Responding to the Crisis

Five Things You Should Do to Remain Successful in Challenging Times
Think Twice before Hacking your Organization to Pieces

by Robert Porter Lynch

Make no mistake -- this Economic Earthquake is a monster. Like a deadly cancer, in just a few months it has successfully infested every marketplace around the globe with dreadful results. Its after-shocks will resonate for the next 3-5 years. Unless business takes carefully designed steps both strategically and operationally, the results could be your business’s demise.

Action needs to be taken quickly before time and cash runs out. The banks don’t seem to be able to help when you need cash the most. And worse, they are lopping off lines of credit, making it nearly impossible to finance new growth.

How should you proceed in a world where the old rules no longer apply?

Your first instinct may be to hack and slash costs. While this is important, it’s not the first place to start.

First, Think Strategically:

As the initial step, you must think about the direction you’re headed -- what is the competitive advantage you really have? If it’s just price, that might not be good enough, because every sinking business will cut it’s prices to survive, catching you potentially in a death-spiral of endless cost-cutting. This type of war of attrition is likely to be a blood-bath of red ink for everyone who engages. While tightening and leaning your operations is essential, a strategic focus on competitive advantage and value creation is, in the longer view, more important.

   The initial questions to consider are:

• What markets am I in that will continue to stay reasonably strong, and which one’s are likely to be soft?
• Which markets are we really positioned well to succeed in, and in which ones are we competitively disadvantaged?
• What is my competition likely to do that would damage my chances of success?
• What alliances do I have to forge to generate new revenues from sources I would not normally have access to?

When establishing alliances, use best practices as a means of reducing risk. Best Practices are 5 times more effective than a stringent legal agreement for risk reduction because best practices create success, whereas the legal agreement only provides minor protection in the event of a failure.

 Second, Focus on Your Customers:

More businesses fail for lack of sales and strategic positioning than other reasons. Remember the top-line: REVENUES; it’s the only line on your operating statement that makes a positive contribution to profit.

But don’t start with what you want to “sell” to a customer. Instead, set up a meeting with your top ten or twenty customers. Then explain to them:

We are setting up this meeting to find ways in which our company can create competitive advantage for your company. Our objective is to make your company more successful by:

• creating more business for you
• increasing your revenues and profits, and
• focusing on innovations that help you thrive
• helping you beat your competition

Some of the things we are seeking to understand:

• What opportunities could we create for you?
• What processes are in place that impede us from providing better products, systems, services, integration, or speed?
• If we changed our strategy and relationship with each other, what’s possible?
• We know that innovation is the single most important competitive advantage in a fast moving, rapidly changing world. We also know that a company cannot cost-cut its way to prosperity. We would like to get an idea of what Innovations (process or technology) would you like to see us provide to you that would improve your business in dramatic new ways?
• What things have we been doing that you’ve found unhelpful in our business relationship?
• Do you think we really understand and relate to your needs as a customer? If we were doing things better, what specifically would we be doing or saying differently?
• What are your customers demanding of you that we, as a preferred supplier, should be responding to or being prepared for?
• What are best-in-class suppliers doing that we should also be doing?
• In the overall scheme of things, how important are we/should we be to create strategic competitive advantage for you? 

   What DOES the Customer "Want?"

 This is a 360 approach:

• If the customer's “WANTS" aren't met, then there will be a dissatisfied Customer.
• The answer to the question “What does the Customer WANT?” will tell you whether there are internal disconnects & misalignments inside the customer.
• If there are misalignments, what are the reasons?
  (poor management, prospective versus retrospective viewpoints, natural transfunctional dispersion, etc.)
• It’s vital to distinguish the difference between WANTS and NEEDS. If someone “wants” chocolate ice cream but “needs” to be on a diet, there is an obvious difficulty brewing.

   What WILL the customer "Want/Need?"

• This is a different kind of question from what they think they "want."
• This issue addresses where they will need to be in 1-3 years to be successful given the dynamics of their strategic world.
• Often "Wants" and "Needs" are divergent, so the issue of addressing "Needs" must be done jointly with the customer to be sure they track with the process, otherwise the client will discard the advice.
• The objective in a fast moving world is to provide to any customer exactly what they "Need" just at the same time they come to realize they need and want it -- not before nor after that realization.
• This requires Leadership to be ahead of the curve, and Marketing for the right timing.
• Alliances are critical to align the Value Chain/Network for this timing and delivery.

Third, Concentrate on Value and Innovation Flows

Cash flows in the opposite direction and in direct response to value and innovation flows. If you want to generate cash, find ways to create value and useable innovation.

• Innovation is the single most important competitive advantage in a fast-moving, rapidly changing world
• A company cannot cost-cut its way to prosperity
• Therefore identify critical innovations that must pass to the customer to keep the customer healthy (If your customer is not healthy, you will inherit the malady!)
• Some of the most important innovations are simply “process” innovations (e.g. WalMart, Dell Computers, Toyota, Honda, etc.) However these are often the most difficult to identify and replicate because they look invisible.

Most companies think of themselves as islands in a competitive world. However, value is seldom created independently. At the end of every value chain is the final product or service that resulted from a succession of companies adding value. In the larger view, the most competitive companies at the end of the chain are those that have lined up a series of best-in-class companies contributing to the end product/service. In other words, this is a battle of value chains. Thus, thinking of your suppliers strategically and getting your customers to treat you strategically in the creation of value is a powerful weapon in the competitive battle.

When you think of innovation, don’t get stuck thinking strictly of technical inventions -- this is just one of the types of innovations you can use to create value. Other approaches include joining a series of products and services together into an integrated solution cluster, much like OnStar does. Another approach is to make improvements and integrate new features into an existing product, much like the iPod. Still another is to make process flow improvements, using such methods as lean management. But there are still more ways: you can extend your existing customer base by selling them new products and services, perhaps through an alliance with a company that does not share your customers. Or you can create a new business model to create competitive advantage in a new way, such as selling on the internet or providing new services that will ease your customer’s problems.

Fourth, Beware of Outmoded Metrics and Rewards:

What ever you set up for a measurement and reward system will drive people’s daily behaviors. Measure and reward old things, and you get old behavior. Implement a new program, but don’t change the reward system, and people will behave dysfunctionally.

Most companies measure costs using old-fashioned cost accounting designed centuries ago to measure unit costs -- such as hourly labor costs, purchasing costs, etc. Often this metric can be highly deceiving because it masks all the other costs involved in production. It is much better, particularly for critical products and services to use a Total Systems Cost (or Total Cost of Ownership) approach. This means looking at:

• Product Design
• – Parts Reduction, Design for Manufacturing & Assembly, Integration
• Requirements Definition
• – Specs, what we need, when we need it, where we need it
• Forecasting Accuracy (often 5-15% of TCO)
• – Inaccurate forecasting increases cost of manufacturing & inventory control
• Source Identification
• – sources, selection of sources
• Acquisition Costs (typically this is only 25-40% of TCO)
• – requisitioning, purchases, delivery, receipt, payment
• Processing, Storage & Inventory
• – inventory, staging, reclamation, reconditioning, supply warehousing, preservation
• Operations, Conversion, Installation, & Maintenance
• – operational costs, maintenance, repairs, testing, labor, training, integration, assembly
• Quality, Breakdown, Downtime, Scrap & Waste
• – reduction of productivity, cost of scrap, lost time, disposal, re-tooling & re-ramp-up
• Non-Value Add
• – Hard-Nosed Negotiations, Missed Communications, Faulty Invoice Processing
• Risk Mitigation & Legal
• – Insurance, Unnecessary Legal Filings, Law Suits
• Transportation
• – Travel, Insurance, Overtime, Licensing, Packaging, Record Keeping
• Warranty & Service
• – costs of repairs, brand name degradation
• Impact on Sales
• – lost sales, slow time to market, failure to be able to deliver orders
• Retirement & Environment
• – resale, salvage, disposal, & waste management
• Future Strategic Positioning
• – new research, innovation, competitive advantage, ancillary benefits

Another measure that is essential is to measure speed and flow rates, whether it be the speed a product is designed, constructed, and shipped, or the rate information is processed. Winning companies accelerate cash flow by accelerating work flow.

The other most important thing to measure is ideas that are translated into useful improvements. Japanese companies typically receive at least 8 good ideas per person annually with over an 80% implementation rate, resulting in massive improvements cumulatively over the years. However, American companies are notoriously bad at this, receiving only 1 idea for every 12 people, and implementing less than half the suggestions. Similarly, suppliers are also a great source of innovative ideas, but most companies see them as merely “vendors” and not a source of competitive advantage. Thus suppliers are all-too-often treated poorly and pounded upon for price-cuts, not value increases.

Then, don’t forget to reward people for the new measures you put in place, or you’ll be given the title: Crazy-maker!

Fifth, Build a System of Trust & Teamwork:

Great leaders understand that

            Trust unleashes and focuses the latent human energy in an organization,
            Resulting in enormous productivity and innovation. 

Internal teams function to keep your organization alive. Alliances with customers, other providers, and suppliers are the external teams that can radically improve your prospects for success.

Our initial research is indicating that there is up to a 50% competitive advantage for companies that have high trust with their suppliers and customers, as opposed to those with deep distrust. This is a massive advantage that’s too often overlooked in companies. It is a terrible cost of doing business that is, for all intents and purposes, hidden from view -- it never gets reported on the balance sheet or P&L, because, like a poison, it’s imbedded in every line item.

Trust can be designed -- there are best practices. Every leader at every level of the organization should be attuned to creating trust, because it costs far less to have trust than the alternative -- nagging, gnawing distrust that daily pilfers people’s energies and creativity.

Yet most leaders tell us that their relationships in business are filled with manipulation, deceit, criticism, extraneous legal protections, posturing, skimming, hidden agendas, and subtle trickery that damages good decision-making, slows down communications flows, and blocks creativity and innovation.

Trust determines the destinies of people and the course of nations  -- Paul R. Lawrence, Professor Emeritus, Harvard Business School

Conclusion

Before you hack, slice, dice, and dissect your organization, think twice, and be sure you’re doing the right things for the right reasons. Conventional thinking may say “cut,” but these aren’t conventional conditions. Every problem has an opportunity. Every one of your customers is seeking a solution, and you might just be the one to have it (or part of it).

Because sales revenues are essential in these tough times, keeping your customer in business is a new job you might not have thought of doing before, but is a massive advantage to those who have the vision, fortitude, trust, and innovative spirit. 

Return to Home Page