Why does every business unit consider its project to be strategic?
Strategic relevance begins where ‘strategic’ becomes an explicit decision-making criterion.
BOARDROOM QUESTIONS
The questions your portfolio should be able to answer.
The CAPEX budget is running low.
200 projects are competing for 500 million euros.
The business units must prioritise.
And suddenly something remarkable happens:
Almost every major project is ‘strategic’.
The new production line?
Strategic.
The digitalisation of processes?
Strategic.
The expansion of a site?
Strategic.
The new logistics centre?
Strategic.
The modernisation of an existing plant?
Of course, this is also strategic.
The problem is not that these projects cannot have strategic significance.
The problem arises when ‘strategic’ no longer has a clearly defined meaning.
If Everything Is Strategic, Nothing Is Prioritised.
Strategic relevance is an important decision-making criterion in many investment processes.
But it often remains qualitative.
A project proposal
maythen contain statements such as:
‘High strategic importance.’
‘Supports our growth strategy.’
‘Important for future competitiveness.’
‘Strategically necessary.’
All these statements may be correct.
But when several business units use the same wording, it creates a problem of comparison.
What exactly does ‘strategic’ mean?
Strategy requires a common language
Business Unit A may interpret ‘strategic relevance’ as growth.
Business Unit B interprets it as productivity.
Business Unit C thinks of market share.
Business Unit D thinks of resilience.
Business Unit E thinks of digitalisation.
They all argue from a strategic perspective.
But they base their arguments on different dimensions.
This
means it is not just projects that compete with one another.
It is different definitions of strategy that compete with one another.
The question is not: Is the project strategic?
The better question is:
‘Which strategic objective does this project contribute to – and to what extent?’
This transforms a label into a decision-making framework.
A company could, for example, define strategic criteria such as:
GROWTH
PRODUCTIVITY
DIGITALISATION
RESILIENCE
INNOVATION
SUSTAINABILITY
MARKET
ACCESS
COMPETITIVENESS
Not every company needs the same criteria.
The key factor is:
Management defines what strategic relevance means for their own company.
Then every project must answer the same questions
Project A comes from Production.
Project B from IT.
Project C from Sales.
Project D from Supply Chain.
Project E from an international business unit.
The projects are completely different.
But it should be possible to assess their strategic relevance using a common decision-making framework.
To what extent does the project support growth?
To what extent does it increase productivity?
How relevant is it to digitalisation?
What contribution does it make to resilience?
How significant is it for innovation?
Which strategic criteria does it fail to meet?
This turns ‘strategic’ into an explicit statement.
Strategic criteria are not an objective truth
Even a criteria model does not eliminate subjective management decisions.
And nor should it.
Management decides which strategic objectives are relevant.
Management decides how criteria are defined.
The weighting assigned to them is also a management decision.
Mathematics cannot replace these decisions.
However, it can consistently calculate their consequences across the entire portfolio.
From ‘strategically important’ to a transparent assessment
Suppose a company defines five strategic criteria:
Growth
Digitalisation
Productivity
Resilience
Sustainability
Each relevant project is now assessed against these same defined criteria.
Not:
‘Is this project strategic?’
But rather:
‘What contribution does this project make to which strategic objectives?’
This can reveal differences that were previously hidden behind the same term.
Project A and Project B can both be strategic
But for different reasons.
Project A can make a significant contribution to growth.
Project B can be crucial for resilience.
Project C can have the greatest impact on productivity.
Project D can enable digitalisation.
Project E can support several objectives simultaneously.
Strategic relevance does not, therefore, have to be one-dimensional.
It can consist of several explicitly defined criteria.
This raises the next question: how important are the criteria?
The company has defined its strategic criteria.
But one important piece of information is still missing.
Are all criteria equally important?
Perhaps not.
During a growth phase, expansion may be given greater weight.
In a crisis, liquidity and resilience may become more important.
During a transformation, digitalisation may be given higher priority.
Strategic weightings translate corporate priorities into an explicit decision-making logic.
The weighting is a matter for management
Assuming, for example, that the board defines:
Growth: 30%
Productivity: 25%
Digitalisation: 20%
Resilience: 15%
Sustainability: 10%
These figures are not a mathematical truth.
They reflect a strategic decision.
Another company may use completely different criteria.
And the same company may change its weightings if its strategy changes.
What matters is not the specific figure.
What matters is that the priority is made explicit.
Now the business unit no longer has to say: ‘Our project is strategic.’
It can make more precise arguments.
“Our project strongly supports growth.”
“It also makes a significant contribution to digitalisation
.”“Its contribution to resilience, on the other hand, is minimal
.”Another business unit can do the same.
This changes the nature of the discussion.
It moves away from the assertion:
“My project is strategic.”
towards the question:
“How does this project contribute to the strategic objectives defined by the board?”
Nevertheless,
strategic relevance alone is not the deciding factor
A project may be an excellent strategic fit.
But it may require an enormous amount of capital.
Another may offer significant economic value, but only contribute to certain strategic criteria to a limited extent.
A third may be absolutely essential, even though its direct economic contribution is minimal.
A fourth may not be feasible due to a lack of resources.
That is why strategic relevance is only one dimension of capital allocation.
Strategy must be reconciled with economic viability, capital requirements, resources, dependencies and constraints.
A strategic score does not yet constitute a portfolio
Here, too, the next oversimplification lurks.
One could evaluate all projects on the basis of their strategic relevance and then draw up a ranking.
Project A: 92 points.
Project B: 88 points.
Project C: 84 points.
Funding is then allocated from top to bottom.
But this simply creates another ranking.
Capital allocation is a combination problem.
A project with a lower strategic score can, together with other projects, produce a better overall solution.
Budget, resources and dependencies alter the optimal combination.
From Project Score to Portfolio Fit
This provides a more important perspective.
Not just:
‘How strategic is this project?’
But:
‘How does this project contribute to our strategy within the best available combination?’
That is Portfolio Fit.
A project may appear very attractive in isolation.
But perhaps it ties up resources that several other strategically relevant projects require.
Perhaps it has a dependency.
Perhaps it is crowding out a more economically viable combination.
Strategic relevance must therefore be considered within the context of the entire portfolio.
Who actually defines what is strategic?
This question belongs in the boardroom.
Not every business unit should use its own definition.
Otherwise, different strategic languages will emerge within the same company.
The Executive Board or the relevant senior management should define the overarching strategic priorities.
Strategy can operationalise these.
Controlling can ensure consistency in the evaluation logic.
Business units provide the project-specific information.
Finance adds the economic framework.
Operations provides resources and operational constraints.
A shared decision architecture emerges from multiple perspectives.
This also protects the business units
Explicit criteria are not merely a control mechanism.
They can also improve the quality of the discussion.
A business unit no longer needs to try to defend its project using the strongest possible wording.
It understands the decision-making logic.
It understands the strategic criteria.
He understands the financial framework.
He can understand why a project is or isn’t selected within a given scenario.
The rules become clearer before the decision
is
made.
Strategy is allowed to change
Today, growth is the number one priority.
Tomorrow, the market will change.
The Executive Board is placing greater emphasis on resilience.
Or cash flow.
Or productivity.
Or digitalisation.
Then not every business unit should have to re-label its projects.
The strategic decision-making logic changes – and the portfolio is reassessed under the new conditions.
What happens when growth becomes more important?
The Executive Board increases the weighting given to growth.
The projects remain the same.
The data remains the same.
The budget remains the same for the time being.
But their relative importance within the model changes.
The portfolio is recalculated.
Some projects are added.
Others are dropped.
Capital is reallocated.
Trade-offs become apparent.
A change in strategy results in a change in capital allocation.
And what happens if every business unit rates growth as 10 out of 10?
Then the company does not have a mathematical problem.
It initially has a governance and data problem.
Assessment criteria require definitions.
What does a 10 mean?
What does a 5 mean?
What evidence is required?
Who validates the assessment?
Can a project manager determine their own strategic assessment?
Or does it require independent validation?
A score without an evaluation framework merely produces subjectivity that appears precise.
Strategic criteria require definitions
Let’s take growth as an example.
‘Growth’ could mean:
additional revenue.
New production capacity.
New markets.
New customers.
New products.
Or a combination of these factors.
The company must decide which definition is relevant to its capital allocation.
The same applies to resilience, digitalisation, innovation or sustainability.
The clearer the criterion, the more robust the decision-making logic.
Not everything strategic needs to be weighted
Another important distinction:
Some strategic requirements are not a matter of weighting.
They are a condition.
A project required by regulation may need to be implemented.
A defined minimum capacity may need to be maintained.
A specific location may need to be taken into account for strategic reasons.
A minimum resilience requirement may be binding.
If such conditions are quantifiable and can be modelled, they can be treated as constraints.
Strategic relevance can therefore, depending on the decision-making logic, act both as a criterion and as a binding condition.
The difference is crucial
A weighting indicates:
‘This objective should be given greater or lesser weight in the assessment.’
A constraint states:
“This condition must be met.”
The two should not be confused with one another.
If something is truly mandatory, it should not merely be awarded extra points.
If, on the other hand, something is a trade-off, it should not automatically be treated as a non-negotiable condition.
Good decision architecture separates preferences from conditions.
Now the discussion in the Investment Committee is changing
Before:
“Our project is strategically indispensable.”
Afterwards:
“Our project makes a significant contribution to growth and digitalisation, requires 35 million euros and is competing for the same engineering capacity as two other projects.”
Before:
“This project is crucial for our future.”
After:
“If we select this project, the defined strategic objectives will be better met; at the same time, Project B will be sidelined due to resource constraints.”
This is a different quality of discussion.
From adjectives to trade-offs.
The CEO should be able
to ask a simple question
The portfolio is available.
200 projects.
500 million euros in CAPEX.
The CEO asks:
“Show me why these 47 projects are more strategic for our organisation as a whole than the 153 projects we are not funding.”
The answer should not be:
“Because the business units have prioritised them.”
It should be based on a transparent decision-making logic.
Objectives.
Criteria.
Weightings.
Economic contributions.
Budgets.
Resources.
Dependencies.
Constraints.
And the resulting portfolio alternatives.
CAPEX Live Boardroom Simulation
Now the strategic discussion can be directly linked to capital allocation.
The CEO asks:
“What happens if growth becomes more important?”
Change the weighting.
Recalculate the portfolio.
The CFO asks:
“What is the financial
cost of this priority to us?”
Compare alternatives.
The COO asks:
“Which resources will become bottlenecks as a result?”
Consider constraints.
Strategy asks:
“What happens if resilience simultaneously becomes a minimum requirement?”
New condition.
New calculation.
Question. Calculate. Compare. Decide.
StratePlan: From ‘strategic’ to an explicit decision-making logic
StratePlan can incorporate defined strategic criteria alongside economic targets, budgets, resources, dependencies and other quantifiable conditions within a mathematical decision-making model.
Management defines which strategic criteria are relevant.
It defines their significance and – where provided for in the respective model – their weighting or binding minimum requirements.
The projects are assessed within this shared decision-making framework.
StratePlan does not decide what should be strategic for a company.
Management defines the strategy.
Decision Architecture translates this into criteria and conditions.
The maths calculates the resulting portfolio alternatives.
The board makes the decision.
Why Does Every Division Think Its Project Is Strategic?
Perhaps because many projects do indeed have strategic significance.
Or perhaps because the term ‘strategic’ is too vaguely defined.
The solution does not lie in depriving business units of their strategic perspective.
The solution lies in creating a common language.
What are our strategic objectives?
How do we define them?
What criteria do we derive from them?
Which of these are preferences?
Which are binding constraints?
How do individual projects contribute to these?
And which combination best implements this strategy with our available capital?
Then no business unit will need to simply claim:
“Our project is strategic.”
The portfolio can demonstrate what this statement actually means within the defined corporate strategy.
MAKE STRATEGY EXPLICIT.
CALCULATE THE TRADE-OFFS.
OPTIMISE THE PORTFOLIO.
DON’T TRUST US. CALCULATE IT.
