One of the most important and basic pillars of having a strong business acumen competency is 
understanding how to make the best decisions that align to your chosen value proposition to your customers. Unfortunately, one of the biggest mistakes business leaders make is thinking that they have to be the best at every element of their value proposition instead of focusing on the right balance and the right value proposition to their selected customers. For example, I was recently conducting a Business Acumen learning engagement for a group of mid-career leaders and asked a group of 36 professionals the following; “Who thinks the most important thing that you do as a leader is to get all your people to make the best product, deliver it with the best service, and go to market with the lowest price to win the business?” 31 out of the 36 participants raised their hands. All 31 were incorrect and are leading the execution of decisions and strategies that can’t exist in 2017 and beyond.
The best and most successful businesses in the world focus on one unique and distinct value proposition to their customers and execute to being leaders in their markets in their chosen strategy.
Business Simulation are Great Tools to Illustrate Diminishing Returns
When working with leaders to understand and then apply this concept we typically use computer-based business simulations to provide the opportunity to practice and learn-by-doing. Inevitably, the question of “how much” of being the “best” at something is enough? For example, if a company is striving to be the best and most innovative in their market, how do they specifically know they have achieved success? During a simulation workshop, I will respond “The Answer is 117!” and will typically get blank stares and questioned looks at my response.
“117” is of course an attempt at humor but it is also grounded in a very realistic and important answer based on an economics concept called the “Law of Diminishing Returns.”
In the simulation, many of the key metrics of the business dashboard (beyond the pure financials of the Income Statement, Balance Sheet, and Cash Flow Report) and based on a scale of 100 where a 100 is considered very good and more than acceptable to customers. For example, Perceived Quality, Perceived Customer Satisfaction, and Marketing Effectiveness are all based on a 100 scale. Competitors can invest more into these metrics or less into these metrics through a multiple number of sources such as higher quality raw materials, more staff, more training, etc. These investments – the same choices leaders make every day in the business world – are the controllables of the execution of strategy and the only way to create real and true marketplace differentiation.
More is not More; the Law of Diminishing Returns
This is where it gets interesting. If you have established a competitive leadership position in a metric and have achieved a relatively high score that is significantly better than your competitors, then continuing to invest more will have less impact and customers which means the investment has less value and could have been put into other metrics or returned to shareholders. This is the law of diminishing returns.
The full definition is as follows:
At a certain point in a business investment cycle, investing additional resources into a specific function (or metric of success) causes a relatively smaller increase in output.
In the world of business decision making, there may be nothing worse than continuing to invest resources into something that is not providing a strong return. Here are three tips to make sure that you are optimizing your resources and making the best decisions:
1) Know your metrics
Select to focus on no more than 3-5 key metrics that are aligned with your business strategy and value proposition to customers. When you do this, also make sure you know which metrics you are not focusing on! Once you’ve selected the key metrics, set goals and objectives to achieve them checking in regularly to see what’s and who is driving them.
2) Analyze your key metric data and compare it to key competitors
Make sure you are receiving solid, accurate, and quantified data about your key metrics. As critical is competitive data so you know the relative distance between you and your competitors to make sure you aren’t over or under investing.
3) Make logical business decisions to continue investing
Based on your analysis of relative competitive positioning, make the right business decisions about continuing to invest, slowing it down, or divesting completely.
