Finding Common Ground Between the CFO and COO–Part 2

[Continued from Part 1]

I do not believe there is any doubt about it. Cutting costs takes far less real and deep thinking than it takes to come to understand your marketplace better. Both the CFO and the COO can agree that cutting costs saved them money—even if the unspoken side-effect of the cost-cutting action was to also reduce revenues through lost sales, lost customers or both. (Of course, in really hard times, the CFO and COO can console themselves by saying, “Sales probably would be down anyway,” and thus ignore the damage done through cost-cutting.)

Making your move

Most firms—even with brilliant CFOs and COOs—are not going to make one giant step from “failing” to “leading.” It is far more likely that they will take incremental steps. So, let us now look at each of these quadrants in more detail.

Failing

The failing firms are those that are both ineffective at increasing Throughput and are also undifferentiated in the marketplace. These are the “also-ran” firms in which management has been unable to produce enough throughput to sustain profitability.

Throughput leads to profitability via this formula:

Profit = Throughput – Operating Expenses (OE)

Recalling the definition (see Part 1) of Throughput, and substituting, we get this:

Profit = Revenues – Truly Variable Costs (TVC) – Operating Expenses (OE)

Of course, the ineffectiveness in producing profits is also linked directly to management’s other failure: the failure to differentiate itself in the market. It is far more challenging to produce a profit when all you have to offer is a “commodity”—a product or service that is so generic as to make “price” the sole differentiator.

Risking

Risking firms are sometimes “bleeding-edge” companies. These firms have found ways to differentiate themselves, but have not yet discovered how to make a profit while doing so. Their differentiation leads to demand, but the demand just adds more risk because they are losing a bit on every unit while trying to make up the difference in volume.

Competing

The competing firms are also stuck dealing mostly with “commodities.” They find themselves competing based on price more than almost any other factor—due to their lack of differentiation in the marketplace. The good news is that their management has learned how to be effective at producing a profit, at least.

Some firms are very comfortable in this role. They do not seek market leadership. If they are, then all of their profit must be predicated on business volume. They are generally hurt by significant economic downturns that kill sales volume.

Leading

The largest rewards (on a per-unit basis) are reserved for “leading” firms. Companies in this quadrant have both differentiated themselves in their markets and their management has proven itself effective at producing and increasing throughput.

Even as overall markets shrink, it is possible for such leading firms to prevail by taking a larger and larger share of the shrinking market. While sinking or shrinking companies are giving up market share, prevailing or leading companies can grow by taking over what is surrendered by vanishing firms.

Increasing breadth of market

In 2006, Chris Anderson, a former journalist at The Economist and editor of Wired magazine, published a book entitled The Long Tail: Why the Future of Business is Selling Less of More. The term “the long tail” comes from the appearance of a sales graph where lots of products (x-axis) are sold in smaller quantities (y-axis) into lots of different market segments. This book talks about the why behind the product proliferation we are seeing in many, many markets.

Although I am not a smoker, when I was a young man a recall that there were only a couple dozen cigarette brands sold in the U.S. Today, the tobacco industry has proliferated cigarette branding to perhaps a hundred varieties or more. Similarly, when I was younger, there were a few dozen major soft drinks: Coke, Pepsi, Mountain Dew, and so forth. Today, that has exploded into almost a dozen varieties of Coca-cola, alone.

In the 1950s and into the early 1970s, automobile makers produced a fairly limited range of options available for U.S. made cars. Many cars were sold out of the showroom or out of dealer inventory simply because they had a model in stock with all the options a particular customer might want.

Today, however, the number and variety of options available for U.S. made cars has grown to the point that one automaker claims that “no two cars delivered” are identical—even if they are inventoried by the dealer and sold out of dealer stock. Choices in colors, sound systems, trim kits, accessory “packages,” engines, seating, and more have led to satisfying “markets of one.”

[To be continued…]

Getting more of what you want - Part 4

In prior posts in this series, we have talked about why organizations frequently face significant challenges in getting more of what they really want -- to make more money tomorrow than they are making today. We have linked this to what we call "making the leap from entrepreneurial to enterprise."

We have also identified the underlying issue as being the loss of that view once held by the entrepreneurial leadership of the firm -- namely, the view that the whole company is one integrated "system" with one unifying goal. Instead, departments and layers of management erode that thinking away into ultimate oblivion in the minds of the entrepreneur.

The question we are facing now, in this post, is: If executives and managers have recognized the negative symptoms in their organization, and they surely have a desire for improvement, what is actually keeping organizational leadership from clearing away the barriers to making more money?

There are really multiple answers to this question, and the true response will -- naturally -- vary from organization to organization. However, consider these as a small sampling:

• Firms that are already suffering from poor performance -- or performance below management's expectations, at least -- are often so consumed with trying to meet short-term objectives that they do not have time to back away from the details to even consider the "system" as a whole. All of management's time, energy, and way too much money is being consumed in activities like meeting month-end sales goals, expediting production, tracking down late shipments from vendors, or getting late shipments to customers out the door. There is just no time to step back and figure out why everyone is pulling their hair out but profits keep declining.
  
• The organization has grown to be so large so fast (say, from 12 up to 55 employees in one year or so) that the entrepreneurial management just can't figure out which "lever to pull" to get the results it wants. What used to be a simple decision now seems overwhelming in complexity.
• The entrepreneurial leadership has some ideas that might improve the company, but they can't figure out how to come to final decision because it just seems too hard and too complex to figure out the balance between the risks (investment) involved and the rewards (profits) that any given change might bring to the firm.

Consider this: If a small firm has just 5 people working in it, there are 120 different permutations of interactions between those 5 parties. Add a sixth person into the mix and that number jumps to 720 ways they might interact. If you get to 10 employees, the permutations jump to more than 3,000,000; and with 15 the number is 1,307,674,368,000. Of course, this doesn't even count interactions with customers and vendors.

It's no wonder that entrepreneurs with great ideas and great companies can readily be overwhelmed by apparent complexity as their organizations grow. No wonder the once confident entrepreneur-executive can no longer which "lever to pull" to get the result he or she desires.

Fortunately, the number of things that any executive or manager needs to know in order to manage effectively is a very small number. I'll tell you just how small in the next post.

[To be continued...]

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