The Dangerous Dichotomy - Part 1

Far too many business executives have created an artificial dichotomy within their own organization that is potentially dangerous to their firm's survival and almost certainly destructive of profits. What is that artificial dichotomy, I hear you ask?

The answer is simple: Businesses all too frequently put the responsibility for increasing revenues into the hands of one part of their organization, while putting an entirely different group--usually most of the rest of the organization--in charge of reducing costs.

While, on the surface, this may seem to make sense; it really does not.

Here's why.

The Revenue-Increasing Group
The folks in the organization put in charge of increasing revenues--usually the sales and marketing departments--generally are measured only on the things pertaining to revenues. Because it is not a part of their reward metric, the folks in sales and marketing are, therefore, wont to make decisions that may:

1. Increase the costs of production
2. Drive inventories up
3. Increase operating expenses
4. Reduce output

Now, they don't do these things intentionally. They are just trying to do what they have been mandated to do by management and senior executives.

But, if increases in revenue are stymied or shrunken by, say...

1. Failures to meet delivery-time promises
2. Out-of-stock conditions on finished goods or components
3. Lay-offs or cut-backs in production, warehousing or elsewhere

Then, the revenue-increasing group has an "out" for not performing up to expectations or forecasts. Their excuses are generally based on the performance of the other part of the organization.

The Cost-Cutting Group
The other part of the organization is, as I said, usually all the rest of the organization. These folks have all been instructed and, frequently, are being measured based on "keeping costs down." There interest is in doing everything they can to...

1. Keep the costs of production down
2. Holding inventory levels as low as possible
3. Making sure that operating expenses are minimized

These parts of the organization's management also want the organization to succeed. But they are not being measured based on the organization's (the "system's") success. They are being measure on their performance against budgets for costs and expenses.

The folks working in these other departments have no malice of intent, but when sales and marketing brings a request to engineering or production that is going to increase the costs of production, they are not likely to look too kindly upon the idea. When sales tells these folks that they could sell more if they just had more inventory, they may nod their heads in affirmation, but the are not likely to take affirmative action because they aren't rewarded for that effort. To the contrary, they are more likely to be rewarded for holding inventory levels down and increasing inventory turns.

So, the battle rages
And, of course, the battle does not end there. When cost-cutting fails to make the firm more profitable, this group is just as willing and able to point fingers at the "sales guys," and point out how their frequent interventions, their calls to change production or shipping priorities, and their demands that end-of-period orders "get out the door" prevent serious cost-cutting by...

1. Driving overtime expenses up
2. Increasing requirements for both raw material and finish goods inventories
3. Reducing production by breaking up shop floor production runs with new priorities on a daily basis

 Hence, these two separate factions--who should be working toward a single end--are first formed by management and then each becomes the excuse for the other for non-performance. Meanwhile, the firm as a whole suffers reduced profits, higher operating expenses, and--generally speaking--too much inventory (made even more unbearable by having too little of the things that the customers want when they want them).

To be continued...
If your organization is not presently experiencing this warfare--even if subtle or boiling just beneath the surface of a "mask" of "team work"--then you are a fortunate one and, more likely than not, you know a firm or have worked in a firm where this is or was true.

This internal conflict is evidence of the lack of "system thinking." When executives give different directives to different parts of the organization--in the hope of squeezing some profit out of "local optima," rather than global metrics that encompass the goal of the whole system--the whole organization--this is what one must expect.

There is an answer.

[Continued next post....]