In trying to restructure the organisation, and thus revive their companies’ fortunes, many directors resort to ‘Cowboy’ antics and shoot from the hip. This is definitely not the key to success, and is a syndrome which one might describe as ‘Anorexia Industrialosa’ – the excessive desire to be leaner and fitter. Like its human counterpart, it can lead to emaciation and eventually death.
Malcolm McDonald, Emeritus Professor at Cranfield School of Management explains why boards must practice strategic thinking or face the consequences.
By asking a Board of Directors the two following simple questions which they cannot answer, one would immediately know what sort of a company they run:
“What are your key target markets in order of priority ?” (most can only list their PRODUCTS); and
“What are your company’s sources of differential advantage in each of these key target markets?”It still hasn’t dawned on many directors that in the halcyon pre-recession days of the early years of the 21st century they were hardly managing at all – merely being dragged along by the momentum of growth and easy marketability. Or that habits developed then can be disastrous now.
Take the directors of a construction group as an example. At a recent in-company workshop run by me, this company, in spite of its 65% growth in net profits, clearly hadn’t a clue how it had made its money. I asked one CEO, who had grown net profits by 185 per cent:
“Did your market grow? If so, by how much and how much of your profit growth came from this?”
He didn’t know!
“Did you grow your market share? If so, by how much and how much of your profit growth came from this?” He didn’t know !
“Did you have any price increases last year? If so, how much of your profit growth came from this?”
He didn’t know!
“Did you have any productivity improvements last year? If so, how much of your profit growth came from this?” He didn’t know!
Do you get the picture? All people like this had to do over the past few years was to get out of bed in the morning to get rich.
Looking at profit and loss accounts seems to be the principal re-occupation of many boards and few have any understanding of the causes of the financials. Indeed, in most boardrooms, the P and L Account has only ONE line for revenue, but scores of lines for costs. No prizes for guessing what these loonies spend their time on !
Take figures 1 and 2 (a real company, disguised for confidentiality). Even a cursory glance at figure 2 shows that Intertech are heading for disaster the moment there is a downturn.
In the long run, any company can only make money by selling something to somebody and there has to be a reason why they would want to buy from them rather than from someone else offering something similar.
It certainly makes you wonder what these so-called Directors spend their time discussing at Board meetings. Also, returning to the topic of the cost-cutting brigade, there is a massive body of evidence ( PIMS, IPA etc ) to show that cutting promotional expenditure during a downturn is disastrous. The IPA database is replete with examples of companies that took years to get back to pre-cut sales levels.
Indeed, recently Chris Moore, Chief executive of Domino-s Pizza said “Eighteen years have passed since the last generation of managers have come up who have never been through a downturn - and inevitably, they make mistakes. They stop advertising, reduce quality and service. They behave out of fear and their management is reactive. They try to cheat to get out of a tight spot - and usually that means the end of the road”. A new breed of chief executive, however, has begun to appreciate the need for strategic planning and a pro-active vision that stretches beyond the end of the current financial year. Companies led by such managers are showing results palpably better than the old ‘re-active’ companies managed on a short-term philosophy.
Such executives realise the need for a properly articulated vision of where their companies should be going, and for business plans to identify and develop their distinctive competence in the market-place. Where this fails to happen, plans tend to be developed from a purely financial base, extrapolating from current situations: they are about as skilled a method of navigation as a sailor steering by the wake in choppy waters. Since most operational managers prefer selling the products they find easiest to sell to customers who offer the least line of resistance, this approach is tantamount to extrapolating the firm’s own inefficiencies.
It is easy to understand why companies can prefer this soft option. Many strategic planning departments, bulging with highly paid management scientists, brainstormed out their brilliant plans at a comfortable distance from the ‘coal face’ and the real world of operational managers. Recession exposes this kind of planning as the farce it always had been.
The reaction in many boards is to fall back on tried and tested ‘Action man’ methods: strategic planning is out and the hobnail-boot brigade are back, at least for a time.
The new, emerging culture places much greater emphasis on close scanning of the external market environment, the early identification of forces emanating from it, and on developing appropriate responses. The difference this time round is that all levels of management are involved.
It is not difficult to spot those companies which have failed to adopt the new strategic orientation; They are the ones which reorganise with monotonous regularity because they don’t know what else to do.
This preoccupation with organisational structure is likely to be fatal in many cases. This is so because there isn’t the same slack in the system as there was in recent years.
Strategy before structure
Only when a company has developed a strategy towards its market place should its organisational structure even by considered – and then it should be designed so as to reflect its strategic thrust into the external market. So, strategy before structure should be the basic orientation.
There are three distinct yet interdependent stages involved in developing a strategic capability in an organisation. These are:-
- Establish a disciplined framework (or logic) for undertaking the planning process;
- Underpin this framework with a meaningful marketing intelligence function;
- Undertake the necessary steps inside the organisation to convert the paper plans into propositions capable of action. When this behaviour is being achieved on a consistent basis, then a new culture has been established.
To summarise, the main themes emerging from the better companies are:
- acceptance of the need for a strategic orientation among key executives
- a growing understanding of how to embed the new orientation into the corporate culture
There are three distinct yet interdependent stages in developing a strategic capability in an organisation which, when overlooked, are bound to cause strategic failureWe discern three company types:
- The more enlightened companies which are adopting these approaches and which are getting better faster and faster;
- Those which have not made the shift and are losing ground, a trend which will grow as the environment becomes even more hostile;
- Those few which appear to be still healthy and which eschew strategic approaches as unnecessary and undesirable.
The latter ones, still enjoying growth, must beware. It was only a few months ago that the then breed of “whizz kids “ were milking dry the fruits of the brilliant endeavours of past generations of entrepreneurs. Rationality to them meant only short term results and profits on a product-by-product basis and if this meant raising the price or deleting the product, who cared as long as the end of year profit came out right ?
Regard for competitive position, market share, promotion, customer franchise, R&D and the like all seemed irrelevant in times of high growth. It is this approach more than any other in the name of rationality and prudent management which has led to economic decline.
Professor Malcolm McDonald MA(Oxon) MSc PhD DLitt DSc Emeritus Professor, Cranfield University School of Management, was recently cited as one of the top marketing gurus in the world, along with Philip Kotler and Michael Porter and, has been named as one of the top ten consultants in the UK. He is now Emeritus Professor at Cranfield University School of Management where, until recently, he was Professor of Marketing and Deputy Director. Formerly Marketing Director of Canada Dry, he is Chairman of six companies and works with many of the operating boards of the world’s biggest multinationals on every continent. He is the author of over 40 books, many of which have been translated into several foreign languages and has published hundreds of articles and papers. Malcolm continues to research and teach at Cranfield and other universities around the world, in addition to speaking engagements, visiting lectures, and consultancy work. The Chartered Institute of Marketing’s Malta branch (CIM Malta), who has bridged the illustrious professor with the journal, has hosted Malcolm McDonald for a second time in Malta earlier in the year with two successful events. Malcolm may be contacted through CIM Malta at firstname.lastname@example.org