In spite of everything that’s transpired over the past five years, we still have a record setting $15 trillion dollar economy in the U.S., and, thanks mostly to China and India, the world economy is significantly larger than it was the day Lehman Brothers collapsed. The U.S. economy contracted by 5% in 2009, gained it all back the following year, and continued on the same pace of growth during 2011. Europe is currently struggling, but the problems facing some of the weaker economies is not exactly news, and although China is no longer on its former double-digit growth tear, 7% still beats the rest of the developed world hands down.
What is different is that the developed economies have realigned with 5-10% fewer employees. Labor productivity came roaring back to mid-2000′s levels. Investment levels, however, are lower than at any time since the 1970’s, in spite of the $2 trillion in cash that corporations are sitting on, 7.5% of corporate assets, a level not seen since 1959. Non-financial corporate balance sheets have gotten squeaky clean, impacted by mark-to-market asset valuations, whereas household balance sheets are unfortunately still partying like its 1936.
This decade’s counterpart to the enigmatic stagflation of the 1970’s is real asset deflation side-by-side with commodity inflation – we have excess productive capacity along with a shortage of raw materials. Not entirely mysterious, but a bit odd nonetheless. Top-line revenue growth is the same struggle it’s always been, likewise for free cash flow from operations. In a pinch you could borrow as much as you wanted at the lowest interest rates since Japan’s Lost Decade, except that nobody’s lending either.
It’s the best of times, it’s the worst of times. We are all dressed up with no place to go. What’s a girl to do? (Caution – please leave the overuse of worn out clichés to the professionals).
Don’t get me wrong here, though – the one thing I am not going to recommend is “consolidating your position” – we’ve pretty much been through that and there is little further significant upside to additional rationalization. Instead, an appropriate analogy for our current situation might be the Red Queen from Lewis Carroll’s “Through the Looking Glass”:
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.”
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
What we need are some good options for running in place faster, at least until something in the global economy breaks for the better.
I’ve got five possible avenues to explore under these peculiar circumstances:
- Get your costs aligned with your strategy.
- Focus on customer management.
- Put even more focus on improving your customer experience.
- Innovation might be the only strategic game in town for a while.
- Scenario planning so that you never have a “cost problem” again.
Get your costs aligned with your strategy. When you took out all those costs in 2009 is was not a pretty sight. Not knowing how bad things were going to get it, 2009 was basically four consecutive quarters of across-the-board cuts done in panic mode. Not a single budget made it past March 31st. That was followed by a 2010 that primarily focused on rebalancing inventories throughout the supply chain. 2011 came along with all the outward appearance of normality and you tried to play along. Now, halfway through 2012, you are getting a better picture of the more permanent structural changes that have occurred, and a clearer idea of where to take your business from here. But does your cost structure support that vision?
Cost reduction measures were made hastily and with broad brush, across-the-board cuts, as they necessarily had to be considering the dire global economic circumstances at the time. Given all the departmental defensiveness that accompanied these cuts, it is doubtful that your current spending and resources are aligned with your new external and strategic objectives. It is probably best to approach this undertaking from both sides at once: proper development of strategic objectives, relationships, metrics and alignment, and, from the other direction, accurate resource, activity, process, product and customer costs.
Focus on customer management. The profit cliff chart you get as output of the above exercise comes in two flavors – product and customer. At last autumn’s Palladium conference a customer-oriented profit cliff was presented that essentially ended at the 150% mark, descending from over 200% at its peak, but with two points, just two, individual points, representing two, single customers, at the 130% and the 100% points. In this real-life example, just two customers were responsible for destroying 50% of final, reported profits. How valuable would this information be to you, if you had it?
Knowing is one thing, the first necessary step; taking action, however, is quite another. This was the subject of my “George Jetson” blog post last year where I described the target marketing, optimization and execution steps beyond simple segmentation necessary to generate value and profitability from your customer data. You may be running in place for a while, but these are already your customers – make the best of the situation. Apply some customer intelligence techniques to turn those non and marginally profitable customers into profitable ones.
Customer Experience. Have you ever called customer service, supplied them with all of your account information, including your phone number (which you ‘d think they’d already have from caller ID), only to be transferred to someone else who asks you to repeat it all over again? Was that a rhetorical question? What kind of experience do your customers get when they contact you? Is your on-line store a completely separate experience from your 1-800 number and different again from your bricks-and-mortar locations?
Face it, your customers’ expectations are being set by best practices from various consumer experiences in certain cutting-edge industries, probably not your industry, but that’s not relevant. Their best experience with their bank or phone or cable company or from Amazon or their favorite retailer has set the bar and is now the expectation across the board. If your siloed data and systems are not supporting a best practice customer experience, then you are losing customers. Proper data integration and management is at the heart of improving the customer experience.
Innovation. At last month’s IE Group’s Chief Strategy Officer Summit in San Francisco, I introduced the speech by Jim Stikeleather, Chief Innovation Officer at Dell, as if it were a William F. Buckley moderated debate entitled, “Resolved: Is Innovation the Only Strategy Left?”, with Jim coming down on the affirmative side of the discussion. His general argument, translated into my Red Queen analogy, is that anything else is just running in place. If you want to run in place twice as fast you need to pull away from the pack and break new ground (i.e. Blue Ocean strategy).
Innovation, however, is one of those things that’s easier in theory than in practice. One of the things I felt I did not hear enough of at this strategy conference was “execution”. I heard plenty about innovation and strategy development, but the field was a little weak on the execution side. If you want to learn more about effective strategy execution, tryout this website and book: “How Stella Saved the Farm”, by Vijay Govindarajan and Chris Trimbe. Subtitled “Making Innovation Happen”, strategy execution is supported by Strategy Management tools that introduces some rigor into the process by way of: 1) Documenting the strategy and assumptions, 2) Communication, 3) Analyzing the results and 4) Updating and adapting. As Govindarajan puts it, “Companies think they are good at execution. But generally they’re good at execution in their core businesses”; executing on innovation is a different matter. (or check out this other related book by Govindarajan and Trimble: “The Other Side of Innovation: Solving the Execution Challenge”. )
Scenario Planning. If you have been following along with my discussion about the proper relationship between planning versus forecasting versus budgeting in the overall scheme of things, you understand my view that budgeting is primarily about resource allocation (and reallocation) in support of / in conformance with a specific planning scenario. In this view of the world, you should never have a “cost problem”; there are simply different budgets / resource allocations associated with different scenarios. Too often we only employ ONE scenario, where a budget change to the same scenario necessarily implies a “cost problem”. However, with the proper application of scenario planning you simply move from Plan A to Plan B to Plan V, and you automatically deploy its associated budget, a reallocation of resources that have already been communicated and agreed. It’s only a “problem” if you haven’t planned for it.
The Red Queen gets an undeservedly bad rap in most modern theatrical presentations. Remember though, she is still a queen, able to move in any direction over the entire surface of the chess board, and despite all this talk of running in place, she is there at the end to celebrate Alice’s own promotion to queen as she reaches the edge of the board. This treadmill economy won’t last forever, and with proper preparation, you may even be able to step off yourself before the rest of your industry catches on.
By Leo Sadovy, EPM Channel Contributor, from: http://blogs.sas.com/content/valuealley/2012/06/06/the-red-queen-economy-running-in-place-faster/