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This chapter is from the book

To Invest or Not to Invest

John Favaro is a software consultant who works in Italy. His brothers work in management consultancy in New York and Chicago. Despite the geographical separation, they have managed to combine the well-established principles of strategic investment management with investment in software products. They have used the Market Economics and Competitive Position framework to explore two factors to consider when making an investment decision: worth and competitiveness. [2]

Worth

Worth is about identifying the value you place on your area of investment—the market in which you might invest. For example, before Amelia decides whether to do anything about her inherited camera shop, she must decide if it has any worth to her. That is, does she really want to run a camera shop? Does she intend to become a writer, say, and a camera shop has no worth for her? On the other hand, if she dearly wants to carry on her parents' work, or she sees the shop as a great way to make her living and feels the photographic market is lucrative, then she may place a high worth on it.

Next consider competitiveness. To attract customers, Amelia will have to give her shop features, or provide ser vices that attract potential customers. If her shop sells a better range of cameras, or sells them more cheaply, or provides printing and uploading ser vices unavailable in other shops, she increases her competitiveness.

We can ask the same two questions—worth and competitiveness—to assess investment in requirements.

Your product (regardless of whether it is a consumer product, a piece of software, or a ser vice) will be deployed in a work area. Bear in mind a work area is either a part of your own organization or an external market for which you are developing products. The work area may be accounting, research and development (R&D), marketing, engineering, or almost anything else.

The question is, what is the worth to the organization of that work area? For example, the pharmaceutical companies place a high worth on R&D. If they do not come up with a breakthrough drug every few years, sales decline as generic products start to encroach on sales. If you are an investment broker, the trading part of the business has a high worth to you as the source of your revenue stream. If you are in the retail business, the supply chain—having the right goods available for sale at the right time—is a high-worth work area.

Look at your organization and possibly speak with your upper management to find what they find worthy. The answer by the way is not "profitability"—profitability is a goal, not a work area. But it is a useful answer. Now ask what parts of the organization contribute most to the profitability of the company. Also ask what work areas have the most value in meeting company goals. This question is all about investing in good work areas or markets: those where the money is.

Competitiveness

Next, competitiveness. Consider the differentiation and cost position of the product in question. Differentiation does not merely mean different.

(It's easy enough to have a different product—just paint it yellow.) Differentiation refers to the perceived improvement of the new product. In other words, do consumers believe the new product makes some tasks much faster, or makes the work cheaper or easier? Or does it enable external customers to look up their own accounts and save internal clerks from doing it? Does it provide some new quality customers value? Or can it provide some advantage—streamline operations, reduce costs, comply with the law, etc.—that has value to the project sponsor?

For software for sale, differentiation means the improvement or benefit offered by your product over your competitors'. Think about the advantage to the consumers if they buy your product instead of someone else's.

Differentiation is all to do with consumers' perception of your product. If the consumer is willing to pay more (or alternatively the price stays the same but more people are willing to buy it), you have achieved differentiation.

The other aspect of competitiveness is economic cost position. Can you produce the same product with a better cost advantage? For instance, Amelia can go through an analysis to see how to run her shop to obtain an advantaged cost position. Maybe if she outsources the photo lab instead of having her own in-house printing, she can offer prints at lower cost than the competition.

We strongly suggest some combination of project sponsor, intended buyer, and operational user evaluate competitiveness. Unless you are a very unusual project manager, you tend to overestimate the differentiation and underestimate the cost of your product. After all, it's your proj ect and you want it to be seen as valuable. You need a more objective assessment of competitiveness than you can normally provide by yourself.

Figure 2.3 looks at the desirability of investing. Note that if your organization is building products or ser vices for sale, then the "worth of work area" scale should be replaced by "Attractiveness of the market." Is it a high-yield market with good margins and high demand—video games, software, DVDs? Or is the market soft and unattractive with low margins and unprofitable sales?

02fig03.gif

Figure 2.3 The vertical axis shows the worth of the work area rele vant to the delivered product. The hori zon tal axis is the degree of competitiveness, improvement over the existing or com peting product, the proposed product delivers. This graph is adapted from work by John and Ken Favaro.

The obvious project that warrants investment is building a product likely to be deployed in a work area that has a high worth to the organization, and the proposed product is more competitive (produces increased profits) than its predecessor or competition.

When the product is to be used in a work area of high worth but the product has low competitiveness, investment is not advisable. From the point of view of investing in a product for your own organization, people working in the high-worth area are probably bright (look at your own organization to see where the best and brightest work) and you will not gain by giving them a product that provides little competitive advantage.

From the point of view of an external market, a company in a bad competitive position is likely to be unprofitable even in a market where the average participant is profitable. For example, suppose that Amelia assesses that the Internet photo printing market is highly attractive. However, she is horribly disadvantaged competitively because she only has a 56Kb dialup telephone line and an old desktop printer for printing photos. Even in this profitable market, her competitive position makes it inadvisable for her to invest.

The product that offers significant competitiveness in the low-worth work area is a better investment, as it may make some noticeable difference to that area—perhaps enough for the area to become more valuable to the organization.

You can consider this from the point of view of an external market. Suppose Amelia wants to invest in running photography classes. Her analysis shows the average camera store does not make money in this market. However, she has a huge competitive advantage because her uncle, who is a famous photographer, is the teacher. So everybody comes to her store's class and she's the only profitable participant in an otherwise unprofitable market.

Regardless of whether you are analyzing an investment in an internal work area or an external market, competitive position generally carries more weight than worth of the work area.

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