Tuesday, June 12, 2007

Cutting Your Way to Prosperity? (part 2)

One of my favorite comic strips of all time was Pogo, by the late Walt Kelly. In one of his comic strips, Albert the Alligator was running as fast as he could through the swamp. Pogo the ‘possum was desparately trying to keep up with the pace. While they were still running, Pogo asked Albert where he was going. Albert answered something to the effect that he didn’t really have a particular destination in mind. In response, Pogo replied, “If you don’t know where you are going, then why are you running so fast to get there?”

This story is not that dissimilar to what happened to Alice in Wonderland. Alice was confused, so she asked the Cheshire cat which way she should go. The Cheshire cat asked Alice where she was trying to get to. Alice said that she didn’t know. In response, the Cheshire cat said that if you don’t know where you are going, then it really doesn’t matter which path you take.

Strategic planning is all about finding the right destination for your business and the right path (journey) to get you to your destination. Both are necessary ingredients to success. A goal without a means to get there is worthless. Similarly, tactics which lead nowhere are also worthless.

Sometimes, we can fall into the trap that captured both Albert the Alligator and Alice in Wonderland—disconnecting the journey from the destination. Albert was so intent on making progress on the path that he failed to take the time to choose a destination. A lot of activity and movement was enough to make him happy. And as Pogo pointed out, if the journey has no purpose, striving to do it faster or more efficiently does little, if any good.

Alice had a similar problem. She was so intent on leaving her current situation that she failed to take time to determine a better location. She was seeking guidance on which path to take to move away from a position she did not like. And as the wise cat responded, if you have not planned your destination, then it really doesn’t matter what you do or where you go.

Although it may seem silly to think that a business would be as foolish as Albert or Alice, it does happen. During the dot com boom, people were saying that choosing a destination is obsolete. All you need to do is race like Albert to get to the next “killer application” before someone else. Some of those dot com “geniuses” don’t look so smart anymore.

Another time when leaders are tempted to disconnect action from destination is during tough times. When tough times hit, there is pressure to make a lot of cuts in order to make it through until good times return. These cuts can be across the board, regardless of any strategic concern. Like Alice they are looking at avoiding the current bad situation rather than seeking out a better situation. The analogy I hear often goes something like this:

“I don’t have time to worry about fancy things like strategy and positioning. My patient is dying. I’ll worry about that luxury later. Right now I have to focus on stopping the bleeding.” And, of course, stopping the bleeding means stopping the flow of red ink by cutting costs as much as one can (and without thought as to how it will impact the strategy). However, if you do not know what is wrong with the patient and how to cure the underlying problem, stopping the bleeding will not ultimately solve the problem.

This blog is the second in a series on avoiding pitfalls when in a cost-cutting mode. In the prior blog (see “Cutting Your Way to Prosperity (part 1)”), we looked at the pitfall of when cuts are really not cuts, but rather just a shifting of costs from one location to another. In today’s blog, we are looking at what happens when cost cutting is done without concern for its impact on reaching a strategic destination.

Three principles should be considered when making cuts to ensure that it doesn’t get disconnected from strategy:

1) Prioritization
2) Process
3) Preemption

These are covered in more detail below.

1) Prioritization
Across the board cuts can not only cut the fat in your business, but also the meat. I recall two discount store chains that cut their merchandise buying across the board. Unfortunately, not all merchandise sells at the same rate. Fast turning items like health & beauty care, household chemicals or candy sell through much faster than clothing. In one store, the only thing consumable item left in stock after inventory cuts was 2001 flushes, so that’s what an entire aisle was filled with. In another store, I saw more than three aisles filled with just one item—red licorice rope. I doubt if this left a good impression on the customer who was looking for the items which used to be on those shelves. Sometimes, you have to cut things differently, due to their different characteristics.

Rather than cut everything equally, one needs to make priorities. In general, areas that are most near and dear to one’s competitive advantage need to be cut the least. You’ve worked hard to build that reputation. Don’t give it all away at the first sign of panic.

Areas that are least crucial to your strategy should take the brunt of the cuts. Of course, this assumes that:

A. The people doing the cutting understand the strategic priorities of the company and what is most crucial to success; and
B. They understand how various cuts might impact the ability to continue down the path to one’s strategic goal.

Before making a cut, first ask yourself:

- Will there be a noticeable difference to my customers, enough to turn them away?

- Will this cut change the nature of who I am, to the point that I have inadvertently changed my strategy without knowing it? For example, if your historical strategy hinges on being known for superior service, and you cut the life out of your people providing the service, then you have really changed your strategy to no longer be about service.

2) Process
It takes a certain amount of input (people, money, equipment) to get a job done in a particular way. If you cut back on one or more of these inputs and do not change the expectations of the way a process gets done, you may be courting disaster by guaranteeing failure, since the same process cannot be done with the lower input. Decisions about cuts in inputs should not be divorced from decisions about the process creating the outputs.

Two types of process decisions can be made. First one can look at the various tradeoffs involved in cutting the inputs. For example, it you need to cut back on your service one can choose a tradeoff between speed and quality—either keep the quality and make it take longer to get the service, or keep the speed, but lower the quality. Depending on your strategy, one tradeoff may be better than the other. Hence, you alter your process based on which tradeoff you want to make. Making such a tradeoff is usually better than cutting back both quality and speed.

The second type of process decision may be to change the process to best fit the cut in inputs. For example, let’s say that the advertising budget gets cut. Since the original process cannot be achieved on the lower budget, maybe it’s time to do things differently, like maybe switch from TV advertising to radio, or move from mass-oriented advertising to just advertising to a narrow niche…or cluster fewer ad dollars into less frequent, but bigger bursts, instead of dribbling it evenly throughout the year.

Again, it is easier to know how to alter the process if you know your strategic direction, because it will help direct which alternative processes are most in tune with your strategic direction and destination.

Sometimes tough times are caused more by our own lack of strategic direction than by any outside forces. To quote from Pogo again, you may be in a situation where, “We have met the enemy, and he is us.” If your strategy is weak, you are more vulnerable to competitive onslaughts and economic downturns. Conversely, if your strategy is strong, you may be able to weather an economic downturn without much difficulty. You may not even have to cut much at all, because the strength of your strategy will carry you through.

The plummet in prices on digital TVs is hurting all the consumer electronics retailers with weak positions. Circuit City has been furiously trying to cut costs. Tweeter this week filed chapter 11. Best Buy, however, is still going strong due to its years of building a strong strategic position.

In other words, the best way to deal with price cuts is to avoid them completely by creating such a strong strategy that you are less vulnerable to downturns. This would be preempting cuts via strategic forethought.

During tough times or economic downturns, there can be a tendency to forget strategy and just rush to cut costs. Spending a little time first thinking about strategic implications can make cost cutting far more productive, and may even eliminate the need to make the cuts in the first place.

The best time to prepare for the tough times is when you are still in the good times. During the good times, you have the luxury of time to figure out your strategy and what is really critical to its success (the destination and the path). As a result, instead of acting irrationally or emotionally in panic when the bad times come, you can calmly go back to what you learned in the good times and do what makes sense both near term and long term.

No comments:

Post a Comment