The Chemistry of Strategy tm Newsletter July 30, 2015

The cost of everything -- the value of nothing

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Once upon a time, at the Pinnacle company's annual strategic planning meeting, someone asked about Pinnacle's relationship with its largest customer. "The Wicket Company's CFO is after us to lower our prices again," said Pat, the CEO, sharing her frustration. "He keeps harping on how buying from Acme Inc. would be so much cheaper. He seems incapable of grasping the difference between cost and value."

Pat listed the many ways her company increased Wicket's profits, things that the cheaper Acme wouldn't or couldn't do. "In addition to never giving Wicket any reason to have any serious worry about quality or delivery, last year our engineers came up with a way for them to eliminate the need for an additional multi-million dollar press by shortening their cycle times. When Wicket's largest customer had an unanticipated surge in business, we were able to step up production and enable them to meet their customer needs." Pat noted that making a purchasing decision based on the lowest cost would in fact lower Wicket's profits.

As it turned out, Wicket's CEO understood and agreed with Pat when she reminded him of why Wicket left Acme for Pinnacle in the first place. Wicket renewed its contract with Pinnacle for another five years.

The planning discussion moved on to Pinnacle's financial performance. "Our 8% profit margin isn't as good as our best competitors," said Pat. "How can we get to our 10% goal?"

The CFO thought he had the answer: "Look where our greatest expense is - our labor costs. Our competitor Acme has much lower labor costs. They use cheaper, part-time workers and script everything so it doesn't take any time to 'train' a new employee. They also don't allow any slack -- if demand is low they just send employees home." 

Pat smiled. "Yes Acme has lower labor costs. They also have high turnover of employees and customers, and half our profit margin. I prefer we look at our workforce as an investment rather than a cost. What's the best strategy for increasing the value of our labor investment?"

The strategic plan that year included specific cross-training goals to increase employees' ability to relieve bottlenecks wherever they occurred. Pinnacle standardized best practices, and "rationalized" the product line to enable everyone to focus on making the smaller number of products even more profitable. The company re-engineered its recruiting and on-boarding processes to address chronically understaffed areas. Finally, they sustained accountability with improved measures and feedback.

The net effect after two years? They achieved their 10% profit objective. The amount of "shrink" (scrap, rework, etc.) declined, customer and employee retention increased, and ... well, you know how the story ends. All the stakeholders lived happily ever after.

  The key lesson from our story? A company has two products.

1.  The things its customers pay for - parts, services, etc., and

2.  The jobs its employees join the company for and execute.

Focus your strategy on optimizing the value of your two products and you will grow the value of your company. Focus on costs alone and end up being worth peanuts.

Create a strategic plan with your team

"If you pay peanuts, you get monkeys."
 --- James Goldsmith

A well-facilitated strategic planning process is a proven way to make sure the company is making the best investments in its greatest assets - its people. A good strategic planning process helps you create a plan that not only capitalizes on long-term opportunities and optimizes the value of your company's current reality but also creates a plan that can provide directional guidance and sustain the support of your stakeholders.

How long have you been saying that you will develop your strategic plan, but you haven't yet done so? Why? Perhaps it remains on your to-do list because it feels like a huge, laborious process and you haven't the time to spare to do it. Peak-performing companies have a clearly defined strategic plan…and it doesn't have to take long to create an effective one.

John W. Myrna

is co-founder of
Myrna Associates Inc


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John Recommends

The Good Jobs Strategy
by Zeynep Ton

What? Combine investment in employees and operational excellence

Why? To provide low prices and excellent service to customers, create jobs that give dignity and respect to your employees, and make more money than your competitors.

How? Set and enforce high standards for employee performance and organize for success:

1.Offer less. 2.Standardize and empower.
3.Cross-train. 4.Operate with slack.


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