| Drawing false conclusions from Return on | | | | what they had predicted. |
| Investment analysis can be embarrassing and it | | | | They dropped their prices considerably below |
| can be costly. | | | | what Company A was charging. |
| Here's an example from business in managing risk | | | | Their market share increased to 45% during the |
| and calculating Return on Investment ROI: | | | | first six months of the new operation and then |
| The management of company A wanted to | | | | gradually increased to 65% during the next two |
| decrease the cost of manufacturing a key | | | | years. |
| product. This was in light of new technologies that | | | | During this period, Company A realized they |
| had just become available. | | | | should have included something in their analysis |
| They have 60% of the available business with this | | | | concerning the probability of their competitors |
| product and their closest competitor, Company B, | | | | taking market share. They started the |
| has 14% of the market. | | | | modernization of their factory. |
| Company C has about 10%. | | | | The owners of the company were very |
| The other 16% is held by several small companies | | | | dissatisfied with the performance of the company. |
| that sell a substitute product of lower cost but | | | | After sacking the Board and certain members of |
| inferior performance. | | | | management, they sold the company to |
| Company A calculated the cost of reducing | | | | Company B. |
| manufacturing cost. They then calculated the | | | | To the Chairman of the Board who had said, "All |
| return on investment (ROI). The return was less | | | | is well!" the owners said, "Farewell!" |
| than the 15% required by company management. | | | | Company B accelerated the modernization of the |
| A Board member with an accounting degree and | | | | facilities of Company A to increase their |
| banking experience said the technology looked | | | | production while lowering costs. |
| "shaky" to him. | | | | This was done in the face of the fact that |
| Some board members agreed with him. | | | | Company C had lost market share to Company B |
| The company's engineering director said the | | | | but had responded rapidly and had just completed |
| assumption was wrong, that the technology would | | | | their modernization which would help them regain |
| function as described. | | | | what they had lost and perhaps do more damage |
| The Board rejected the modernization plan. | | | | to Company B. |
| Company A continued to undersell company B | | | | The war price war was on. |
| because of their current lower manufacturing | | | | The above example is similar to that given at a |
| cost. | | | | management conference on managing technology |
| The Chairman of the Board said, "All is well!" | | | | I attended some years ago in Miami, Florida. The |
| Company B did the very same analysis at the | | | | executive who gave the presentation was from |
| same time. Company B decided to make the | | | | the General Electric Company. Unfortunately, I |
| investment because it would lower their | | | | don't remember his name. |
| manufacturing cost, increase production capacity, | | | | The bottom line is that if your analysis is not |
| and they would be able to undercut Company A's | | | | comprehensive, and you don't consider the |
| current prices by 5%. | | | | possible actions of your competitors, you can fail |
| Company B used the probable increase of their | | | | miserably. |
| market share in their ROI calculations. | | | | You must also consider who has the best |
| When Company B completed the improvements | | | | background and education to make technical |
| in manufacturing, which took two (2) years | | | | decisions and who has the best background and |
| including planning, they learned that the | | | | education to make financial decisions. Opinions are |
| manufacturing cost dropped another 5% below | | | | not always evaluations. |