Finding the inflection point

How often do you discuss the contrarian view of your company’s current situation? By keeping the status quo, you are inherently accepting some trade-offs and risks, and those trade-offs and risks can change over time due to external factors. What should you do to mitigate the risks? What external factors could change that would cause to make a change in your current situation?

Many times, you run into 50/50 trade-offs at this level that are really difficult to wrap your head around. At one point, Sears was the biggest retailer in the world, but they were unable to correctly determine that the growth of the internet and online retailers like Amazon would eventually overtake their brick-and-mortar and catalog business and drive Sears into irrelevance. Their error was that they missed the inflection points that should’ve led them to change course and adapt to a changing environment.

There are seemingly infinite case studies that have been done on Sears, and I’m not here to do another one. I instead want to focus on hypothetical trade-offs that they may have had to consider.

For example, e-commerce retail sales as a percent of total sales doubled from Q1 2000 to Q1 2003 (source). Granted, in 2003, only 1.6% of retail sales were online. Now we’re faced with a tough decision. We could say that Sears should continue to focus on its brick-and-mortar stores because 98.4% of sales are in stores. Or you could make the argument that the trends show that online shopping has the possibility of really cutting into the stores’ profits, so we should focus on building an online business that will win in the long term.

Here are some questions that I think would be worth discussing:

1. Where is the inflection point in the metrics that would cause us to change the status quo? What if e-commerce sales tripled instead of doubled in the same time period? What if X% of retail sales were online? What if the numbers varied by company or industry?

At this point, the best you can do is guess, but if everyone came up with an answer to the question and then you had a discussion about people’s view of the inflection point, that may lead to a more interesting discussion that digs deeper into the reasons for making a change.

2. How much capacity do we want to dedicate to mitigating the business risk? This of course depends on many things, like the health of the business, the perceived threats that competition poses, and the amount of volatility in the industry.

The problem is that you always have startups like Amazon that will go all-in on one approach (online retail), which means they are more likely to win if they guess right. They’re also very likely to fail if they guess wrong, but there are also other startups out there going all-in on a different approach hoping they win the lottery.

If you were in Sears’ position, you would need to decide how much capacity you want to dedicate to building out an online retail business. I think it’s more than that though – I think it’s important to know where the inflection points are where you should increase or decrease this investment and have a discussion about those inflection points.

The amount of risk you’re willing to take can also depend on the health and size of your company. If a larger company is doing well, they can devote more resources towards mitigating risk and still achieve good results in the core business. If a company is an earlier stage startup, they may not have the capacity to focus any resources toward mitigating risk and may need to go all-in on one approach and accept the risk.

3. What factors might cause us to make the wrong decision? This is where it gets really tricky, and where I think many companies go wrong. How much capacity do you put towards mitigating risk, which will reduce the revenue of your core business? If you’re a public company, taking action to meet quarterly targets may be the best thing for the company stock price, but could be detrimental to the business in the long term. Making a sound business decision may negatively impact the career prospects and compensation of people in the company. Senior leaders on shaky ground may be less likely to make a risky but correct decision because they can’t afford another perceived failure.

I’m applying these three questions to a business case, but you can apply the same principles to engineering teams as well. By discussing these questions, we give ourselves more data points to analyze because now we have several past assumptions that we can reflect on. Now the discussion turns from “we made the wrong decision a year ago” to “we made the wrong decision a year ago because we incorrectly assumed that X would change by Y% over the past year”. Now you can discuss why you made the wrong prediction about X, and how your predictions about other factors maybe were correct. If you never made a prediction about X, you wouldn’t have an opportunity to reflect on your decision making process, which is potentially more valuable than just realizing that you missed an opportunity.