It Takes a Leader

Is your perch a branch or a mountaintop? Employ these seven ideas to make your business more competitive in tough times.

• By Pam Mitchell
• Jul 01, 2003

"I don't care how you do it, but I want an across-the-board 10 percent cut in budgets for the rest of this year." "Sales are down. We have to tighten our belts. I suggest limiting all travel, software upgrades, and equipment purchases until business improves. I want to see people working longer hours while we try to pull out of this slump."

When business gets tough, cutting costs is a logical solution. But how effective are across-the-board budget cuts? Reduce budgets. Reduce staffing. Reduce customer service. Each person left is expected to do more work with fewer resources. Has history proven this is the pathway to long-term success?

Certainly, any organization that has become fat with cellulitic layers of mediocre middle management needs to shed a few pounds. But are we slashing the fat or the lean? A downturn in business is the time to assess our line-of-sight. Are we standing on a single branch looking down at the minutia? Or are we standing on a nearby mountain taking in the total view? Are we positioning ourselves for growth and survival, or for mediocrity and a slow, painful death spiral?

When the economy is slow, too many companies position themselves for the death spiral. First, employees begin to pay more attention to slashing budgets and worrying about the next layoff than to creating value for their customers. Second, the work environment changes. Some companies count on the threat of layoffs to keep people at the grind, but the most talented employees will seek and find employment elsewhere.

What are we left with? Losing teams are comprised of demoralized employees and fleeing customers. Inventories are cut in the wrong areas. Lead-times lengthen. Territories are consolidated, and sales service diminishes. Customer-service people become overworked and forget to follow up on critical items, or they are too busy at the coffee machine talking about the heinous things going on in the organization.

This is typical of what can happen to industries in an economic downturn, but your company can be different. You can take advantage of mistakes that your competitors are making right now. You can emerge from the current economic slowdown as the value leader in your marketplace while your competitors are slashing budgets.

Maintaining Your Focus
Here are some strategies to maintain your focus and use an economic slowdown to capture additional market share.

1. Talk to your customers and prospects. Find out what they value most in a business partnership and give it to them. A leading retail logistics company holds a Store Planning Symposium each year to listen to its customers and prospects, trying to figure out how they can better solve their problems. The symposium and their partnership attitude position this firm as a leader in its marketplace.

2. Create a customer value definition statement based on your research. Post it in your organization. Make sure everyone knows what the customers value and what his role is to deliver value to those customers. A successful food ingredients distributor knows its customers value fresh ingredients delivered on the exact day they are needed. The company tracks on-time delivery and post the results around the building and on its Web site. Everyone in the organization knows how critical that number is.

3. Flow-chart your major business processes. Ask those closest to the process: What part of these processes truly creates customer value? What part is pure fat? Include direct expenses and overhead in your analysis. Eliminate the fat.

4. The leader determines the focus in the organization. If the leader focuses on minutiae such as expense reports, managers will do the same. If the leader is talking about the big picture such as her value proposition, employees will do the same.

5. Create a formal two-way communication system in the company. The people closest to a problem are always the best ones to solve it. Few will share their ideas with top management unless requested to do so. Make them feel comfortable sharing their ideas. Give them the tools to implement their ideas.

6. Do not lay off employees who work themselves out of a job. Reward them with a raise, a promotion, or a bonus. Once there is something in it for them, you will see many more cost reduction ideas.

7. Know what business you are losing and why. Keep a database. Use this information to refine your value proposition. The biggest mistake managers make is basing their decisions on what business they are winning.

A Case Study in Failure
One job shop stopped production on a regular basis to change jobs for rush orders. Machine setup costs were a large percentage of the total cost. The problem was that no one was paying for the extra setup. It was done in the name of customer satisfaction. Once the rush job was complete, they had to reset the first job--so two jobs required three setups.

The supplier acquired a reputation for being the "go to" company when one needed a rush job. This company received more and more "rush" work. They continued to charge the third setup to overhead. Overhead costs grew as the number of rush jobs grew. The supplier had to increase the percentage of overhead applied to each new quote. It began losing standard lead-time work because its price (overhead) was too high.

The harder the company tried to provide excellent customer service, the more jobs it lost on price. The more jobs it lost, the lower its utilization rates went, further increasing costs. The problem was that the marketplace was going to lower-cost shops for standard lead-time work. The job shop had priced itself out of the market under the guise of excellent service, because it did not truly understand what its customers valued. The managers reasoned the competition must have lower direct labor costs. (However, direct labor is generally only 10 to 30 percent of one's cost structure. Therefore, if a competitor's direct labor costs are 20 percent lower, the total impact is only 2 to 6 percent in the final quote.)

This job shop misread the customer value definition because it looked only at the business it was winning. It failed to look at the business it was losing and ask why.

What is your line-of-sight? Are you standing on a branch looking at the minutia of your business? Or are you standing on the mountaintop taking in the total picture? Do you seek the opinions and solutions from the people closest to the customer and to the job?

The bottom line is that market leaders throughout the history of free enterprise systems are not those companies that slash budgets the best, but those companies that provide the most value to their customers. Any manager can issue an edict to cut spending. Any manager can make decisions based on the business he or she currently has. It takes a leader to navigate the company through the maze of an economic downturn and emerge as the value leader in the marketplace.

This article originally appeared in the July 2003 issue of Occupational Health & Safety.