The Chemistry of Strategy tm Newsletter September 13, 2011

You can't grow by cutting costs alone

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"You have to get with the program, John," the CFO told me. "The sales department has cut costs the last quarter, while your expenses have jumped up." This was quite a surprise to me, since my team had set, executed, and -- I had been assured -- achieved significant cuts. For the first time in my professional life, I really dug into the general ledger data rather than just reviewing the summary report.

Imagine my surprise when I found that the gap between my expectations and our reported performance was an avalanche of transactions that moved expenses from other departments into my cost center. Managers more experienced in playing the budgeting game had "cut costs" by simply moving those expenses out of their cost center into mine. Shifting costs to another department in the company may improve your individual performance but does nothing for the profitability of the entire company.

This is not unlike the game that sports teams play. The Oilers moved to Nashville after the taxpayers in Houston refused to contribute an additional $144 million plus $70 million in ticket sales to build another stadium only eight years after they had spent $67 million to remodel the Astrodome. There was no net change for the nation's football fans, just a shifting of expenses to another city.

My company's managers had lost sight of a few key truths.

  • Expenses shifted are not cost reductions. You reduce costs through productivity gains.
  • Growth is the best way to reduce costs. You amortize overhead over a larger revenue base, and improve productivity by accelerating the learning curve.
  • No company can grow through cutting costs alone.
  • Having your managers focus internally on costs rather than externally on the market can send your company into a death spiral.

In aviation, a death or graveyard spiral is a dangerous spiral dive entered accidentally by a pilot who is not trained or not proficient in instrument flight when flying into instrument-only meteorological conditions (such as heavy fog).

Graveyard spirals are the result of several sensory illusions which may occur when the pilot loses awareness of the aircraft's attitude. In other words, the pilot loses the ability to determine which way is up.

In business, a graveyard spiral can be the result of management fixating so much on cutting costs that they lose the ability to determine which way is up, i.e., how to grow.

Isn't it time to shift to a growth strategy?

As McDonald's founder Ray Kroc was fond of saying, "you are either green and growing or brown and rotting." It's great that you've survived the economic tsunami, but what now?. It's time to fold the "new normal" into your strategy and return to the business of growing value.

Take some time out of the day-to-day craziness and reestablish a shared vision of the future with your management team. Take that shared vision and create a plan of action to shift the company's trajectory to one that will realize the vision.

The executive team's primary job is to create value. Public companies understand that the market values their company with two measures -- current profit multiplied by their expectations of future growth (earnings times p/e ratio). It is the executive management's job to not only deliver current earnings but also to position the company for superior future growth. Your vision for the future must be supported by a strategic plan that leads to daily action in support of it.

John W. Myrna

is co-founder of
Myrna Associates Inc


My next Webinars

Shift from Survival to a Growth Strategy
September 16, 2011
11:30 AM -12:30 PM Eastern Time

 Create and Communicate Your Strategic Plan
October 7, 2011
1:00-2:00 PM ET


John Recommends

Win: The Key Principles to Take Your Business from Ordinary to Extraordinary
by Frank Luntz

To win you need:

the ability to see the challenge, and the solution, from every angle;

The ability and the drive to do more and do it better;

The ability to communicate your vision passionately and persuasively; and

The ability to move forward when everyone around you is retrenching or slipping backward.

How can you win if survival is your only goal?


Speaking Gigs

John loves to share his insights. Email him if you'd like to have him speak at your next meeting.
success@myrna.com


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Testimonial

"The Myrna process has been at the center of most of our growth -- and we even grew and remained profitable through this recession."

John Muncaster, CEO, Polyguard Products

Testimonials

Myrna Associates Inc.
421 Timber Creek Drive, Athens GA 30605-7027
success@myrna.com  http://www.myrna.com
800-207-8192

Copyright 2011 Myrna Associates Inc.