Ideas or Projects?
I think a problem with entrepreneurs is that they never want to miss out on opportunity by prioritizing, so they make every idea an opportunity. I suggest making two lists: ideas and projects. Ideas are half-baked. They are opportunities that haven’t been well investigated, have no clear project description and are not being actively worked on. Projects have gone through some screening process, have a project brief and are being actively worked on.
The idea list can be that pot where the entrepreneur in all of us can pitch whatever crazy idea we want. It can include a brief investigation as well in order to help the steering committee decide if it is worthy of moving up to the project list.
The project list should be limited to 1–2 years worth of work. This how we will control our work-in-progress to avoid the problems of queues.
There are two ways to determine what gets to become a project: by measuring the cost of delay or how time sensitive is the project and the second is by gauging its financial potential.
Gauging financial potential should be part of every screening process. This doesn’t need to be difficult. Using simple publicly available data, we can make a best case and worst case scenario and extrapolate revenues and profit targets. Activate the biggest winners to your project list.
Additionally, one could cross-reference this with the potential of success. At the early stage, this measure is completely arbitrary no matter the research and analysis, but is worth considering none-the-less. I recommend using some of the well documented business analysis techniques like Porter’s Five Forces and SWOT. After completing the analysis, assign a percentage that you think the project will meet your goals. If you are an over-confident entrepreneur, I recommend having others in your organization anonymously do the same exercise and compare the results. They will never correspond, which is a big advantage to uncovering potential problems.
The second prioritization method is using cost of delay to calculate how time sensitive the projects are. To begin, don’t get bogged down in details. Cost of delay is like horseshoes and hand grenades, close is good enough. To calculate cost of delay, simply ask yourself how much money you won’t make if the project is delayed 30 days, 3 months or 3 years (depending on your market). Then rank your projects by the projects that will lose the most money if delayed to the least.
Let me give some examples to demonstrate. An example of high cost of delay is something like online mattress retailing. Casper Sleep started selling foam mattresses online in 2014. Analyzing the business at the time, one could project that ultimately there will be one major brand in the category and many smaller competitors. The longer one waited to join the industry, the more expensive it would be to establish the new brand and garner free publicity (magazine articles, news pieces and blog entries). Therefore, there would be an increasingly costly cost of delay.
I happened to do an analysis around 2014 and projected that they might develop into a $30 million / year revenue business by 2016 that would account for the majority (30–60%) of online mattress retails. I projected that if I started sales in 2015, I might have $10million revenue in 2016. If I waited 12 months, that would limit my potential business to maybe $3 million because of increased competition by Casper. Therefore, my cost of delay for 1 year would be $7 million dollars. That’s not much in the world of the Fortune 500, but it is a huge difference for a small business.
As it turns out, Casper had around $200 million in revenue in 2017. So my cost of delay should has turned out to be more like $180 million or more! It was a very expensive mistake not starting that business!
On the other hand, there are the suppliers to warehouse club stores. The club stores keep the same food stuffs constantly, but will order in furniture, toys and seasonal products for only three months at a time. If the office chair supplier already has an item in the store and is looking to replace it, there is really no cost of delay as long as the store doesn’t get tired of waiting and cancel the order. There is no cost because the chair supplier will continue making sales of their current product and can expect that the boost in sales of a new model will be the same in one month as it is today. Since the club will only carry the chair for three months, there is a maximum amount of sales that they can make and that is not dependent on delivering now or in a month either.
