During stretches of economic stress the natural tendency for CEOs and senior executives is to send the cost freeze or cutting memos to functional and regional executives. We have witnessed this with companies in Asia, Europe and North/South America during the extended downward economic cycle. As a visible effort to shore up the bottom line blanket costing freeze or cutting seems natural, rational, even expected – plus it demonstrates action is being taken.
However, the approach in our experience serves to only dampen the organizations ability to improve ﬁnancial results. Why? Because it is usually based on two faulty assumptions:
Faulty Assumption 1: Cause for Poor Profit Performance is Known
Many companies mistake the fact that profit is an outcome of revenue and cost decisions; rather the product and market intersection is where they should be looking for both the positive and negative gaps in performance. Dealing with the effect versus the cause never improves the business – which is probably why we have seldom seen a VP of Profitability or a Profit department.
Faulty Assumption 2: All Products and Markets Are Performing Poorly
When companies are under performing (poor proﬁtability and topline growth) a typical response we hear from senior executives is the business is bad right now therefore we are taking cost side measures. The reality is all the product and markets are NOT underperforming. Most likely you just have not examined your business in this combination.
When we ask which speciﬁc product / market combinations are underperforming? And by how much? The answer to this is usually “I don’t know.”
This is because many companies do not set up product and markets in a matrix to effectively display and ferret out root cause with the surgical speciﬁcity required. The end result is a shot-gun mandate to cut cost rather than looking into the sharp IS/ BUT NOT distinctions a product / market format offers.
If your organization is suffering from reliance on these faulty assumptions there are two things you can immediately do to ﬁnd strategic root cause and squeeze extra proﬁts from your business (albeit not through cost cutting):
1. Ask your CFO for a Product / Market matrix to be set up with the top 5-7 product and 5-7 market families or segments with actual performance and TTM ( trailing twelve month) data for Revenue, Margin and Volume for each cell.
2. Examine and find cause for the top 3 negative (below budget) and positive (above budget) product market segments and devote your efforts and mandates of your organization to these. This will enable you to lead with data and guide with precision to resolve the key areas that in fact – are causing you to say “ the business is bad.
Making faulty assumptions visible and getting more specific on the true cause of the poor performance through a product and market matrix format will enable you to expedite your business performance and save you that COST CUTTING MEMO.
Tim Lewko, Partner, Thinking Dimensions is the author of this thread.