This post was written for Industry Week. Still very relevant voor operations managers. And that is the reason I included this in this post.
Keep in mind that during a recession or depression, innovation still sells.
By David A Fields, Managing Director, Ascendant Consulting, LLC
|Jan. 7, 2009 — Pop quiz!
Question 1: At one point Ford outsold Chevrolet 10-1. When did Chevy overtake its rival to become the #1 automaker? Question 2: C.W. Post used to be the cereal king. When did Kellogg take the throne? The answer may surprise you.
Extra credit question: Why did Chevrolet and Kellogg surpass their larger competitors?
Given the current economic outlook, this should make you sit up and take notice: Chevrolet and Kellogg both surged past lagging competitors in the early 1930s — during the Great Depression! The same dynamic growth is possible in the face of today’s economic Monsoon. General Mills, for example, reported a 14% increase in revenues last quarter.
What about you?
Are you just trying to “hunker down” and survive the current crisis or are you setting yourself up to thrash the competition? This article quickly covers the steps to writing your own success story during the present economic meltdown and how to pay for it.
Historical analysis reveals our Pop Quiz’s extra credit answer: the reason Kellogg, Chevrolet, and many other companies blossomed while their rivals were wilting is they invested in marketing and innovation. At a time when most companies were freezing spending, cutting R&D, and thereby reducing their share of customers’ minds, smart companies increased their investments in these areas. When the Depression ended, the same smart companies leveraged their enhanced equity to continue growing faster than competitors.
Keep in mind that during a recession or depression, innovation still sells. During the 1930s the high growth industries included movies, radios, and electrical products because these were all new, high-value offerings. Businesses and consumers do buy during a depression, just more judiciously; therefore, the need to offer better value (through innovation) and to communicate that value (through marketing) is intensified.
How, though, do you pay for marketing when reaching into the corporate purse may cost you a few fingers? Not by cutting people. A recent study demonstrated that by the time a company realizes the economic benefit from staff reductions, the need for downsizing has usually passed and the slimmer workforce has become a competitive disadvantage.
Downsizing can also make your company fragile and at greater risk for financial disaster.
One seasoned CEO of a steel company talks about a competitor who went “lean and mean” during the downtimes. The competitor boasted that they had cut down to three people managing all their procurement versus the five people handling procurement for the CEO’s much smaller firm. Two months later, the competitor’s over-worked procurement team missed a price increase in zinc which sent them spiraling into the red, while the CEO’s firm continued enjoying solid margins.
With staff cuts out of the running, you need more creative ways to fund your marketing and innovation efforts. Fortunately, we can show you three approaches which are proven to generate incremental dollars even if you have already completed numerous, successful cost-cutting projects:
1. Relentlessly prioritize using Net Preference as your yardstick. To find money for marketing, the corporate belt needs to be tightened elsewhere. But how do you choose where to cut when the future is so uncertain and all projects have strong justification? You rely on the most important and stable determinants of success: drivers of customers’ choices; i.e. Net Preference. We have seen the application of this metric turn up millions of dollars by shining the harsh light of marketplace reality on “great” projects which would not have significantly affected long-term results.
For instance, a Midwest packaging company instituted an aggressive cost cutting effort including a mandatory 15% reduction in expenses and multiple six-sigma initiatives. “Non-essential” projects were shunted aside in their quest to preserve margins. Without realizing it, their cost cutting project almost drove them out of business. When they turned to Net Preference, they found diverting dollars from the cost cutting projects to two high-potential, non-essential projects would (and did) create sustainable growth.
2. Reduce your resource requirements by identifying bottlenecks. Every company, including yours, has process bottlenecks which are determining the minimum resources required to produce current results. Find the bottlenecks and you can devise ways to reduce costs without sacrificing productivity. Granted, this is easier said than done; however, there are straightforward methods which typically identify a few million dollars in resource savings within a few days. (Yes, a few days.)
One good example is a mining firm which already led their industry in output per labor dollar. A bottleneck analysis showed that even a one-day reduction in the time it took to clean a key refining machine would produce a dramatic decrease in resources required to meet customer demand.
3. Renegotiate your purchasing contracts using an innovative options approach. First, I can assure you that your purchasing group is not going to like this idea because it implies they are not already doing the best possible job. Also, they have never heard of this approach. Using options theory to negotiate better terms is a cutting-edge development which consistently delivers over 10% savings across all your purchases. Raw materials; outsourced services; you name it – all for 10% less.
The Texas-based firm pioneering this approach has achieved eye-popping savings in industries ranging from oil refining to trucking to construction. They also apply the same techniques to the sell side in order to deliver higher margins on your contracts with customers which, of course, creates even more money for marketing and innovation!
Times are tough and virtually everyone in every industry is reeling from the economy’s brutal punches. Now you know how to win big in today’s marketplace. The big question is whether you are going to be a victim of the times or whether you are going to use the situation to your advantage.
David A Fields is managing director of Ascendant Consulting, LLC. He can be reached at David.Fields@ascendantconsulting.com