Sunday, October 23, 2011

ROI Versus VOI

Return On Investment
"A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The Return On Investment formula:
Return On Investment (ROI)

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest."
 ROI is simple and straightforward, but does not enable or support an organization's ability to make investment decisions.  It is a lagging indicator; it tells you what were good and bad decisions in the past, but nothing about deciding on investments to increase the long-term effectiveness or agility of an organization, which are vital in today's "bonkers" business environment (to use Tom Peters' term), and disruptive technology environment.

One famous example demonstrates this point.  When Jeff Bezos founded in 1994, he knew that he needed customers to create what he envisioned as "The Walmart of the Web".  This meant that he had to decide on a mission, which was to create a highly visited website.  He then settled on at least four strategies.  First, concentrate on selling books, don't try to sell all the products initially.  Second, create a website with a superb user experience.  Third, ensure that Amazon has access to all books any of its customers could possibly want.  Fourth provide value to the customer, to the point of selling books below wholesale cost, to generate website traffic.

Value On Investment
None of these strategies are designed to produce an ROI, but especially the fourth.  In fact, the mission of creating a highly visited site does not create ROIObviously, if the vision of creating the "Walmart of the web" is realized, there will be a good deal of ROI.  But the mission to start to realize the vision does not support ROI--but it does create Value On Investment (VOI).  A decision-maker creates Value On Investment when his or her decisions increases the organization's Production Capability (after Dr. Stephen Covey), that is, the ability of an organization to be more effective at achieving its vision and mission.

Jeff executed and persevered in the mission to increase Amazon's growth to these disciplined strategies to increase Amazon's VOI, which is the point of the mission to create a highly visited website, that is, a highly visited site is much more valuable than a site that is visited very little.  In executing this mission, it did not turn a profit until 2000, much to the ire of many of its investors, but it took an increasing share of the customer base that itself has been growing at an increasing rate.  Therefore, Jeff met this mission for Amazon.

The enterprise architecture for Amazon was constantly upgraded, including software, hardware, and physical infrastructure.  The net result is that Amazon is now competing with all other major retailers for customers.

Unfortunately, too many CEOs give into the nanosecond market that expects an increasing ROI every quarter or sooner.  It is like expecting George Washington to beat the British in every battle in the Revolutionary War.  Washington lost far more often than he won, but together with the other founding fathers, he did create an enormous VOI that subsequent generations have transformed into ROI.  Likewise, NASA in the Moon Mission created VOI that Jeff Bozos, Bill Gates, Steve Jobs, and the world have profited from.

If the people of the "Occupy Wall St." movement have a point, its that there is too much focus on Wall St. for ROI and too little on VOI.  Wall St. is using the wrong metric for the wrong duration.  And they are "leading" the rest of us into bankruptcy as a result.

1 comment:

  1. Such a nice blog and i appreciate your all efforts about your thoughts. it's really good work. well done.
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