To prosper in a tough economic environment, business leaders must make some difficult decisions. Those decisions will set the stage not only for surviving the recession, but also for sustaining growth during the inevitable economic recovery.
In responding to a weakening economy, there are two fundamental kinds of money-saving strategies managers can choose. First, they can chop expenses. This typically means cutting controllable expenses such as marketing and employee training, or laying off employees.
While chopping expenses does provide savings in the short term, those short-term savings come at a very high price. Cutting marketing expenses, for example, often leads to a decrease in sales some six or eight months “downstream.” Bad enough if the economy soon turns up. At least the boost from an improving economy might then mask the company’s weakened competitive position. But what if the economic downturn were to last another year or more? Cutting marketing expenses might then prove fatal.
Cutting employee training is also an expensive “savings.” For it’s a sure way to fall behind the productivity curve in a competitive environment. As for layoffs, this “last resort,” short-term strategy comes with morale problems, plus later hiring and training expenses as well. And once again, productivity suffers.
GET THE LEAD OUT
The second type of money-saving strategy is far more beneficial in the long term. That strategy is to “get the lead out.” OK, I’ll explain…
Every organization – some more than others – is burdened by dead weight. What do I mean by dead weight? I mean a lack of focus in its many dimensions. Like too many products or services, some of which aren’t pulling their weight in profit contribution. Or too many product options adding layers of complexity and inefficiency.
Some years ago, I worked with a client on an analysis of both sales revenue and profit contribution for each of the products which the company manufactured. To management’s surprise, a full 37 percent of the company’s products (representing 14 percent of the company’s sales revenue) offered negative contribution to profit. Following the analysis, the company’s management team “killed” a number of unsuccessful products. They “got the lead out” and profits quickly improved, not just from the elimination of “dead weight” products, but also from management’s greater level of focus on those stronger, remaining products.
Many companies have a number of “wrong” customers. Those companies are so driven by sales volume that they never stop to analyze whether particular customers are really contributing to bottom-line profit. So they continue to serve unprofitable customers.
I worked with a client on an analysis of both sales revenue and profit contribution by customer. Our findings were an eye-opener for the management team. We discovered that four customers, representing 13 percent of the company’s sales revenue, were actually contributing negative profit! Again, the company’s management team “got the lead out.” Actually, they let just one customer go. They turned two others profitable through pricing strategy. They turned the fourth profitable through changing the product mix.
It’s never too early to get the lead out
Early in 1984, The Wall Street Journal reported results of the WSJ/Gallup survey of 822 top U.S. executives. That survey questioned the executives on their feeling about the recession of 1981-1982, which had then recently ended. Guess what? Seven out of ten thought the recession was a good thing for the country!
The surveyed executives said, “It was a well justified adjustment.” “Perhaps it was the medicine we needed.” “It put a dose of reality into our lives – sharpened us up.”
Well, let’s reflect on the specific lesions learned from recessions. Just how do recessions “sharpen us up”?
Surely many of the 822 surveyed executives were from companies that had layoffs during the recession. OK, whom did they lay off? Good people or deadwood? If deadwood, why in the world wasn’t that deadwood booted out before the recession?
Surely a number of the 822 executives narrowed product lines during the recession – discontinued products and services that weren’t quite making it. Focused instead on the “real winners. Then why, before the recession, were they hanging on to the “real losers”?
I could go on and ask about tolerance for unprofitable activities, belated make-versus-buy decisions, and mismanaged marketing programs. But I won’t. I’ve already made my point – that during a recession, things get so terrible that business managers finally stop doing the things they never should have been doing in the first place.
Managing their business in times of non-recession, executives have their choice. They can hang on to a few weaker products and services, a few marginal activities, a “monument to management” here and there. They can put on a few extra inches around the middle management.
Or they can act the way they’re forced to act during the recession. They can run lean and insist on winners only.
Why should they run lean? Two reasons:
1. That’s how to grow profitably when times are good.
2. That’s how to remain prepared for times which aren’t so good.
Lesson Learned: Thomas Watson said it best…
“Companies don’t get into trouble during the bad times.
They get into trouble during the good times.”
Thomas Watson, founder of IBM
This article is adapted from Bill Birnbaum’s 2009 Special Report: “Nine Strategies for Growing Your Business During the Recession.” For a free copy of that report, e-mail Bill Birnbaum at: Bill@BirnbaumAssociates.com or call him at: 541-588-6297
Bill Birnbaum is President of Birnbaum Associates, business strategy consultants. He helps clients develop a shared strategic vision, and then turn that vision into a sound business strategy. His most recent book, “Strategic Thinking: A Four Piece Puzzle,” is available from book stores and on-line book sellers.