What is a percentage point strategy worth?

When strategic weightings change, the entire CAPEX portfolio may change.

BOARDROOM QUESTIONS
The questions your portfolio should be able to answer.

Growth: 30 per cent.

Profitability: 25 per cent.

Digitalisation: 20 per

cent.

Resilience: 15 per

cent

.

Sustainability: 10 per

cent.

The strategic priorities have been defined.

The CAPEX portfolio has been calculated.

Then the CEO asks a seemingly minor question:

“What happens if we give growth one percentage point more weight?”

30 per cent becomes 31 per cent.

Just one percentage point.

But more than just a number may change.

Projects may change in relative attractiveness.

A different combination of projects may emerge.

Capital may be reallocated.

And suddenly it becomes clear what economic trade-off this strategic shift creates within the defined model.

What is a percentage point strategy worth?

Strategic priorities are easy to formulate

Almost every company has several strategic objectives at the same time.

Growth.

Profitability.

Digitalisation.

Resilience.

Sustainability.

Innovation.

Productivity.

Market

share.

These objectives can all be valid at the same time.

The problem arises when they compete for the same capital.

This is because a company cannot automatically maximise every strategic objective at the same time.

Strategy therefore does not merely mean defining objectives.

Strategy also means accepting trade-offs between objectives.

‘Growth is important’ is not enough

If several strategic objectives are to be taken into account in a capital allocation decision, management must specify their relative importance.

Which objectives take priority?

Which are the minimum requirements?

Which can be weighed against one another?

Which conditions are non-negotiable?

And to what extent should an additional measure of growth be prioritised over profitability, resilience or other criteria?

Only once this decision-making logic has been made explicit can its consequences be examined.

Weightings make priorities visible

A simplified strategic decision-making model could, for example, use the following weightings:

Growth: 30%

Profitability: 25%

Digitalisation: 20%

Resilience: 15%

Sustainability: 10%

These values are not a mathematical truth.

They represent a management decision.

Management is thereby stating:

We wish to evaluate our available investment alternatives based on these assumptions.

The maths does not determine whether 30 per cent growth is correct.

However, it can calculate the consequences of this weighting within the defined portfolio.

Then the CEO changes a figure

Growth is to be given higher priority.

From:

30%

becomes:

31%.

To

ensure the overall weighting logic remains consistent, the remaining weights must be adjusted or normalised accordingly, depending on the model.

The portfolio is recalculated.

Perhaps almost nothing happens.

Perhaps one project changes.

Perhaps ten projects change.

Perhaps a completely different combination emerges.

That is precisely the interesting information.

A single percentage point can tip the balance

Portfolios do not necessarily change in a linear fashion.

A project may lie just outside the optimal combination at a certain weighting.

A slight shift in strategic priority may be enough to make this project more attractive than an alternative.

This results in the reallocation of capital.

This, in turn, may displace other projects.

Dependencies may become relevant.

Resources may be utilised differently.

A small change in the strategic assumption can therefore trigger a significant portfolio effect.

Strategy has a sensitivity

This creates an interesting perspective for the boardroom.

Not only:

“What does our portfolio look like with these strategic weightings?”

But also:

“How sensitive is our portfolio to changes in these weightings?”

What happens at 29 per cent growth?

What happens at 30 per cent?

What happens at 31 per cent?

What happens at 35 per cent?

And at what point does the project mix change fundamentally?

Strategic sensitivity becomes apparent.

What is the cost of more growth?

Assuming that placing greater emphasis on growth leads to additional expansion projects being included in the portfolio.

As a result, other projects are dropped.

This may cause the expected short-term cash flow to fall.

Capital tied up

may increase.

The risk may increase.

Perhaps less capital is allocated to efficiency projects.

This does not mean that the growth strategy is wrong.

It means:

Growth involves a trade-off.

And this trade-off can be visualised within a defined model.

What is the cost of greater resilience?

The same applies to resilience.

The Executive Board wishes to secure supply chains.

Build in redundancies.

Protect critical infrastructure.

Reduce production

risks.

The importance of resilience is increasing.

As a result, projects with a lower direct financial contribution can be included in the portfolio because they contribute more strongly to the strategic objective.

Other investments are displaced.

Now the Executive Board can see:

What are the economic implications of our additional resilience within this model?

This does not automatically make the decision any easier.

But it does make it more transparent.

What is the cost of greater sustainability?

Sustainability targets also compete with other requirements for limited capital.

As their strategic importance increases, the portfolio may change.

Additional investments are selected.

Other projects are put on hold.

Capital is allocated differently.

The relevant point is not whether sustainability has been weighted ‘correctly’ or ‘incorrectly’.

The relevant point is that management can see the consequences of its weighting.

Strategy is not a slider

Of course

,

corporate strategy cannot be reduced to a few percentage points.

Strategy encompasses markets, competition, capabilities, organisation, technology, people, risks and many qualitative factors.

Not all of these can be meaningfully quantified.

Not everything should be mathematically optimised.

However, where strategic criteria form part of an investment decision and can be reliably operationalised, their weighting can be made transparent.

The model does not replace strategic discussion.

It makes some of its consequences calculable.

Weightings are management decisions

This is an important limitation.

An algorithm should not tell the board:

‘Growth must be weighted at 31 per cent

.’

This decision belongs to management.

Management defines objectives.

Management defines criteria.

Management decides on weightings.

Management defines constraints.

Mathematical optimisation then answers a different question:

‘Which combination of projects results from these specifications?’

Now the trade-off becomes apparent

Let us imagine two portfolios.

Portfolio A

Growth is weighted at 30 per cent.

The portfolio generates a specific expected total economic and strategic value.

Portfolio B

Growth is weighted more heavily.

The remaining weightings are adjusted in line with the defined model logic.

The portfolio changes.

Now both variants can be compared with one another.

Which projects differ?

How much capital is being reallocated?

How does the expected economic contribution change?

How does the achievement of strategic objectives change?

Which resources are being deployed differently?

Which risks are changing?

The difference between the two portfolios is the visible trade-off resulting from the changed strategic priority.

What is the economic value of this percentage point?

Now the CFO can ask a question that was previously almost impossible to answer precisely

:

“What does this additional strategic percentage point cost us?”

The answer does not necessarily have to be a single euro figure.

It can consist of several dimensions.

Change

in expected portfolio value.

Change in capital commitment.

Change in liquidity.

Change

in risk.

Changes in resource utilisation.

Changes in strategic target achievement.

Strategic decisions thus become visible as trade-offs.

And what is the next percentage point worth?

Perhaps the first additional percentage point of growth is very cost-effective.

It affects only a few projects and significantly increases strategic target achievement.

The next percentage point can already trigger much larger changes to the portfolio.

And a further percentage point could cross a critical tipping point.

This gives rise to a kind of strategic boundary analysis:

What additional impact does a further change to our strategic priority generate – and what trade-off are we willing to accept in return?

The Executive Board can identify the threshold

30% growth.

Calculate the portfolio.

31%.

Recalculate.

32%.

Recalculate.

35%.

Recalculate.

The Executive Board can monitor when the portfolio changes.

When projects are added or removed.

When capital flows shift.

When resources become a bottleneck.

And when the additional strategic benefit results in a significantly higher economic trade-off.

This means that strategy is not merely planned.

It can be tested for sensitivity.

A percentage change does not merely alter another percentage

That is the key insight.

A weighting is part of a system.

If this weighting changes, the relative attractiveness of the projects within the model changes.

This can cause the project mix to change.

This can cause capital allocation to change.

This can cause resources to change.

This can cause opportunity costs to change.

A one-percentage-point change. The portfolio responds.

CAPEX Live Boardroom Simulation

This is precisely the kind of scenario that lends itself to a live boardroom simulation.

The current portfolio is displayed on the screen.

The CEO adjusts the weighting of a strategic criterion.

The portfolio is recalculated under the new conditions.

The changes become visible.

The CFO asks:

“What is the financial cost of this change to us?”

Comparison.

Strategy asks:

“What happens if there is a further percentage point?”

New calculation.

Operations asks:

“Which resources will become critical as a result?”

New perspective.

Question. Calculate. Compare. Decide.

StratePlan: Making strategic trade-offs quantifiable

StratePlan can incorporate defined strategic criteria alongside financial targets and portfolio constraints within a mathematical decision-making model.

Management defines which criteria are relevant and how these are handled within the model.

If weightings or other assumptions are changed, the portfolio can be re-optimised under the new conditions.

This makes it possible to examine the effects that a change in strategic priority has on the combination of projects, capital allocation and the defined targets.

StratePlan does not determine how important growth, resilience or sustainability should be.

StratePlan calculates the consequences of the decision-making logic defined by management.

What Is One Percentage Point of Strategy Worth?

Perhaps almost nothing.

Perhaps only one project changes.

Perhaps 20 million euros are allocated differently.

Perhaps a fundamental shift occurs in the portfolio.

The answer cannot be deduced from the weighting alone.

It arises from the portfolio as a whole.

This is precisely why the question in the boardroom should not only be:

“How important is this strategic objective?”

But also:

“What happens to our capital allocation if we prioritise it more highly?”

Management defines the priority.

The maths calculates the trade-off.

The board decides whether it wants to accept this trade-off.

DON’T TRUST US. CALCULATE IT.