With the “Yes” values of 6, 4, and 2, you must use 3. After a value point receives a “Yes,” no more points are assigned. The table below lays out all the possible choices.

NOW
WITHIN 18 MONTHS
WITHIN 5 YEARS
More customers
Yes=6 No=3
Yes=4 No=3
Yes=2 No=3
More products
Yes=6 No=3
Yes=4 No=3
Yes=2 No=3
More capacity
Yes=6 No=3
Yes=4 No=3
Yes=2 No=3
More net profits
Yes=6 No=3
Yes=4 No=3
Yes=2 No=3

This table is one I could use with a client trying to make an acquisition decision. The value-points in this case are the classic reasons for a company to acquire another company – customers, products, capacity, and profits. The time frame is one commonly used in investment – now, within 18 months, or within 5 years. In this case, nothing beyond 5 years counts.

First, let us consider buying more customers and more capacity now, with a promise of more net profits within 5 years, but not within 18 months. This is a commonly touted strategy for growing a company.

NOW
WITHIN 18 MONTHS
WITHIN 5 YEARS
More customers
Yes=6
More products
No=3
No=3
No=3
More capacity
Yes=6
More net profits
No=3
No=3
Yes=2

Total, separately, the “yes’s” and “no’s.” The totals are Yes = 14 and “No” = 15.

Second, let us consider acquiring a company that provides more product lines and more capacity now, and more customers and more net profits with 18 months.

NOW
WITHIN 18 MONTHS
WITHIN 5 YEARS
More customers
No=3
Yes=4
More products
Yes=6
More capacity
Yes=6
More net profits
No=3
Yes=4

For this acquisition, Yes = 20 and No = 6.

USE THE VALUE-MATRIX AND DON’T LOOK BACK

For each of these deals, based on the values assigned to the value-decision matrix, the choices are clear. The value decision matrix shows that the value proposition for the first acquisition does not support it being done. It is simple, and it tells you right off what you should do – not pursue the acquisition. In the second example, even thought they do not get more customers or more profits until the second time level, within 18 months, because they immediately receive more products and more capacity, this is a good deal for the company.

CLOSE DOES NOT COUNT

You can come up of equal, or close scores, even though each of the sample acquisition configurations gives you an absolute answer: “No” for the first, and “Yes” for the second. If you are one of those people who try to wrestle with the neutral area, do not bother. I suggest a (for me) radical approach: if it is not a clear and resounding “Yes” or other positive indication or feeling, you are still experiencing “No.” Life becomes much easier when you only pursue strongly positive things, and make the ambiguous, neutral, and negative go away. If you think this is foolish, ask yourself how much time and money you really want to spend on iffy projects? After adopting this philosophy, I found that there were even more highly positive things for me to pursue than I had ever seen before, because they were crowded out by the mediocre and uninspiring.

The results of making a value-decision are immediate. You can clear piles of proposals, term-sheets, and business plans from your desk. I found that, as I seek the brutal truth, I find that my understanding of the situation grows. When I use the value-decision matrix, an unambiguous view of the value proposition of the situation comes into focus. Either the value proposition works or it doesn’t. That is all that matters.