Tuesday, July 3, 2012

Strategic Planning Analogy #459: Strategic Toss-Outs

When its time to clean out the junk which accumulates at my house, my wife and I have different opinions.  She seems very willing to toss out my stuff, but more reluctant to toss out her own stuff.  I, on the other hand am very willing to toss out her stuff while hanging on to my own.  As a result, we often disagree about what should be tossed out.

Sometimes, I’ll come home from a business trip and find out that my wife used the time I was away to get rid of the junk in the house.  Apparently, she finds it a lot easier to make those decisions about what to toss when I’m not around.   The disagreements go away (along with a lot of stuff I would have wanted to keep).

Houses aren’t the only things which collect junk over time.  So do businesses.  Business junk that accumulates over time includes:

   1) Old Products and Services which are no longer relevant.
   2) Formalized Processes and Procedures which are out of date.
   3) Informal ways that things get done which are out of date.
   4) People and positions which no longer accurately reflect best practices.
   5) Ways of thinking about the business.
   6) Unprofitable customers.
   7) Old capital investments.

Although nobody would argue with the abstract concept of eliminating the obsolete and irrelevant, the problem arises in that not everyone agrees about what is obsolete and irrelevant.  This is particularly true if someone else believes that what you yourself do for the business is obsolete and irrelevant.  Like the situation with my wife, someone else’s area in the business may appear less relevant than one’s own, so you fight to toss their junk while keeping your own.

Worse yet, sometimes businesses are in a position like a couple who is downsizing from a large house to a small apartment.  In order to fit into the smaller dwelling, they not only have to get rid of junk, but also get rid of some stuff that has reasonable value.  Similarly, businesses often find a need to downsize and are faced with the tough task of getting rid of seemingly good things in order to fit the budgeted shrinkage.

The problem, of course, is in deciding what seemingly valuable aspects of the business to toss out.  This can be difficult, because it may require getting rid of long-time employees or heritage products associated with the founding of the company.  And, as in the story, there can be differences of opinion as to what is or is not valuable. 

And, if some people are left out of the decision (as I was during a business trip), some highly valuable things could get tossed out because the one doing the tossing did not appreciate the value.

The principle here is that strategic planning is about more than just how to grow a business.  Yes, it may be more fun to talk about growth strategies.  However, often times a lot more value can be unlocked from a business by tossing out a lot of the accumulated junk already choking the business.

There can be all sorts of processes, people, products, and factories embedded in the business which are gigantic cash drains.  Getting rid of this junk can create a far greater return on investment than investing in completely new stuff.  (Remember all those statistics about how most acquisitions and new product introductions fail?—it is not a given that every growth move is a winner.) 

Unfortunately, if you get rid of the wrong stuff, like core competencies, key aspects of your competitive advantage, and investments in the future, you can end up destroying the future of the business. (Wrong cutting moves can be as dangerous as wrong growth moves).

Therefore, decisions about what to toss out can be just as strategic as decisions about what to add.  Yet, I’ve seen many examples where cost cutting programs totally bypass any strategic scrutiny.  Perhaps every department is told to cut out 10% of their expenses and they can use their own judgment about what they can toss.  This could end up being a strategic nightmare, because it may not cut out enough junk in some areas while choking off the best potential in other areas.

Without a coordinated, strategic approach to tossing out, you can end up tossing away your best chance at success.  Here are some strategic issues to consider when embarking on a cutting/fixing program.

1) Know what is the Foundation of Success
Nobody would intentionally sabotage the underpinnings of their success.  Yet it happens all the time.  There are two causes.  First a company may not know what is the basis of their success, or they may have a mistaken understanding of what strategic elements created their success.  Unless you first know what is critical to your business model, you will not know how cuts or fixes are going to affect those critical elements.  So before embarking on a cutting/fixing program, make sure everyone is in agreement as to what is important for future success.  Know what your key points of differentiation are and what parts of the business model cause them.

Second, all cutting/fixing suggestions need to be viewed in the context of their impact on the core business model.  If the cuts or fixes critically hurt the core elements of success, then don’t do them.  Remember, these are not isolated decisions.  They impact the overall business model.  Keep that in mind when making each decision.

2) Consider Cross-Linkages
Actions in one part of the business can impact many other parts of the business.  For example, the operations department might cut back on labor to make their department’s costs lower.  They might even get a big bonus for this action.  However, the resulting drop in quality could ruin the budget for the service/repair department and make the selling force much less productive due to the problems in trying to sell lower quality goods.

Therefore, one needs to look at the big picture and all the cross-departmental implications.  Reward people on the total impact of their decision, not just on their individual area.  Otherwise, you can end up with a single individual maximizing their area while destroying everyone else (sort of like when my wife cleans out when I’m not around).

3) Flexibility and Backup is Important
Getting rid of excess fat in your supply chain is usually a good idea.  However, like most good ideas, it can turn into a bad idea if taken to an extreme.  If the 2011 tsunami in Japan taught us anything, it was that an extreme approach to lean supply chains is a disaster if a link in the chain gets broken. 

A lot of automotive manufacturing parts had only a single source of supply and that source was wiped out by the tsunami.  And because of a just-in-time system, there were no excess parts on hand. As a result, the entire global automobile supply chain ground to a halt waiting for the single source for one product to be replaced.  This created great financial losses for many months.

You can prevent these great losses by building a little bit more flexibility and backup into the system. Have backup sources or alternative manufacturing options.

Also keep in mind that needs and desires can change over time.  This can require you to make frequent tweaks to your offering.  If you get so specialized in your process (to save money) that you cannot quickly adapt to minor tweaks, you have really made yourself less efficient. 

4) Consider Fewer, But Larger Cuts
A lot of strategy has to do with making trade-offs (see prior blogs here and here).  The idea is that if your strategy requires you to excel in a certain area, it may require you to put more money in the area to excel in and less in areas which do not add (or even take away from) from your competitive edge.

In other words, instead of cutting back a little bit everywhere, perhaps you need to invest more in some places and completely eliminate other areas.  For example, Wal-Mart invests more in areas where cost savings can be realized (like IT systems) and completely eliminates services which only serve to raise costs (and prices).  When you consider fixed and variable costs, the only way to get big improvements in some non-essential activities is to eliminate the whole thing (to cut out the fixed cost).   

So, before making your decisions on what to toss out or fix, first understand the trade-offs which underpin your strategy.  Then consider becoming more extreme in your approach to those trade-offs.

5) Think Longer-Term
To prosper long term, you need a full product development pipeline.  You need something to sell today, something to sell in the near term and something to sell in the long term.  If you cut off R&D and product development to help near-term profits, you may be destroying long term profits because you let the pipeline get empty.

This is like saving a little money today by not changing the oil in your car and ending up eventually having to replace the entire engine because of the damage caused by improper lubrication.  Those near-term savings pale when compared to the long-term consequences.  So make sure our near-term cuts aren’t crippling your long-term strategy.

Strategy isn’t just about plans for how to grow and expand.  It should also include plans for how to fix/improve/eliminate the messes in the current business.  If you do not take a strategic approach to these cuts and fixes, you can end up destroying the key elements of distinction which created your basis for existence.  In other words, strategists can’t just dream about a blue sky future; they need to get their hands dirty helping keep the current businesses on a balanced path between cost efficiency and strategic effectiveness.

A lot of companies focus on “best practices” in order to increase efficiency.  But if all you do is focus on industry best practices, then you are not doing anything to distinguish yourself in the marketplace.  To win, you have to do things differently, and you don’t get different by following industry norms.  Strategies help you understand how to be different, and this can open up greater efficiencies through trade-offs than you can find in best practices. So power your cuts and fixes with strategic insight.

1 comment:

  1. Gerald Nanninga,

    I love this post. It is a great reading. I agree that sometimes we need to know what to stop doing more than what new activities to introduce. At least, we have more control on elimination than we have on growth in these cases

    Extra luggage that is taking the space is much more economic than buying a new cupboard to accommodate our growing luggage.