Hunting for Alpha

Alpha (α) is a term that captures the essence of what a great business strategy is meant to deliver; category outperformance. In other words, a better return on capital when compared to the indexed benchmark (beta).

Achieving a positive alpha is an important measure if attracting investors, customers, market share and talent are important to the future of the business (which is certainly the case for most forward-orientated businesses), which means that everyone should at least start every year with the intent to achieve alpha.

If you are intentionally operating a business just to grow at the same rate as the category, you're choosing a tough route. Under conditions of uncertainty, inflation, increased competition and growth in other sectors; you're purposefully selecting trouble ahead.

Getting it right however, means that compared to the category that you find yourself in, you need to be playing the game with some kind of 'edge', or advantage, over the competition. Your top-line growth trajectory needs to be angled steeper...for a sustained period of time. Efficiency efforts are important, but are not going to deliver on much needed top-line growth.

For a sober exercise in basic business mathematics, compare the difference in the compound return on capital over just a 10-year time horizon between a 10% and a 15% annual return on a capital amount. Shoot that comparison out over a period of 30 years and the urgency for consistently achieving alpha, is really brought home.

Assuming that all of your competitors are also hunting for that 'edge' to achieve alpha for themselves, are you confident that you have done the hard work of finding an advantage that consistently over time is going to enable you to beat the benchmark?

And then the critical factor in all of this is time.

Alpha yields magical results when this kind of outperformance is compounded over time. So the best time to have a 'strategy edge' would have been when the business was founded; the second best time is today.

The more you delay, the more the absence of 'having alpha' massively constrains the financial performance of your business in the future.

Beating the index is not an easy task, but it has to be a critical metric for any business that wants to be successful. Hunting for alpha means staying in a position where you are holding an unfair advantage (and delivering outperformance) over your competitors with a better strategy.

Ultimately you need to choose to either 'be the alpha', or die....because you are not the alpha.