Movement is not progress

The market is in a weird place right now, a lot of companies are making record profits, but at the same time every other company seems to think bankruptcy is around the corner.

Both of these camps seem to use the same general strategy: cut costs and maximize profits. What mainly comes down to: getting more money.

A lot of people would argue that that’s the core of every business out there. The less you spend and the more that comes in, the better the company is doing. A CFO would definitely like that part, but I would argue that this is not strategy. It’s always easier to run a company when you have more money. But running a company is not improving a company.

A dog chasing a car

You probably know the metaphor of a dog chasing a passing car. It runs after it, barking and growling, but once it catches the car, it has no idea what to do with it.That to me is what I often feel about bottom-line optimisation exercises.

The company is not doing well, or we want to do better than we are currently doing so, we start doing more with less and “optimize” our products and revenue streams¹. But what actually happens when we reach the end of the exercise? Is the company still in a sustainable place, from a product and organizational perspective? What are we going to do next?

Exercises like this often take a toll on the people working in the organization and cash in on the social credit you’ve built up with your customer base. The next step should be the payoff for both of these people. A better product or a more streamlined work environment. If not, this will come over as a greedy cash grab.

For this you need a plan of attack. If there is no step two after the exercise, you’re going to have to do this entire song and dance again in a few years. But this time with diminishing returns as you are going to tap the same well. The only alternative you have then is just to hope that the market picks up, and we can ride that wave back to profitability.

I understand that if your company faces insolvency that it’s also not exactly in a sustainable place, and I’m not saying that cost-cutting and profit optimisation is something a company shouldn’t do. I just think there should be more to the entire idea.

If you solely focus on solvency you will get into Goodhart’s Law² territory , where you’re going to sacrifice your company for short-term profits.

Actual strategy

As I stated in the beginning, the market is in a very unpredictable space right now. But that doesn’t mean you can’t have a 5-year plan. You will, however, probably have to revisit and adjust the plan more often moving forward.

And cost-cutting can be part of that strategy, but that would be one of the first steps, but it’s not the end point. It should always be part of a bigger plan.

Let’s start from vision: “To become Europe’s most trusted soda brand” for example. From there on you would focus on the strategy to make that happen: where are we now, and what are some steps we can take to move further toward that goal? Are we not popular in Italy? Ok, why? Do they like a different flavour profile, or maybe they do like our product, but we can’t supply enough product?

Great, in both these cases we probably want to scale up our production. Do we have financial headroom to do this? Maybe not; let’s see how we can get that financial headroom.

That is a different story compared to: hey our YoY numbers are down, we need to get them back up.

Moving with purpose

What I’m getting at is that I see so many companies moving at breakneck speed, in all kinds of directions. But I often have the feeling that it’s all disconnected from the bigger picture. There are optimisation exercises everywhere, but it’s always in small areas. You can even ask yourself if these optimisations you are focusing on today will still exist in the processes the company uses in 3-5 years time.

If not, then this might actually cost you more than what you’d hope to gain.

It’s very plausible that I’m not in the right meeting rooms, or that the grand strategy is not communicated. But if the company-wide strategy is not transparent across the company, how will we ever get there?