Saturday, February 7, 2009

Analogy #237: Take It Off

The Story
A lot of people have trouble losing weight. Well here are two sure-fire ways to lose weight.

Method #1: Get Very, Very Sick
There’s nothing like a severe case of food poisoning, flu or diarrhea to take off pounds quickly. The weight just goes down the toilet. In addition, you’ll feel so weak and nauseous that you won’t want to eat for awhile after that.

Method #2: Amputation
Now some would complain that with method #1, the weight eventually comes back. So if you really want to make sure your weight loss doesn’t come back, try amputation. Once you cut off a leg or two, that weight is never coming back. It’s quickly gone FOREVER.

The two methods above that were recommended for weight reduction are impractical and stupid. What good does it do to lose weight if you have to spend all your time weak and sickly, either in bed or near a toilet? There’s nothing beautiful about seeing someone in such a sickly condition. In addition, there are the long-term negative health considerations from depleting your vital fluids.

Amputation may cause weight reduction, but it also eliminates key functioning parts of your body. Chopping off vitally important pieces of your body is extremely short-sited. Eventually, you’re going to want those pieces back, and by then it is too late. Not only that, you still haven’t eliminated the ugly fat in the rest of your body. You’re still fat, but without a leg.

As silly as these methods sound for human weight reduction, I have seen similar approaches taken by companies in the name of cost reduction. On the one hand, some companies cut out their “vital fluids” to the point where the company is too weak and sick to effectively function in the marketplace. They may be lean, but they are not mean. They are bedridden and on their way to oblivion.

This is often the result when companies indiscriminately announce 20% cost reductions across the board. Not every area has 20% waste, so some areas will lose vital fluids needed to be effective in the marketplace. Purging yourself of vital energy to compete makes a company sicker, not healthier.

Second, some companies will lop off entire sectors of their business. At first, they may think that they can get away without these major pieces of their business, but eventually they want them back and it is too late. For example, amputating R&D or maintenance from your company may save money today, but without R&D, you won’t have a pipeline to grow future profits, and without maintenance, your current profit machine will break down and go into disrepair, shutting you down.

During these current economic times, many strategies are focusing on cost reductions. Please don’t use either of these methods.

In the end, the real goal is not absolute lowest weight, but absolute best health. If you go to a health club, the trainers will tell you that some people are so weak that they need to gain some muscle weight in order to function at their peak. Likewise, strategies should be designed to focus on health, rather than just cost reduction, since, as we have seen, not all loss is healthy.

Experts will tell you that the sensible way to lose weight is also the healthy way. The idea to do a combination of two things: Change to healthier eating habits, and increase your exercise. In other words, it’s all about managing caloric inputs and outputs: fewer, but more nutritious calories in, and burn more calories out. In today’s blog we will apply this principle to business cost reductions.

1. Cut Back on Bad Calories
The goal is not to cut out all calories. That leads to unhealthy bulimia. Instead, eliminate the empty calories that provide no nutrition. In a business sense, that means cost cutting which takes out the things that have no bearing on your positioning, things that will not be missed and do not hurt your image or competitive strengths. In fact, some cuts can actually improve your strengths (just like cutting out an excess of cabs and sweets can eliminate energy crash cycles).

My current favorite example of this is Revol Wireless. In the United States, cell phone usage is fairly mature. Just about everyone who wants a cell phone already has one. Now the typical cell phone model in the US is to sell a phone well below cost and then charge a higher phone rate over a set period of time (in a contract) in order to recover the cost of the phone.

Well, what if a cellular company were to treat the phone as empty calories? If you eliminate the phone, the usage fees no longer have to cover a phone subsidy. In addition, you do not need to lock people into a long-term contract, since you don’t need to stretch usage out until subsidy is paid for. That’s basically what Revol Wireless has done. By treating the cell phone as empty calories, it can eliminate the undesirable contract and charge much lower phone rates than the competitors who have to factor in a subsidy.

Now not everyone wants to stick with their old phone, but if that market is big enough, someone like Revol can make out.

A simpler example is Kellogg. In the past, cereal companies have tried to cut back by putting less cereal in the box. Over the long haul, that can hurt, because you have reduced the value of the box without a comparable reduction in price. This is not just eliminating fat, it is eliminating muscle. People are buying cereal, and you’ve reduced that very thing they are trying to buy.

Recently, however, Kellogg has tried a different approach. Instead of reducing the contents of the box, they have changed the shape of the box so that it takes less cardboard to house the same contents. When you multiply a small savings on cardboard times all the boxes they sell, that adds up to a large cost reduction. This reduction, however, did not reduce in any way the quality or quantity of the contents. As a side benefit, Kellogg contends that the new shape fits better on a customer’s shelf, so the value may have actually increased, even though costs decreased.

Many of the green marketing programs also work in this way. They eliminate wasteful excess packaging (empty calories), which not only reduces costs, but can increase one’s image as caring about the environment.

2. Increase Exercise
One can lose weight not only by cutting out food, but by keeping food intake constant and increasing exercise. So when one feels pressured to improve productivity, don’t blindly rush to cut. Perhaps all you need to do is improve your exercise.

In a business sense, you can see that in ratios. Most productivity measures are ratios, like Labor $ per Unit Made, Costs per Unit Sold, Overhead per Dollars Sold, and so on. The cutting reflex wants to quickly cut the numerator of these ratios—the labor, the costs, the overhead. The exerciser realizes that productivity can also be gained by keeping these inputs flat and increase the denominator outputs, like units or sales.

For example, in this current economic recession, P&G has resisted cutting inputs like advertising. If anything, they are putting added emphasis on advertising. Why? Strong advertising (flexing their advertising muscles) can increase the denominator of sales, thereby increasing productivity.

Recently P&G has announced that they are taking their Mr. Clean Car Washes out of test mode and rolling them out. This will cause an increase in expenditures, but it is a productive exercise of their money, so they will be better off. In addition, it will provide another avenue of sales so that overhead as a % of sales will go down even if overhead costs stay the same.

In tough economic times, there can be a lot of pressure to cut costs. However, the best strategy is not one that cuts the most costs, but one that creates the healthiest company. So if you have to cut, look for cutting the empty calories out of your business diet—things that won’t be missed or hurt your image if they are cut (both near term and long term). Otherwise you may be cutting out something vital that you will need later (weight loss through amputation). In addition, look for ways to increase your exercise, so that you can grow the denominator (sales, units) faster than the inputs (costs). If an investment is highly productive, you can increase productivity by actually spending more.

The tough times will not last forever. More prosperous times will return. Unfortunately, if you amputate your leg, it is never coming back. Think twice before placing the saw on a piece of your corporate body.

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