Competing for the Future

Breakthrough Strategies for Seizing Control of an Industry & Creating

Tomorrow’s Markets

Leadership:Beyond Restructuring

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

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

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

Numerator Management

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

lie– must be able to anticipate changing customer

needs– must have invested preemptively in building

new core competencies– must provide clear and consistent leadership

Denominator Management

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

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

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

Denominator Management

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

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

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

Denominator Management

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

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

Efficiency & productivity

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

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

Restructuring Results

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

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

Restructuring Results

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

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

Restructuring Results

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

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

Restructuring Results

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

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

Restructuring Results

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

Restructuring Results

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

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