Business initiatives don’t fail for lack of financial analysis

When a major business initiative – launching a new product, acquisition/merger, entering a new market, starting a new branding/positioning campaign, mounting a competitive response, etc. – fails it is rarely because the numbers didn’t work or financial risk wasn’t properly assessed.

If education, training and professional certifications are a guide, we can assume that financial analysis is a reasonably robust skill set among all medium-to-large companies (and even a lot of smaller ones). According to the National Center for Education Statistics (NCES), American universities have cranked out well over 100,000 new MBAs per year every year since 2000. Every company of any size has one, two, six, or a hundred MBAs peppered throughout the organization, and each of these MBAs has been thoroughly schooled in basic financial analysis. Add in the accountants, CPAs, business analysts, risk managers and, in some cases, mathematics and statistics specialists and you have a solid base for testing and validating the numbers before any new project, initiative or campaign is launched.

Yet the success rate for new initiatives, across industries and markets, remains between 25% and 35% — only slightly better than random luck. Let’s look at some statistics:

  • More than 65% of new consumer packaged goods fail to meet sales expectations 1
  • As many as 60% of Hollywood movies fail to earn back their costs 2
  • 70% or more of new market entries will exit the market in less than 10 years 3
  • 70%-80% of mergers and acquisitions fail to increase shareholder value 4
  • 30%-50% of mergers and acquisitions actually reduce shareholder value 5
  • 65%-75% of marketing and branding campaigns fail to deliver expected results 6

Recent history does not suggest the situation is improving. If anything, it may be getting worse. For all the emphasis on big data and business intelligence, the success rate does not appear to be increasing.

We have to ask why?

If robust and near-ubiquitous financial analysis is not improving success rates then something must be missing. In our next blog post we’ll look at some important missing ingredients.

Notes:

  1. Study by Prime Consulting Group, 1997, quoted in “Developing New Food Products for a Changing Marketplace”, John B. Lord, © 2000, CRC Press, Inc. Viewed online 10 JULY 2014 (pdf).
  2. KPMG and Booz-Allen & Hamilton study results, published in “The Effects of Mergers and Post-Merger Integration: A Review of Business Consulting Literature”, Paul Pautler, Bureau of Economics, Federal Trade Commission, 2003. Viewed online 09 JULY 2014 (pdf).
  3. Anecdotal evidence offered by MPAA CEO Dan Glickman in an interview posted on the Freakonomics blog. Viewed online 10 July 2014.
  4. KPMG and Booz-Allen & Hamilton study results, published in “The Effects of Mergers and Post-Merger Integration: A Review of Business Consulting Literature”, Paul Pautler, Bureau of Economics, Federal Trade Commission, 2003. Viewed online 09 July 2014 (pdf).
  5. “Overconfidence and Excess Entry: An Experimental Approach”, Colin Camerer and Dan Lovallo, The American Economic Review, Vol. 89, No. 1 (Mar., 1999), pp. 306-318. Viewed online 10 July 2014 (pdf).
  6. Evidence of marketing and branding campaign failures is largely anecdotal. Mass media advertisers often eschew tracking and accountability, but direct and internet marketing is easier to track. According to one study by web marketing firm Webrageous only 25% of online campaigns meet expectations. Viewed online at AdvertisementJournal.com 10 July 2014.