J CURVE MANAGEMENT

The Should We/Can We model requires every short term operational decision to be supported with a Yes we should and Yes we can response, i.e., both the return on operations and the cash flow improve as a result of the decision. But is it possible for a good decision to result in a decline in ROO and cash flow?

The answer is Yes – if it is a J Curve decision.

Any strategic decision to spend money today, to receive a benefit tomorrow, is called a J Curve decision. J Curves produce a short term financial loss that is overridden by a long term strategic gain. Some J Curve examples are:

• A new product line
• Access to new markets
• A new equipment purchase
• New staff hire
• New business premises / opening other premises
• Moving manufacturing overseas
• Acquiring competitors

J Curves can appear on the income statement or the balance sheet. Graphically, J Curves are characterized by 3 phases:
Phase 1 – Investmet
Phase 2 – Catch Up
Phase 3 – Blue Sky

All J Curves start out in Phase 1 – Investment. If a J Curve never makes the turn to Phase II – Catch Up – it will begin a downward course called a ski slope. While it’s common for strategic endeavors to cost more and take longer than projected, the key is determining whether the investment will ever turn around and begin catching up to reach Phase III - Blue Sky. In every instance, J Curves on a ski slope should be abandoned.

Improper J Curve Management Can Sink Even a Strong Company

Identification, prioritization, and management of J Curves are some of the most important determinants of entrepreneurial success. All J Curves carry costs and implications impacting the company’s financial performance:

• Short term loss of cash flow, return, and profit
• Exceeded “executive headspace,” or the opportunity cost of executives focusing attention on specific J Curves
• The possibility of a J Curve in Phase 3 slipping backward (referred to as a “W Curve”)
• Compounded negative financial consequences of too many “good” J Curves in effect at one time, causing potential loss of acquisition opportunities or even bankruptcy

J Curve performance can be measured as impact either on return on operations or on cash flow. Initially the cash flow impact is easier to comprehend, but when measuring the cost in terms of cash flow, it’s important to consider the marginal effect before undertaking the strategic project. As resource capacity increases, CEOs need to be increasingly aware of the opportunity cost of using a resource for one project versus another.

J Curve Management Rules

Almost every company encounters J Curves at various times, but few companies with less than $100 million in revenue track their performance and abide by a stringent set of rules for making strategic decisions. Following rigid rules ensures that leadership teams don’t allow what may at the time seem to be good strategic decisions, but may ultimately seriously harm the company’s financial performance.

Establish a J Curve register

• The register will track the number of J Curves active in the business. The register should be maintained in spreadsheet format, such as Excel, for easy updating, and it should be updated every 30 days. The register isn’t a project management system; it’s a dashboard that highlights “stalled” J Curves and ski slopes, and indicates when to remove a J Curve from the register.

Create and manage a plan to quickly move from Investment to Blue Sky

• Focus on the critical transition between the innovator and the implementer by using clear communication, documentation, and procedures. And beware of innovators who will not let go of their baby!

Measure and manage depth and breadth of the valley

• Be prepared for the valley to be deeper and wider than anticipated. Encourage honest discussion about costs as well as the opportunities of ideas.

Do NOT become emotionally connected to a J Curve

• Watch out for ski slopes and emotional arguments to continue them. Examples are sunk costs and people management.

Do NOT take on too many macro J Curves at once

• Identify, prioritize and stagger J Curves. Understand how many your company can handle at one time. Understand “aggressive” versus “passive” introduction, and ask two questions when considering any new J Curve: Will it benefit the business? Is now the right time?

What’s next?

Establishing your J Curve register requires discipline and accountability for monthly tracking and for factoring the curve into all strategic decisions.

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