At first glance one may believe that simple, cheap lifesaving products and solutions will always be a market winner as the value proposition is clear: invest in “A” for a few dollars and save my own life. Such an investment would appear to be outstanding value for money we need to be careful in jumping to a conclusion.
Unfortunately, people seem loath to invest in prevention. It seems the “it won’t happen to me” syndrome is alive and well. There are numerous examples that prove this:
The following had to be legislated to save people from themselves:
You must fasten your seatbelt when driving; Despite every car being fitted with one, people still fail to do so.
You must carry life a separate jacket in a boat for every person: A life jacket can be purchased for as little as $15.
To protect people from themselves, it has now been legislated that for boats under a certain size a life jacket must be worn at all times.
Your house must have a smoke detector: This is despite smoke detectors costing as little as $7.
Your vehicle tyres must have a suitable tread depth.
You must carry chains in snow country.
Cyclists and motorbike riders must wear a helmet.
A helmet must be approved as useful to stop people flouting the law.
We see that even in the case of an unarguable, potentially lifesaving value proposition, the market outcome is not always predictable.
Process innovation: Unarguable value for money!
In process innovation, like the implementation an automation system, a clear value proposition can usually be mathematically proven. For example, it is quite easy to calculate the benefit in labour saved compared with the cost of implementing the automated system.
Normally such an investment is predicated on an investment return of 12 to 18 months and from there on it is all “upside”. In this case one may have thought a “go” decision would be obvious. However, this is not always the case, due to unforeseen circumstances.
As the GFC spread like the plague through economies, many companies that had invested heavily in automation were in for an unfortunate surprise.
Unlike labour-intensive businesses that could lay off staff in bad times, companies that took on serious debt to finance automation projects were hit hard by the need to continue to finance interest payments on their investments while their cash-cow of ever growing demand evaporated. The lesson is that even in good times, investments showing a strong value proposition need to be questioned and financed with sufficient “slack” to manage any severe market downturn. A failure to abide by this principle can leave the company leader with many sleepless nights if demand shrinks.
Conclusion
Market risk is by far the biggest business risk but even that cannot be removed by a positive value proposition – nor can an investment on a pure mathematical basis, particularly in process improvement, as the GFC proved.
The secret is to always invest in new initiatives well within your means, and do not take even the most obvious markets for granted so as to ensure survival if the market fails or circumstances beyond your control eventuate. Too many people “fly” on confidence alone and ignore this axiom – much to their peril.
