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 | Apr 4, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Web/Tech
Understand your core strength, and protect it. Sounds like the key to success, and a simple motto. It's the mantra of many a management guru. Only, far too often, it's the road to ruin.
The last week 3 big announcements showed just how damning the "strategy" of building on historical momentum can be.
Start with Research in Motion's revenue and earnings announcement. Both metrics fell short of expectations as Blackberry sales continue to slide. Not many investors were actually surprised about this, to be honest. iOS and Android products have been taking away share from RIM for several months, and the trend remains clear. And investors have paid a heavy price.
Source: BusinessInsider.com
There is no doubt the executives at RIM are very aware of this performance, and desperately would like the results to be different. RIM has known for months that iOS and Android handhelds have been taking share. The executives aren't unaware, nor stupid. But, they have not been able to change the internal momentum at RIM to the right issues.
The success formula at RIM has long been to "own" the enterprise marketplace with the Blackberry server products, offering easy to connect and secure network access for email, texting and enterprise applications. Handsets came along with the server and network sales. All the momentum at RIM has been to focus on the needs of IT departments; largely security and internal connectivity to legacy systems and email. And, honestly, even today there is probably nobody better at that than RIM.
But the market shifted. Individual user needs and productivity began to trump the legacy issues. People wanted to leave their laptops at home, and do everything with their smartphones. Apps took on a far more dominant role, as did ease of use. Because these were not part of the internal momentum at RIM the company ignored those issues, maintaining its focus on what it believed was the core strength, especially amongst its core customers.
Now RIM is toast. It's share will keep falling, until its handhelds become as popular as Palm devices. Perhaps there will be a market for its server products, but only via an acquisition at a very low price. Momentum to protect the core business killed RIM because its leaders failed to recognize a critical market shift.
Turn next to Yahoo's announcement that it is laying off 1 out of 7 employees, and that this is not likely to be the last round of cuts. Yahoo has become so irrelevant that analysts now depicct its "core" markets as "worthless."
Source: SiliconAlleyInsider.com
Yahoo was an internet pioneer. At one time in the 1990s it was estimated that over 90% of browser home pages were set to Yahoo! But the need for content aggregation largely disappeared as users learned to use search and social media to find what they wanted. Ad placement revenue for keywords transferred to the leading search provider (Google) and for display ads to the leading social media provider (Facebook.)
But Yahoo steadfastly worked to defend and extend its traditional business. It enhanced its homepage with a multitude of specialty pages, such as YahooFinance. But each of these has been outdone by specialist web sites, such as Marketwatch.com, that deliver everyhing Yahoo does only better, attracting more advertisers. Yahoo's momentum caused it to miss shifting with the internet market. Under CEO Bartz the company focused on operational improvements and efforts at enhancing its sales, while market shifts made its offerings less and less relevant.
Now, Yahoo is worth only the value of its outside stockholdings, and it appears the new CEO lacks any strategy for saving the enterprise. The company appears ready to split up, and become another internet artifact for Wikipedia. Largely because it kept doing more of what it knew how to do and was unable to overcome momentum to do anything new.
Last, but surely not least, was the Dell announced acquisition of Wyse.
Dell is synonymous with PC. But the growth has left PCs, and Dell missed the markets for mobile entertainment devices (like iPods or Zunes,) smartphones (like iPhone or Evo) and tablets (like iPads and Galaxy Tab.) Dell slavisly kept to its success formula of doing no product development, leaving that to vendors Microsoft and Intel, as it focused on hardware manufacturing and supply chain excellence. As the market shifted from the technologies it knew Dell kept trying to cut costs and product prices, hoping that somehow people would be dissuaded from changing technologies. Only it hasn't worked, and Dell's growth in sales and profits has evaporated.
Don't be confused. Buying Wyse has not changed Dell's "core." In Wyse Dell found another hardware manufacturer, only one that makes old-fashioned "dumb" terminals for large companies (interpret that as "enterprise,") mostly in health care. This is another acquisition, like Perot Systems, in an effort to copy the 1980s IBM brand extension into other products and services that are in like markets – a classic effort at extending the original Dell success formula with minimal changes.
Wyse is not a "cloud" company. Rackspace, Apple and Amazon provide cloud services, and Wyse is nothing like those two market leaders. Buying Wyse is Dell's effort to keep chasing HP for market share, and trying to pick up other pieces of revenue as it extends is hardware sales into more low-margin markets. The historical momentum has not changed, just been slightly redirected. By letting momentum guide its investments, Dell is buying another old technology company it hopes it can can extend its "supply chain" strenths into – and maybe find new revenues and higher margins. Not likely.
Over and again we see companies falter due to momentum. Why? Markets shift. Faster and more often than most business leaders want to admit. For years leaders have been told to understand core strengths, and protect them. But this approach fails when your core strength loses its value due to changes in technologies, user preferences, competition and markets. Then the only thing that can keep a company successful is to shift. Often very far from the core – and very fast.
Success actually requires overcoming internal momentum, built on the historical success formula, by putting resources into new solutions that fulfill emerging needs. Being agile, flexible and actually able to pivot into new markets creates success. Forget the past, and the momentum it generates. That can kill you.
by Adam Hartung | Dec 6, 2011 | Current Affairs, In the Whirlpool, Leadership, Transparency
There are few organizations as efficient as the U.S. Postal Service. Really. But it is still going out of business.
Think about the Post Office’s value proposition. They send someone to almost every single home and business in the entire United States 6 days/week on the hope that there will be a demand for their service – sold at a starting price of 44 cents! For that mere $.44 they will deliver your hand crafted, signed message anywhere else in the entire United States! And, if you want it delivered fairly close they will actually deliver your physical document the very next day! All for 44 cents! And, if you are a large volume customer rates can be even cheaper.
And the Post Office has been a remarkably operationally innovative organizations. Literally billions of items are processed every week (about 700million/day😉 picked up, sorted and distributed across one of the physically largest countries in the world. The distance from Anchorage to Miami (let’s ignore Hawaii for now) is a staggering 5,100 miles, which works out to a miniscule .009 cent/mile for a first class letter! Compare that to the Pony Express cost (in 1860 $10/oz and 10 days Missouri to California,) and adjusted for inflation you’ll be hard pressed to find any business that has continually improved its service, at ever lower (constantly declining when adjusted for inflation) prices.
And while AMR is filing bankruptcy largely to force a new union contract, the Post Office has accomplished its record improvements wtih an almost entirely union workforce.
Executive compensation is surprisingly low. The CEO makes about $800,000/year. Competitor CEOs make much more. At Fedex (the Post Office delivers more items every day that Fedex does in a whole year) the CEO made over $7,400,000, and at UPS (the Post Office delivers more items each week than UPS does annually) the CEO made $9,500,000. So, despite this remarkable effectiveness, the CEO makes only about 1/10th CEOs of much smaller organizations.
The Post Office understands what it must do, and does it extremely efficiently. It knows its “hedgehog concept” and relentlessly pursues it to unparalleled performance. Yet, it is barred from raising prices, is losing money, and is now planning to close 3,700 locations and dramatically curtail services – such as overnight and Saturday delivery in a radical cost reduction effort.
Simply put, the U.S. Postal Service is becoming irrelevant. In the 1980s faxing was the first attack on the mail, but the big market shift began 15 years ago with the advent of email. Now with mobile devices, texting and social media the shift away from physical letters is accelerating. Fewer people write letters, send bills or even pay bills via physical mail. Are you mailing any physical holiday cards this year? How many?
Even the veritable “junk mail” is far less viable these days. Coupons are used less and less – and to the extent they are used they have to be much more immediate and compelling – such as offerings from GroupOn and FourSquare et.al. which arrive at consumers by email and social media usually through a smartphone or tablet mobile device.
The Post Office didn’t really do anything wrong. The market shifted. The Post Office value proposition simply isn’t as valuable. We don’t really care if the mail delivery comes daily, in fact many people forget to check their mailbox for several consecutive day. We don’t much care that a physical letter can transit the continent overnight, because we usually want to communicate immediately. And we don’t need a physical legacy for 99.99% of our communications.
The Post Office is really good at what it does, we just don’t need it. Not any more than we need a good horse shoe or small offset printing press.
The Post Office saw this coming. Over a decade ago the Post Office asked if it could enter new businesses in record retention (medical, income, taxation), automated bill payment, social security check administration and a raft of other opportunities that would provide government delivery and storage services to various agencies and to under-served users such as low-income and the elderly. But its mandate did not include these services, and expansion into new markets required a change in charter which was not approved by Congress. Thus, USPS was stuck doing what it has always done, as market shift pushed the Post Office increasingly into irrelevancy.
And that’s what happens to most failed businesses. They don’t fail because they are lousy at execution. Or because of lousy, inattentive managers. Or even because of unions and high variable costs such as energy. They fall into trouble because they either don’t recognize, or for some other reason don’t move to take advantage of market shifts. It’s not a lack of focus, management laziness or worker intransigence that kills the business. It’s an inability to do what customers really want and value, and spending too much time and money trying to ever optimize something customers increasingly don’t care about.
To their credit, both FedEx and UPS have shifted their businesses along with the market. Both do much, much more than deliver packages. Fedex bought Kinko’s and offers people their “office away from the office” globally, as well as multiple small business solutions. UPS offers a vast array of corporate transportation and logistics services, including e-commerce solutions for businesses of all sizes. Their ability to move with markets, and meet emerging needs has helped both companies justify higher prices and earn substantially better profitability.
The U.S. Post Office is the poster child for what goes wrong when all a company does is focus on efficiency. More, better, faster, cheaper is NOT enough to compete. Being operationally efficient, even low-cost, is not enough to succeed in fast shifting markets where customers have ever-growing and changing needs. Leadership has to be able to recognize market shifts early, and invest in new growth opportunities allowing the company to remain viable in changing markets.
My generation will wax nostalgic about the post office. We’ll weave in “mail” stories with others about days before ubiquitious air conditioning, when all we had was AM radio in the car and 3 stations of black & white television stations at home. They will be fun to reminisce.
But our children, and certainly grandchildren, simply won’t care. Not at all. And we better remember to keep the stories short, so they can be related in 140 characters or less if we want them saved for posterity!
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 | Sep 30, 2010 | Defend & Extend, In the Whirlpool, Lifecycle
Summary:
- Outsourcing has been very popular
- Outsourcing removes management options
- Outsourcing creates Lock-in, and makes it harder to deal with market shifts
- Most organizations see long-term performance deteriorate as a result of outsourcing
Outsourcing has been extremely popular – ever since the early 1990s. We know it has led to a lot of jobs moving out of the USA. Outsourcing manufacturing has exploded employment in China and other parts of Asia. Outsourcing information technology has exploded employment in India and parts of Eastern Europe.
Economists tell us that outsourcing has driven down the cost of everything from the clothes and household items we buy at WalMart to the cost of social marketing, ad creation and even telephone services.
But has it helped businesses be more successful? As outsourcing popularity reaches 2 decades – both domestic and offshore – we now have a lot more insight. And what we can see is that almost all outsourcing has been bad for the company that uses it! As things change, outsourcing has left them stuck competing the old way and further removed from market needs.
As my Sept. 29 column in CIOMagazine “Outourcing for the Right Reasons” (also published in ComputerWorld online under the same title) points out, the vast majority of outsourcing was done for the wrong reason. And the result has been deteriorating performance for those who outsourced.
Most companies outsourced to cut cost. The problem is, this has led to even worse lock-in than normal. Where organizations had options when they controlled the function – from manufacturing to janitorial serivces to help desks to datacenters – there were options to make changes. But when something is outsourced the contract takes away most options. The die is cast, usually for years into the future —- regardless of what might happen in the world!
Outsourcing can be used to create flexibility. But, honestly, how often have you seen it used that way? In well over 90% of cases the outsourcing is intended to cut cost – and lock-in operations. It is meant to remove options from the management discussion. Once outsourced, there is no consideration as to undertaking those efforts again. And if the outsourcing is done when business results are poor, the intent is to never revisit doing those things again. Under the banner of “outsource everything that’s not core” the management team is left with nothing to manage – except “core”!!! But if core has limited value, how do you now create a healthy business? How do you move to meet shifting needs?
Outsourcing has been a tidal wave for 15 years. Things might be cheaper, but has it made business performance better? Take a hard look at your company – and you may well realize it hasn’t helped you be a better competitor. When you outsource, how often are competitors able to equally outsource and match your short-term cost reductions? Things might be a penny cheaper, but the business is likely much less flexible, more vulnerable to market shifts, and far more locked-in to doing what it always did!
If you are seriously considering outsourcing, ask some simple questions:
- Am I doing this because I want to simplify my life, or offer the market something new?
- Am I doing this so I can “focus” on my “core” business?
- How will this advantage me versus competitors? Would emerging competitors do this?
- Can competitors do what I’m doing? Can this lead to a price war?
- How will this make me more competitive in 10 years?
- How will this make me more connected to markets?
- How will this make me more flexible to deal with shifting markets, and how will I exploit this flexibility?
- Am I doing this because I’m desperate to cut costs?
- What could I be doing instead of outsourcing to be more competitive?
