Tuesday, September 22, 2009

The Fallacy of Across-the-Board Cuts

One of the most commonly used practices by business leaders during a downturn is across-the-board budget cuts. Within the last year, a large number of public and private organizations announced comprehensive cuts in an effort to demonstrate action to address the drop in revenues. As a business tactic, however, across-the-board cuts demonstrate nothing more than an absence of imagination, a lack of control over the business, and an unwillingness to take the time to dig in and make the difficult decisions.

Implementing consistent budget cuts in every area of the company assumes the organization is running perfectly consistent across all departments, which as we all know, is never the case. Forcing cuts across all areas punishes an demoralizes those in departments that are running well. If one team has put a lot of hard work and effort into continually improving the quality and productivity of its processes while another has historically run inefficiently, both shold not be treated equally in a downturn. The leader of the inefficient area should be forced to reduce his or her budget by a larger amount and implement immediate improvements. Plus, a manager or supervisor who has resisted efforts to continually improve processes in his or her area of responsibility should be included at the top of any list of headcount reductions.

Another problem with across-the-board cuts is that there are certain products or services that, for strategic reasons, may require additional funding, thereby necessitating a budget increase. An across-the-board reduction not only consumes the attention of those leading the strategically important areas to reduce spending, but it also misses an important opportunity for the company to pull itself out of the crisis in a way that actually strengthens the organization.

What's the Alternative?

Instead of implementing across-the-board cuts, the organization's leadership team really needs to conduct a strategic planning session to establish a consistent, in-depth understanding of its current situation and develop a limited set (two or three, at the most) of critical initiatives to pull the company out of the downturn.

The entire company needs to become focused on productivity improvements - without sacrificing quality - to assure any spending that does not add value is reduced (which actually should be done whether the organization is facing a downturn or not). Some areas of the organization will undoubtedly face cuts and leaders will need to identify ways to reduce spending immediately in a way that does not negatively affect the company's overall health. As mentioned above though, some departments, locations, or projects will need to receive additional focus and investment to speed up developments or increase capacity.

Avoid the Easy Solution

It is not difficult for an organization to be profitable during the good times. The true test of leadership occurs, however, when the economy contracts and the market for a company's products or services shrinks. When a crisis does occur, leaders must mobilize their teams to analyze the situation and determine the actions necessary to pull out of the downturn as quickly as possible. Responsible leadership dictates that the plan consider the need to survive along with the need to strengthen the organization for the future. This means avoiding the temptation to implement easy solutions, including across-the-board cuts.

Tuesday, September 8, 2009

Taking Your Eye Off the Ball

Nothing can get you back to your roots faster than a significant and unexpected drop in profits. As the worst economic year in recent history starts to wind down and companies begin to think about budgets and plans for next year, it is a perfect time to reflect on several items, including how to be ready for growth when the economy rebounds, and how to strengthen the organization to avoid significant damage when the next downturn occurs. The best way to begin assessing these issues is to return to the fundamentals and assess whether or not the organization has strayed from its stated purpose.

Many companies are finding that the success they experienced in the years preceding the recession actually led them to unintentionally deviate from their intended purpose. Some of these organizations are now refocusing on their missions as a way to emerge from the current downturn and return to long-term profitability.


When people lose - or are afraid of losing - their jobs, one would fully expect a drop in automobile sales. Because of this, it is not surprising to see Toyota's revenues and profits to fall during the current recession. What is surprising, however, is the extent of the losses incurred. For a company recognized as one of the best run over the last 50 years, the large loss Toyota incurred over the last year or so has been staggering.

So what really led to Toyota's decline? How can the company that invented lean, treats its suppliers as partners, and has been so successful for so long go from earning almost $22 billion in operating income to losing more than $5 billion within one year?

I believe that the problems at Toyota resulted from the company's leaders taking their eyes off the ball over the last 1-2 years. Overtaking General Motors as the world's largest automaker seemed to become their main objective. In the race to be number one, they forgot what got them to that point in the first place: making high quality cars that people want to buy (or, as their mission states, to enrich society through car making).

I regularly read about CEO Akio Toyoda and other Toyota executives working to get the company back on track. Back on track means that they were off track - and off track means that they strayed from the path that made them successful.

For years recognized as the producer of the highest quality cars in the industry, Toyota has experienced a fairly large number of quality problems over the last few years, which may be a result of the enormous growth the company has experienced recently. In the past, managers would rise up through the ranks and be well-versed in the Toyota way, which meant they understood the systems and process for assuring (and continually improving) quality and productivity. As they battled GM for the top spot in the auto industry, however, their growth exceeded their ability to develop leaders and their quality suffered.

Recent comments made by the company's senior leaders means that they recognize the need to refocus before things got out of control. It is very common in business for companies to lose their way and not realize that anything is wrong until the organization is in severe trouble - which can take several years. Understanding the need to refocus now means that Toyota can fix things before significant damage occurs.


Whole Foods started as a modest grocery store in Austin, Texas and, within 25 years, grew into a major chain with more than 250 stores in the U.S. and U.K. Throughout the last few decades, the company became synonymous with healthy, organic and unaltered whole foods. Customers paid more to shop at Whole Foods, but were usually guaranteed to find a wide variety of healthy items in return.

Just like many businesses offering premium priced products over the last year two years, however, Whole Foods experienced a drop in revenues and profits. Rather than cut costs, close stores, and lay off workers, however, company CEO John Mackey decided to revisit the company's roots to return to profitability. As with Toyota, it appears that Whole Foods got caught up in its own success and strayed from its purpose during a period of high growth.

In an August 5, 2009 article in the Wall Street Journal, Mackey admitted that the company sells, "a bunch of junk." He went on to say, "we've decided if Whole Foods doesn't take a leadership role in educating people about a healthy diet, who the heck is going to do it?"

As Whole Foods grew into more of a mainstream supermarket, it replaced much of its healthier fare with gourmet foods. When the recession hit and people became less willing to pay more for gourmet foods, however, the company suffered. This, along with a few other factors, led Mackey to look closely at the reasons for the company's problems and come to the conclusion that Whole Foods had strayed from its purpose.

By definition, whole foods are foods that are unrefined, unprocessed, and resemble what they were in nature. What Mackey found when he recently walked through one of the company's stores was a large selection of white bread, gourmet desserts, and refined oils - in other words, foods that are not even close to being whole - the company's roots.

I'm betting that Whole Foods will succeed in returning to its purpose - and profitability - because Mackey realized that the company lost its focus before too much damage was done. The company has not strayed for very long and, like Toyota, can fix itself by reminding its team members why the company was created in the first place and what made it successful.


The point of all this is that companies must regularly take time to reflect on their purpose to keep from taking their eyes off the ball. Consumer tastes change, technology changes, economic conditions change, but a company's fundamental purpose - it's raison d'etre - should not.

Cars will continually change in terms of technology and design, but Toyota's commitment to enriching society through car making cannot change or its employees will become confused and its customers will cease to see a difference between a Toyota and any other brand of automobile. If Whole Foods strays from its purpose of providing healthy, organic, and unrefined foods, it will lose the customers who will begin to question why they are paying more for the same products offered at Kroger or Safeway.

Do you run the risk of straying? If it can happen at companies like Toyota or Whole Foods, it can pretty much happen anywhere.