Competing for the FutureCompeting for the Future

Breakthrough Strategies for Seizing Breakthrough Strategies for Seizing Control of an Industry & Creating Control of an Industry & Creating

Tomorrow’s MarketsTomorrow’s Markets

Leadership:Beyond RestructuringLeadership:Beyond Restructuring

In an effort to satisfy investor requirements, In an effort to satisfy investor requirements, ROI (RONA, ROCE) is usually the goalROI (RONA, ROCE) is usually the goal

There are 2 components to this calculation - There are 2 components to this calculation - a numerator (net income) and a denominator a numerator (net income) and a denominator (investment, net assets, or capital employed)(investment, net assets, or capital employed)

This leads to 2 options for top management - This leads to 2 options for top management - numerator management and denominator numerator management and denominator managementmanagement

Numerator ManagementNumerator Management

To grow the numerator (net income), top To grow the numerator (net income), top management must have:management must have:– a point of view about where new opportunities liea point of view about where new opportunities lie

– must be able to anticipate changing customer must be able to anticipate changing customer needsneeds

– must have invested preemptively in building new must have invested preemptively in building new core competenciescore competencies

– must provide clear and consistent leadershipmust provide clear and consistent leadership

Denominator ManagementDenominator Management

Many managers realize that it is a lot harder to Many managers realize that it is a lot harder to raise net income, than to cut assets and raise net income, than to cut assets and headcount.headcount.

Under pressure for a quick ROI improvement, Under pressure for a quick ROI improvement, executives reach for the lever that will bring the executives reach for the lever that will bring the quickest, surest improvement in ROI - the quickest, surest improvement in ROI - the denominator.denominator.

Easy and quick, a red pencil is all that is Easy and quick, a red pencil is all that is required.required.

Denominator ManagementDenominator Management

The US and Britain have produced an entire The US and Britain have produced an entire generation of denominator managers.generation of denominator managers.

These managers can downsize, declutter, These managers can downsize, declutter, delayer, and divest better than any managers in delayer, and divest better than any managers in the world!the world!

Even Even beforebefore the current wave of downsizing, US the current wave of downsizing, US and British companies had the highest asset and British companies had the highest asset productivity ratios of any companies in the productivity ratios of any companies in the world.world.

Denominator ManagementDenominator Management

Denominator management is an accountant’s Denominator management is an accountant’s shortcut to asset productivity.shortcut to asset productivity.

In a world where competitors are capable of In a world where competitors are capable of achieving 5, 10 or 15% real growth in revenues, achieving 5, 10 or 15% real growth in revenues, aggressive denominator reduction, under a flat aggressive denominator reduction, under a flat revenue stream, is simply a way to sell market revenue stream, is simply a way to sell market share profitably. Market strategists term this a share profitably. Market strategists term this a “harvest strategy” and consider it a no-brainer. “harvest strategy” and consider it a no-brainer.

Efficiency & productivityEfficiency & productivity

A company must not only get to the future A company must not only get to the future first, it must get there for less.first, it must get there for less.

There is more than 1 path to productivity There is more than 1 path to productivity improvement. While reducing the improvement. While reducing the denominator and keeping revenues constant denominator and keeping revenues constant will increase productivity, so will will increase productivity, so will increasing revenue atop a slower growing increasing revenue atop a slower growing or constant capital and employment base.or constant capital and employment base.

Restructuring ResultsRestructuring Results

How do we know when we are done How do we know when we are done restructuring? Where is the dividing line restructuring? Where is the dividing line between cutting fat and cutting muscle?between cutting fat and cutting muscle?

Downsizing creates plummeting employee Downsizing creates plummeting employee morale. What employees hear is that they are a morale. What employees hear is that they are a firm’s most valuable assets; what they know is firm’s most valuable assets; what they know is that they’re the most expendable assets (in that they’re the most expendable assets (in denominator companies) & feel like the builders denominator companies) & feel like the builders of the pharaohs’ tombs.of the pharaohs’ tombs.

Restructuring ResultsRestructuring Results

Restructuring seldom results in fundamental Restructuring seldom results in fundamental business improvement (the chief tool of the business improvement (the chief tool of the denominator manager). At best it buys denominator manager). At best it buys time.time.

One study of 16 large US companies with at One study of 16 large US companies with at least 3 years experience of restructuring least 3 years experience of restructuring found that although share price improved found that although share price improved initially, the move was mostly temporary.initially, the move was mostly temporary.

Restructuring ResultsRestructuring Results

Three years into restructuring, the share Three years into restructuring, the share price of the companies surveyed were, on price of the companies surveyed were, on average, lagging even further behind index average, lagging even further behind index growth rates than they had when the growth rates than they had when the restructuring began. restructuring began.

Downsizing belatedly attempts to correct Downsizing belatedly attempts to correct the mistakes of the past; it is not about the mistakes of the past; it is not about creating the markets of the future.creating the markets of the future.

Restructuring ResultsRestructuring Results

Downsizing can make a company thinner; it Downsizing can make a company thinner; it doesn’t necessarily make it healthier.doesn’t necessarily make it healthier.

Wall Street has again and again shown itself Wall Street has again and again shown itself quite content to watch a firm profitably quite content to watch a firm profitably restructure itself out of business, when top restructure itself out of business, when top management seems incapable of profitably management seems incapable of profitably creating the future.creating the future.

Restructuring ResultsRestructuring Results

Any company that is better at denominator Any company that is better at denominator management than numerator management - management than numerator management - any company that doesn’t have a track any company that doesn’t have a track record of ambitious, profitable, organic record of ambitious, profitable, organic growth - shouldn’t expect Wall Street to cut growth - shouldn’t expect Wall Street to cut it much slack.it much slack.

Restructuring ResultsRestructuring Results

Wall Street seems to say: “Go ahead, squeeze Wall Street seems to say: “Go ahead, squeeze the lemon, get the inefficiencies out, but give us the lemon, get the inefficiencies out, but give us the juice (ie the dividends). We’ll take that the juice (ie the dividends). We’ll take that juice and give it to companies that are better at juice and give it to companies that are better at making lemonade”.making lemonade”.

Reengineering is often combined with Reengineering is often combined with restructuring - yet both are the penalty a restructuring - yet both are the penalty a company must pay for not anticipating the company must pay for not anticipating the future.future.