by Adam Hartung | Jul 2, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership
Cost cutting never improves a company. Period.
We've become so used to reading about reorganizations, layoffs and cost cutting that most people just accept such leadership decisions as "best practice." No matter the company, or industry, it has become conventional wisdom to believe cost cutting is a good thing.
As a reporter recently asked me regarding about layoffs at Yahoo, "Isn't it always smart to cut heads when your profits fall?" Of course not. Have the layoffs at Yahoo in any way made it a better, more successful company able to compete with Google, Microsoft, Facebook and Apple? Given the radical need for innovation, layoffs have only hurt Yahoo more – and made it more likely to end up like RIM (Research in Motion.)
But like believing in a flat world, blood letting to cure disease and that meteorites are spit up out of the ground – this is just another conventional wisdom that is untrue; and desperately needs to be challenged. Cost reductions are killing most companies, not helping them.
Take for example Sara Lee. Sara Lee was once a great, growing company. Its consumer brands were well known, considered premium products and commanded a price premium at retail.
The death spiral at Sara Lee began in 2006. "Professional managers" from top-ranked MBA schools started "improving earnings" with an ongoing program of reorganizations and cost reductions. Largely under the leadership of the much-vaunted Brenda Barnes, none of these cost reductions improved revenues. And the stock price went nowhere.
With each passing year Sara Lee sold parts of the business, such as Hanes, under the disguise of "seeking focus." With each sale a one-time gain was booked, and more people were laid off as the reorganizations continued. Profits remained OK, but the company was actually shrinking – rather than growing.
To prop up the stock price all avaiable cash was used to buy back stock, which helped maximize executive compensation but really did nothing for investors. R&D was eliminated, as was new product development and any new product launches. Instead Sara Lee kept selling more businesses, reorganizing, cutting costs — and buying its own shares. Until finally, after Ms. Barnes left due to an unfortunate stroke, Sara Lee was so small it had nothing left to sell.
So the company decided to split into two parts! Magically, it's like pushing the reset button. What was Sara Lee is now an even smaller Hillshire Brands. All that poor track record of sales, profits and equity value goes POOF as the symbol SLE disappears, and investors are left following HSH – which has only traded for about 2 days! No more looking at that long history of bad performance, it isn't on Bloomberg or Marketwatch or Yahoo. Like the name Sara Lee, the history vanishes.
Well, "if you can't dazzle 'em with brilliance you baffle 'em with bull**it" W.C. Fields once said.
Cost cuts don't work because they don't compound. If I lay off the head of Brand Marketing this year I promise to save $300,000 and improve the Profit & Loss Statement (P&L) by that amount. So a one time improvement. Now – ignoring the fact that the head of branding probably did a number of things to grow revenue – the problem becomes, what do you do the next year? You can't lay off the Brand V.P. again to save that $300,000 twice. Further, if you want to improve the P&L by $450,000 this time you actually have to find 2 Directors to lay off!
Shooting your own troops in order to manage a smaller army rarely wins battles.
Cost cuts are one-time, and are impossible to duplicate. Following this route leads any company toward being much smaller. Like Sara Lee. From a once great company with revenues in the $10s of billions, the new Hillshire Brands isn't even an S&P 500 company (it was replaced by Monster Beverage.) And how can any investor obtain a great return on investment from a company that's shrinking?
What does create a great company? Growth! Unlike cost cutting, if a company launches a new product it can sell $300,000 the first year. If it meets unmet needs, and is a more effective solution, then the product can attract new customers and sell $600,000 the second year. And then $900,000 or maybe $1.2M the third year. (And even add jobs!)
If you are very good at creating and launching products that meet needs, you can create billions of dollars in new revenue. Like Apple with the iPhone and iPad. Or Facebook. Or Groupon. These companies are growing revenues extremely fast because they have products that meet needs. They aren't trying to "save the P&L."
And revenue growth creates "compound returns." Unlike the cost savings which are one time, each dollar of revenue produces cash flow which can be invested in more sales and delivery which can generate even more cash flow. So if growth is 20% and you invest $1,000 in year one, that can become $1,200 in year two, then $1,440 in year three, $1,728 in year four and $2,070 in year five. Each year you receive 20% not only on the $1,000 you invested, but on returns from the previous years!
By compounding year after year, at20% investor money doubles in 5 years. That's why the most important term for investing is CAGR – Compound Annual Growth Rate. Even a small improvement in this number, from say 9% to 11%, has very important meaning. Because it "compounds" year after year. You don't have to add to your investment – merely allowing it to support growth produces very, very handsome returns. The higher the CAGR the better.
Something no cost cutting program can possibly due. Ever.
So, what is the future of Hillshire Brands? According to the CEO, interviewed Sunday for the Chicago Tribune, the company's historically poor performance could be blamed on —– wait —– insufficient focus. Alas, Sara Lee's problem was obviously too much sales! Well, good thing they've been solving that problem.
Of course, having too many brands led to too much lateral thinking and not enough really deep focus on meat. So now that all they need to think about is meat, he expects innovation will be much improved. Right. Now that HSH is a "meat focused meals" company, and the objective is to add innovation to meat, they are considering such radical dietary improvements for our fat-laden, overcaloried American society as adding curry powder to the frozen meatloaf.
Not exactly the iPhone.
To create future growth the first act the new CEO took to push growth was —- wait —– cutting staff by $100million over the next 3 years. Really. He will solve the "analysis paralysis" which seems to concern him as head of this much smaller company because there won't be anyone around to do the analysis, nor to discuss it and certainly not to disagree with the CEO's decisions. Perhaps meat loaf egg rolls will be next.
All reorganizations and cost reductions point to leadership's failure to create growth. Every time. Staff reductions say to investors, employees, suppliers and customers "I have no idea how to add profitable revenue to this company. I really have no clue how to put these people to work productively – even if they are really good people. I have no choice but to cut these jobs, because we desperately need to make the profits look better in order to prop up the stock price short term; even if it kills our chances of developing new products, creating new markets and making superior rates of return for investors long term."
Hillshire's CEO may do very well for himself, and his fellow executives. Assuredly they have compensation plans tied to stock price, and golden parachutes if they leave. HSH is now so small that it is a likely purchase by a more successful company. By further gutting the organization Hillshire's CEO can reduce staff to a minimum, making the acquisition appear easier for a large company. This would allow a premium payment upon acquisition, providing millions to the executives as options pay out and golden parachutes enact.
And it might give a return to the shareholders. If the ongoing slaughter finds a buyer. Otherwise investors will see the stock crater as it heads to bankruptcy. Like RIM and Yahoo. So flip a coin. But that's called gambling, not investing.
What investors need is CAGR. Not cost cutting and reorganizations. And as I've said since 2006 – you don't want to own Sara Lee; even if it's now called Hillshire Brands.
by Adam Hartung | Feb 25, 2011 | Current Affairs, In the Whirlpool, Leadership
Since Craig Dubow took over as Gannett's CEO in 2005, Gannettblog reports that employment at the company has dropped from 52,600 to 32, 600. So 20,000 employees, or nearly 1 in 3, have disappeared.
- 2006 – 49,675 down 6%
- 2007 – 46,100 down 7%
- 2008 – 41,500 down 10%
- 2009 – 35,000 down 16%
- 2010 – 32,600 down 7%
Doesn't this look like dismantling the company? It is undoubtedly true that people are reading fewer newspapers than they did in 2000. But that fact does not mean Gannett has to head toward the whirlpool of failure, slowly cutting itself into a less relevant organization. There are a plethora of opportunities today – from creating a vital on-line news organization such as Huffington Post to moving into on-line news dissemination like Marketwatch.com to digital publishing like Amazon and its Kindle, to wholesale news distribution like the Apple iPad to on-line merchandising and ad distribution like Groupon, to —- well, let's just say that there are a lot of opportunities today to grow. To it's credit, Gannett owns 51% of CareerBuilder.com (who's employees are all included in the above numbers). But that one investment has been, as shown, insufficient to keep Gannett a vital, growing organization. At this rate, when will Gannett have to stop printing those hotel newspapers?
Yet, the CEO was paid $4.7M in 2009, including a cash bonus of $1.45M for implementing cost cuts. And that's what's quite wrong with CEO compensation America. And the problem, compensating CEOs for shrinking the company, has an enormous impact on American economic (and jobs) growth.
It is NOT hard to cut jobs. In fact, it is probably the easiest thing any executive can do. CEOs can simply order across the board cuts, or they can hand out downsizing requirements by function or business line. It's the one thing any executive can do that is guaranteed to give an improvement to the bottom line. Any newly minted 20-something MBA can dissect a P&L and identify headcount reductions. Anyone can fire salespeople, engineers, accountants or admins and declare that a victory. There are lots of ways to cut headcount costs, and the immediate revenue impact is rarely obvious. So, why would we pay a bonus for such behavior?
You can imagine the presentation the CEO gives the Board of Directors. "Our industry is doing poorly in this economy. Revenues have declined. But I moved quickly, and slashed xx,xxx jobs in order to save the P&L. As a result we preserved earnings for the next 2 years. Because of revenue declines our stock has been punished, so I recommend we take 50% (or more) of the cash saved from the headcount reductions and buy our own company stock in order to prop up the price/earnings multiple. That way we can protect ourselves from raiders in the short term, and continue to report higher earnings per share next year (there will be fewer shares – so even if earnings wane we keep up EPS), despite the terrible industry conditions."
Oh, by the way, because the CEO's compensation is tied to profits and EPS, he is now entitled to a big, fat bonus for this behavior. And, as Brenda Barnes did at Sara Lee, this can happen for several years in a row, leading to the company's collapse. As the company becomes smaller and smaller, its overall value declines, even if the EPS remains protected, until some vulture – either another company, private equity firm or hedge fund- buys the thing. The investors lose as value goes nowhere, employees lose as bonuses, benefits, pay and jobs are slashed, and vendors lose as revenues decline and price concessions become merciless. The community, state and nation lose as jobs and taxes disappear in the revenue decline. The only winner? The CEO – and any other top executives who are compensated on profits and EPS.
When a company grows, compensating profits is not a bad thing. But when a company isn't growing, well, as seen at Gannett, the incentives create perverse behavior. CEOs take the easy, and personally rewarding route of cutting costs, escalating the downward spiral. Without growth, you got nothing. So why isn't there a simple binary switch; if the CEO didn't grow revenues, the CEO doesn't get any bonus? Regardless.
"What about industry conditions?" you might ask. Well, isn't it the CEO's job to be foresightful about industry conditions and move the company into growth industries, rather than staying too long in poorly performing industries? CEOs aren't supposed to manage a slow death. Aren't they are supposed to lead vibrant, vital, growing companies that increase returns for investors, employees and suppliers?
"What about divestitures? What if the CEO sold a business at a huge multiple making an enormous profit?" Good move! Making the most of value is a good thing! But, once the sale is complete, isn't the critical question "What are you going to do with that money now?" If the CEO can't demonstrate the ability to invest in additional, replacement revenues that have a higher growth rate then shouldn't that money all be given to investors so they can invest it in something that will grow (rather than in buying company stock, for example, which just gets us back to the smaller company but higher EPS discussion above)? CEOs aren't investment bankers, who earn a bonus based upon buying and selling assets at a profit. Investment bankers can earn a bonus on transactions, but that's not the CEOs role, is it? Isn't the CEO is chartered with building a growing, profitable company.
Look at the CEOs of the Dow Jones Industrial companies. How many of them are compensated only if their company grows? As growth in these companies has floundered the last decade, how many CEOs continued to receive multi-million dollar compensation payouts?
If we want to grow the economy, we have to grow the companies in the economy. And if we want to grow companies, we have to align compensation. Rewarding shrinkage seems to have an obvious problem.
by Adam Hartung | Feb 18, 2011 | Current Affairs, In the Swamp, Innovation, Leadership, Lock-in, Openness, Television, Web/Tech
Business people keep piling onto the innovation and growth bandwagon. PWC just released the results of its 14th annual CEO survey entitled “Growth Reimagined.” Seems like most CEOs are as tired of cost cutting as everyone else, and would really like to start growing again. Therefore, they are looking for innovations to help them improve competitiveness and build new markets. Hooray!
But, haven’t we heard this before? Seems like the output of several such studies – from IBM, IDC and many others – have been saying that business leaders want more innovation and growth for the last several years! Hasn’t this been a consistent mantra all through the last decade? You could get the impression everyone is talking about innovation, and growth, but few seem to be doing much about it!
Rather than search out growth, most businesses are still trying to simply do what their business has done for decades – and marveling at the lack of improved results. David Brooks of the New York Times talks at length in his recent Op Ed piece on the Experience Economy about a controversial book from Tyler Cowen called “The Great Stagnation.” The argument goes that America was blessed with lots of fertile land and abundant water, giving the country a big advantage in the agrarian economy from the 1600s into the 1900s. During the Industrial economy of the 1900s America was again blessed with enormous natural resources (iron ore, minerals, gold, silver, oil, gas and water) as well as navigable rivers, the great lakes and natural low-cost transport routes. A rapidly growing and hard working set of laborers, aided by immigration, provided more fuel for America’s growth as an industrial powerhouse.
But now we’re in the information economy. Those natural resources aren’t the big advantage they once were. Foodstuffs require almost no people for production. And manufacturing is shifting to offshore locations where cheap labor and limited regulations allow for cheaper production. And it’s not clear America would benefit even if it tried maintaining these lower-skilled jobs. Today, value goes to those who know how to create, store, manipulate and use information. And success in this economy has a lot more to do with innovation, and the creation of entirely new products, industries and very different kinds of jobs.
Unfortunately, however, we keep hiring for the last economy. It starts with how Boards of Directors (and management teams) select – incorrectly, it appears – our business leaders. Still thinking like out-of-date industrialists, Scientific American offers us a podcast on how “Creativity Can Lesson a Leader’s Image.” Citing the same study, Knowledge @ Wharton offers us “A Bias Against ‘Quirky’ Why Creative People Can Lose Out on Creative Positions.” While 1,500 CEOs say that creativity is the single most important quality for success today – and studies bear out the greater success of creative, innovative leaders – the study found that when it came to hiring and promoting businesses consistently marked down the creative managers and bypassed them, selecting less creative types!
Our BIAS (Beliefs, Interpretations, Assumptions and Strategies) cause the selection process to pick someone who is seen as less creative. Consider these comments:
- “would you rather have a calm hand on the tiller, or someone who constantly steers the boat?”
- “do you want slow, steady conservatism in control – or irrational exuberance?”
- “do we want consistent execution or big ideas?”
These are all phrases I’ve heard (as you might have as well) for selecting a candidate with a mediocre track record, and very limited creativity, over a candidate with much better results and a flair for creativity to get things done regardless of what the market throws at her. All imply that what’s important to leadership is not making mistakes. Of you just don’t screw up the future will take care of itself. And that’s so industrial economy – so “don’t let the plant blow up.”
That approach simply doesn’t work any more. The Christian Science Monitor reported in “Obama’s Innovation Push: Has U.S. Really Fallen Off the Cutting Edge” that America is already in economic trouble due to our lock-in to out-of-date notions about what creates business success. In the last 2 years America has fallen from first to fourth in the World Economic Forum ranking of global competitivenes. And while America still accounts for 40% of global R&D spending, we rank remarkably low (on all studies below 10th place) on things like public education, math and science skills, national literacy and even internet access! While we’ve poured billions into saving banks, and rebuilding roads (ostensibly hiring asphalt layers) we still have no national internet system, nor a free backbone for access by all budding entrepreneurs!
Ask the question, “If Steve Jobs (or his clone) showed up at our company asking for a job – would we give him one?” Don’t forget, the Apple Board fired Steve Jobs some 20 years ago to give his role to a less creative, but more “professional,” John Scully. Mr. Scully was subsequently fired by the Board for creatively investing too heavily in the innovative Newton – the first PDA – to be replaced by a leadership team willing to jettison this new product market and refocus all attention on the Macintosh. Both CEO change decisions turned out to be horrible for Apple, and it was only after Mr. Jobs returned to the company after nearly 20 years in other businesses that its fortunes reblossomed when the company replaced outdated industrial management philosophies with innovation. But, oh-so-close the company came to complete failure before re-igniting the innovation jets.
Examples of outdated management, with horrific results, abound. Brenda Barnes destroyed shareholder value for 6 years at Sara Lee chasing a centrallized focus and cost reductions – leaving the company with no future other than break-up and acquisition. GE’s fortunes have dropped dramatically as Mr. Immelt turned away from the rabid efforts at innovation and growth under Welch and toward more cautious investments and reliance on a set of core markets – including financial services. After once dominating the mobile phone industry the best Motorola’s leadership has been able to do lately is split the company in two, hoping as a divided business leadership can do better than it did as a single entity. Even a big winner like Home Depot has struggled to innovate and grow as it remained dedicated to its traditional business. Once a darling of industry, the supply chain focused Dell has lost its growth and value as a raft of new MBA leaders – mostly recruited from consultancy Bain & Company – have kept applying traditional industrial management with its cost curves and economy-of-scale illogic to a market racked by the introduction of new products such as smartphones and tablets.
Meanwhile, leaders that foster and implement innovation have shown how to be successful this last decade. Jeff Bezos has transformed retailing and publishing simultaneously by introducing a raft of innovations, including the Kindle. Google’s value soared as its founders and new CEO redefined the way people obtain news – and the ads supporting what people read. The entire “social media” marketplace is now taking viewers, and ad dollars, from traditional media bringing the limelight to CEOs at Facebook, Twitter and Linked-in. While newspaper companies like Tribune Corp., NYT, Dow Jones and Washington Post have faltered, pop publisher Arianna Huffington created $315M of value by hiring a group of bloggers to populate the on-line news tabloid Huffington Post. And Apple is close to becoming the world’s most valuable publicly traded company on the backs of new product innovations.
But, asking again, would your company hire the leaders of these companies? Would it hire the Vice-President’s, Directors and Managers? Or would you consider them too avant-garde? Even President Obama washed out his commitment to jobs growth when he selected Mr. Immelt to head his committee – demonstrating a complete lack of understanding what it takes to grow – to innovate – in today’s intensely competitive information economy. Where he should have begged, on hands and knees, for Eric Schmidt of Google to show us the way to information nirvana he picked, well, an old-line industrialist.
Until we start promoting innovators we won’t have any innovation. We must understand that America’s successful history doesn’t guarantee it’s successful future. Competing on bits, rather than brawn or natural resources, requires creativity to recognize opportunities, develop them and implement new solutions rapidly. It requires adaptability to deal with new technologies, new business models and new competitors. It requires an understanding of innovation and how to learn while doing. Amerca has these leaders. We just need to give them the positions and chance to succeed!
by Adam Hartung | Jan 25, 2011 | Current Affairs, Food and Drink, In the Whirlpool, Leadership
Summary:
- It sounds good to refocus a business on its core
- It sounds good to centralize for cost reductions and belt tightening as part of refocusing
- It sounds good to sell “non-essential” businesses to raise cash
- It sounds good to have a company buy back shares
- But these efforts serve to destroy the company, killing it softly as it sounds good, but guts the business of revenues and innovation
- Sara Lee’s CEO destroyed the company softly by following such a strategy
The vultures are swirling around Sara Lee. “Sara Lee Said to Get Bid from Bain, Apollo Group Exceeding $18.70 a Share” was the Bloomberg headline. JBS and Blackstone Group are reportedly considering making an offer, according to the Wall Street Journal. This has, of course, driven up the share price from its steady decline of 67% between 2006 and 2009.. But unless you’re a short-term trader, even this acquisition offer is barely going to get you back to break even for your 5 year old investment.
Source: Marketwatch.com
Five years ago Brenda Barnes took leadership at Sara Lee to much fanfare, as she broke the long-problematic glass ceiling for women executives. But her plan for Sara Lee hasn’t worked out so well. Although her compensation has been in the millions, for investors, employees and suppliers this has been a very rough 5 years.
Ms. Barnes took over Sara Lee saying it was a “hodgepodge” of inefficient brands and businesses. Her goal was to streamline Sara Lee, refocus the company and regenerate its core. That certainly sounded good.
Her first steps were to consolidate operations into a central headquarters, including all R&D for the far-flung businesses. She started cutting costs, and heads, as she reduced the number of marketers and centralized purchasing. Going after “synergies,” consolidations were forced on all functions, and the re-launched R&D was staffed at a fraction of earlier product development efforts. The intent, accomplished, was to launch fewer products, and focus on cost reductions. To many listeners, this sounded so soothing. After all, who wouldn’t think there was “fat” to be cut? Who ever believes cost-cutting reaches an end? Why not try to “milk” more out of the old products rather than undertake costly new product launches?
Simultaneously, Ms. Barnes began selling businesses. Gone was the European meats and apparel units, soon followed by the direct sales business sale to Tupperware, and the Body Care business sale to Unilever. Branded apparel was spun out as a seperate company, and the bakery business was sold to Group Bimbo [transaction not yet closed.] Revenues declined from $13.2B in June, 2008 to $10.8B in June 2010 – and after the bakery sale would fall to $8.7B – a revenue drop of 1/3 in just a few years. But this was to refocus, and generate billions of cash for share buybacks. To many that sounded good as well.
All of this streamlining, cost cutting, consolidating and refocusing did raise cash. But, for investors, quarterly dividends were cut from 19.75 cents/share in April, 2006 to 10 cents/share in August, 2006. Only recently have dividends been raised to 11.5 cents/share, but this is still a reduction of over 40% from where dividends were prior to implementing the new refocusing strategy.
After years of implementation, Sara Lee investors in 2010 were holding stock worth less, and had lower dividends, than before this new plan was put into effect.
It all sounded so good, like the lyrics of a lullaby. Refocus. Go back to the business core. Get out of non-essential businesses. Consolidate operations with belt-tightening. Centralize functions to get more done with fewer resources. Sell businesses to raise cash. And invest that cash in share buybacks that would raise the company value. (The alchemy of this last statement still mystifies me. At the end, you’ve sold all the businesses to raise money to buy the last shares – and nobody is left with anything. It’s like selling parts of the house to pay the maintenance – eventually there’s nowhere left to live. How anybody thinks this is good for any constituency of the company is hard to fathom.)
What has been accomplished under the Barnes leadership?
- The equity value cratered, only to be uplifted by a private equity takeover effort that may allow investors to regain their original investment
- Cash dividends have been gutted
- Sara Lee is now a much smaller company, with no new products and no growth plan
- Operating cash flow has declined
- Cash has been dispersed in meaningless stock buybacks that have accomplished nothing
- Tens of thousands of jobs have been lost
- Suppliers have been squeezed out, or if still selling to Sara Lee had their margins squeezed
- Downers Grove, IL ,where the headquarters is located, can link declines in commercial and residential real estate to the downfall of Sara Lee
While it may sound like a comforting song, business leadership that turns to cutting the business throws it into a growth stall from which there is almost no hope of recovery. Even though short-term there may be bragging about the effort to refocus, cut costs and raise cash, these actions simply kill the business – softly and slowly perhaps, but kill it nonetheless.
Sales and profit problems are the result of remaining stuck in old market approaches long after the market has shifted to superior solutions. The only way to “fix” the business is to get closer to the market and launch new products, technologies, processes or solutions that are aligned with emerging market trends. You can’t cost-cut, refocus or re-align a business to success. You have to grow it.
by Adam Hartung | Aug 10, 2010 | Current Affairs, Food and Drink, In the Rapids, In the Swamp, Leadership, Lock-in
Nearly 20 years ago the Clinton campaign inspired itself with the mantra “It’s the Economy, Stupid.” Their goal was to remind everyone that the economy was critical to the health of a nation, and the economy hadn’t been doing so well. Now we could retread that for business leaders “It’s About Growth, Stupid.” For some reason, all too many seem to have gotten caught up in downsizings and cost cutting, forgetting that without growth there’s no way to have a healthy business!
I’ve long been a detractor of Sara Lee. As the company undergoes a change in leadership, the Chicago Tribune headlines “Nobody Doesn’t Like Sara Who?” Under CEO Brenda Barnes, Sara Lee sold off business after business. Now the company is so marginalized that it’s an open question if it will remain independent. For years the leaders said asset sales were to help the company “focus.” Only “focus” made the company smaller, without any growth businesses. Why would an investor want to own this? Why would a manager want to work there?
Had the asset sales been invested in growth, perhaps a positive outcome would have developed. But Sara Lee was like most companies, as that rarely happens. Had the money been paid out to investors perhaps they could have invested those gains in other growth businesses. But instead the money went into the company, where it propped up no-growth businesses. Leaving Sara Lee a smaller, no growth, low profit business. This leadership has not benefited investors, employees, customers or suppliers.
Likewise, draconian cost cutting does more harm than good. The National Public Radio headline reads “Extreme Downsizing May Hurt Companies Later.” Using deep cuts at Alcoa as an example, Wayne Crascia, professor at University of Colorado, points out that it’s unlikely Alcoa has really “prepared itself for future growth.” Instead, cost cutting often eliminates the ability to compete effectively, by cutting into R&D, marketing and sales in ways that are impossible to rebuild quickly or effectively. By trying to save the old Success Formula with cuts, rather than growth initiatives, the leadership hurts the company’s long term viability. Sort of like repeated vomiting by anorexia sufferers leaves them skinnier – but in far worse health. Even though Alcoa still boasts 60,000 employees it’s very likely the company has permanently Locked-in its old Success Formula leaving itself unable to emerge as a stronger company aligned with new market needs.
Yet, while so many company leaders are trying to “retrench to success” it’s clear that growth still abounds for the companies that understand how to create value. BrandChannel.com headlines “The Elastic Brand: Virgin Expands in Every Direction.” Instead of retrenching to focus on some sort of “core” the article points out how Virgin’s leader, Sir Richard Branson, keeps taking the business into new, far flung operations. Defying conventional wisdom, Virgin is in money lending, mobile phones, gaming, social media, international airlines, domestic airlines and even intercontinental flight! By intentionally avoiding any kind of “core” Virgin keeps growing – even during this recession – adding jobs for employees, higher value for investors, more sales opportunities for suppliers and more chances to buy Virgin for customers!
Conventional wisdom be danged ….. maybe it’s time to look at results! Organizations that whittle themselves down to “core” by asset sales or cutting destroy value. While it may feel self-flaggelatingly good to talk about cuts, it does not create value. Only growth can do that. And there is growth, when we start focusing on market needs. Virgin is finding those opportunities – so what’s stopping you? Is it your “focus on your core” business? If so, maybe you need to read the Forbes article “Stop Focusing on Your Core Business.” It may sound unconventional, but then again – isn’t it those who defy conventional wisdom that make the most money?
Postscript: I offer my personal best wishes to Ms. Barnes on her recovery. It has been reported in the press that Ms. Barnes recently suffered a stroke. I know how difficult a time this can be, as my wife stroked at age 54, and I was her personal caregiver for 3 years of difficult recovery. Stroke recovery is hard work. For the patient as well as the family it is a tough time. While I have been a detractor of Ms. Barnes leadership at Sara Lee, in no way did I ever wish my comments to be personal, and I would never wish anyone suffer such a difficult health concern as a stroke. Again, my best wishes for a full recovery to Ms. Barnes, and for both her and her family to have the strength and tenacity to come through this ordeal stronger and even more tightly knitted.
