It was the first of March and the start of a new fiscal year. Historically, it was a time to celebrate. I stood behind the Home Fries station in the company dining area, serving employees a “New Year’s” breakfast and thanking them for their contribution. As a member of the leadership team, I was participating in an annual ritual designed to signal our appreciation for our employees’ hard work. Despite our efforts at putting on a brave face, our leadership team wasn’t exactly glowing with radiance and hope. We looked more like an exhausted group of mountain climbers who had miraculously found their way back to base camp after a terrible storm at the summit.
We hadn’t yet announced our year-end results but our leadership team knew we were going to miss the revenue and profit plan again. We had missed both targets by a couple of percentage points vs. plan. Every department head had contributed to cost cutting initiatives during the year to help drive our bottom line targets but it wasn’t enough to make up for the top line miss.
We were trying to project some optimism to employees as we struggled behind closed doors with our predicament. During the past several months, we had worked diligently to identify and address the core reasons for our continued miss of plan. The list included lack of new product innovation success, lagging sales execution in key strategic accounts, operational recalls on key brands, and geopolitical events in China impacting demand for U.S. goods.
Not surprisingly, we had begun tackling the key challenges through help from outside consultants and internal project work teams. In fact, we had already implemented new processes and practices in certain areas which were readily apparent. However, we knew that these improvements were not going to be enough for the coming year. The CEO and Board were becoming rightfully impatient.
When we first huddled together to review our situation, we each leveled complaints at our aggressive plan targets. Every executive likes to blame the plan targets when reflecting on a plan miss. It’s like complaining about the weather. It’s the conversation starter before you get into the real discussion.
We were a public company so we knew the game - share price is inextricably linked to future expectations of growth. The company was expected to grow above the market. This wasn’t unreasonable. As an industry leader with scale and clout, we should have been able to grow faster than the market. The question was why weren’t we?
Growth acceleration had been painfully difficult. We had been hell-bent on driving new products out in the marketplace to help drive our results but we weren’t succeeding. We were launching imitative products because our New Product Development strategy was aimed at incremental innovation vs. transformational innovation.
Our CEO wasn’t convinced we were capable of succeeding in transformational innovation because of a costly recall on a new package innovation 12 months earlier so we tried to win with new products that had no real differentiation in a category that saw roughly 18,000 new products every year.
Additionally, we were under pressure to launch multiple new products every year without the proper in-market testing to understand long term viability. The innovation team argued for a longer in-market testing period to develop new products that would have a higher likelihood of success but were pressed for immediate results.
When the pressure for short term results supersedes what’s required for long term success, the odds of winning are reduced significantly. In effect, we were hoping for “lightning in a bottle”.
Hope is never a good strategy.
In our case, we were not aligned on how we were going to succeed in the New Product Development game and therefore were walking into the wilderness without a compass everyone agreed to use.
There is another issue with growth strategies which executives often want to ignore - they take time. If the senior team hasn’t been consistently laying the foundation for growth, it’s tough to accelerate growth in one year without dropping price vs. your competition (a losing strategy in the long term). I have seen numerous executives try to bullshit the CEO or Board of Directors that they can turn around the business in the next year with no possible chance of success.
This isn’t to diminish the importance of executing with speed but to acknowledge that organizations need time to create the conditions for a new growth strategy to take root.
It’s essential executive leadership has clarity and alignment on growth strategy before wielding the cost cutting sword. If not, cutting costs is simply a short-term band aid that can create its own spiral downward.
Many cost-cutting or reorganization initiatives begin to take form when the reality sinks in that a new growth initiative is going to take longer than expected. Sometimes, cost cutting is introduced as a risk mitigation maneuver in the short term or part of a dual strategy of implementing future growth strategies while tightening costs to achieve financial results in the short term.
In some cases, it’s even more straight forward – significant cost over-runs need to be corrected. Cost overages are an issue that have been in existence ever since modern organizations began – the proverbial “cost creep” in organizations of all sizes. Companies add people to compensate for poor internal system issues or for expected growth that doesn’t occur. Similar to temporary government entitlement programs, these costs usually become permanent.
In most cases, managers have the right intentions but never revisit their initial program expansion to ensure they are right-sized for the organization. Pruning costs should be part of the annual plan cycle in every organizational department. Rarely does that happen. People are loath to analyze and reallocate resources annually because it requires upsetting the status quo and without broadly mandated reviews across every department, there is little benefit to the one leader who sticks his neck out to do the right thing.
The most basic truth why executives choose cost cutting to make their plans is that it is easier and less demanding than discovering new ways to grow.
Too many reorganizations today treat the symptoms and not the cause of slow growth. If growth has stalled, the executive team needs to be very clear about identifying the core issues and implementing a reasonable plan to turn the situation around.
As an executive team, have you asked the right questions and gathered the critical data to answer those questions?
· Have you done a cross functional performance analysis on key issues inhibiting growth?
· Have you identified the performance drivers that are aiding or blocking your success?
· What specific solutions have you designed to address the important performance drivers?
· Are you aligned on the specific solutions across the leadership team?
· Do you have the metrics in place to track your success across those initiatives?
· Do you have the right leadership talent across the organization to make this happen?
· Do you have a strong, collaborative culture to enable an effective working environment?
· Are your incentives aligned properly with your goals?
· Are people motivated to accomplish the company vision?
Too often, executives want a silver bullet solution to complex problems which require time, effort and organizational change to correct. Cost cutting often becomes the de-facto lever to pull when results don’t materialize. Cost cutting is not the answer to your growth problem.