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Cutting Costs and Creating Opportunities
It doesn’t take much effort these days to find companies driving cost out of the business. Escalating fuel and commodity prices are putting a strain on operating margins. Just today General Motors announced plans to reduce costs, shift debt, and jettison business functions to raise an additional $15 billion to help cover losses and turn around its North American operations.
Cost improvement takes many forms. One approach is to reduce costs incrementally, or tactically, choosing specific areas such as travel, training, benefits, and salaries. Another approach is to use innovation, or a business transformation, as a means to alter the strategic direction of the company and where investments or disinvestments are directed. Both approaches have merit and are valid depending on the level of cost improvement desired.
A recent study, by Deloitte Consulting, found 64% of the companies polled are reducing costs through incremental strategies whereas 36% are choosing a transformational approach. The same study found transformational approaches are more likely to exceed expectations, even though the expectations are higher, versus only 20% of the incremental initiatives surpassing their targets.
So what approach is best suited for your specific company? It depends on the required level of change and commitment your executive teams are willing to invest in the desired outcomes. A transformational approach obviously requires a willingness, on behalf of the company, to be open to tearing down traditional approaches and constructs of the business model. This would require a mature leadership team that is willing to redefine the organizational value proposition, investigate new approaches in defining core and non-core competencies and determine how the company can achieve its desired outcomes. It may require a new level of partnering or outsourcing tactical delivery of certain aspects of the company’s deliverables.
Is your company willing to reinvent itself and take the steps required? If the answer is yes then consider additional findings from the Deloitte study. For transformational initiatives, the study found nearly three in five respondents indicated a lack of stakeholder alignment a significant barrier to success and that they severely underestimated the effort to communicate and manage cultural issues of the transformation. Other barriers included poorly designed workforce transition plans, top leadership support and engagement, and lack of clear value proposition for the change.
Managing change is the core value proposition of ASIL, Inc. Our Driving Complex Change® methodology is designed to empower companies with visibility and understanding into those factors that result in successful cultural change. We offer a variety of services to help you innovate and transform your business. Let us help you achieve new areas of profitability and success.
Contributed by Warren White
July 2008 Spotlight
Making a Big Bet
Everyday we read articles that either praise or blast companies for making a so called “Big Bet”. The term ‘Big Bet’ has become very popular and typically isn’t really a ‘Big Bet’ at all. Many times you see companies primarily making an investment into an extension of the areas that they have already proven are profitable. Not much of a ‘Big Bet’.
Let’s step back for a moment and level the field on ‘Big Bets’. First, they are typically transforming events that shape a company’s future. Second, they are much more risky (even after all of the homework is done) versus your run of the mill initiative. Third, the rewards must be material in conjunction with the inherent risks.
It all sounds very basic and straight forward, yet very difficult to define and even more difficult to execute successfully.
There are many types of ‘Big Bets’, here are a few to consider:
* Getting there first – going where no one else has gone can be very opportunistic and profitable, or very lonely and expensive if you’re wrong.
* Acquiring a channel or entry into an existing market – you can’t play if you’re not there, going after stagnant markets can be dangerous, so shoot for growing markets.
* Increasing investments in unproven solutions – At times you need to invest more to get the level of acceptance and credibility, however when do you decide this poker hand should be folded?
So how do you mitigate the risks around ‘Big Bets” to ensure success? Take the time to clearly define the opportunity and the impact it would have on the company as a whole. Gain a variety of perspectives including your Executive Team, Industry Experts, Investors, and more. Doing your homework upfront is critical to success. Don’t rush to an outcome, due diligence is critical.
Defining the ‘Big Bet’ and placing a value on it is typically done through many objective filters. The execution side is more fragile and is filled with subjectivity. Often companies spend time agonizing over an email to send out to the troops advising them of the change after it has occurred. Involvement from the Key Stakeholders is fundamental in achieving success. The notion is that ‘Big Bets’ will transform your business. Managing change effectively is an ingredient that is typically overlooked and under estimated.
In summary, the ‘Big Bet’ should be bold, with greater rewards and inherent risks. It should ultimately transform your business. Don’t forget to manage the change and impact on your employees, customers, and investors.
Contributed by Peter Pazmany
Industry Trends
Fuel Prices
Okay, you’re tired of hearing about high fuel prices. Well, I'll in a not-so-well-kept secret. Prices are unlikely to go down unless we slow down the use of our oil resources. Adding more oil (drilling, coal liquification, oil shale, etc.) will only result in temporary fixes and not reduce our overall oil dependence. Fuel prices are driving up the cost of everything from your cup of Starbucks to the distribution of parts and material across the commercial markets. The price of a gallon of gas has gone from a national average of $3.02 to $4.11 nationwide since January, a 36% increase.
Fuel consumption is affecting all modes of transportation. Commercial and consumer markets have seen steep increases in costs due to the cost of oil.
It is estimated that 1lb of extra weight carried by an airline fleet over the course of a year can add as much as $100K to the annual fuel cost. The airlines are in the process of eliminating or reducing weight ranging from in-flight movie equipment, the amount of ice carried for drinks, to the amount of extra fuel they carry. They are also retiring their older gas guzzling planes.
Trucking companies are also attempting to milk every mile out of a gallon of gas as well as reduce the total miles traveled. These companies are making an impact by converting to aluminum block engines, streamlining loads, planning efficient routes, eliminating deadheading, and reducing speed. Six miles per gallon is average for an 18 wheeler so every little bit helps.
The reduction in the use of fossil fuels is not a long term solution, just a stop-gap to keep our economy running while we develop alternate fuel supplies and technologies. For now, the more we do to cut our oil usage (both foreign and domestic) the more it will help drive down fuel prices while we focus on our alternatives.
Companies are struggling to maintain profit margins and the cost of fuel is adding to that challenge. Doing business in the same way as you did yesterday and trying to economize in only one area will not solve the problem. Companies need to invest in change management in order to gain a competitive edge in reducing bottom line costs.
ASIL, Inc. can help with your Supply Chain planning to help reduce your costs. Contact us at ASIL, Inc.
Care to share your thoughts on reducing oil dependencies? Drop me a line at msingleton@asil-inc.com .
Contributed by Michael Singleton
Our Software Products
Click on the links below to view ASIL, Inc.'s MAX Partnering® self paced software demonstrations:
> Self Assessment Sample Questionnaire - This demo will enable you to respond to a small sample of self assessment questions focused on change management and create a Heat Map of your responses to see areas that may need attention. The Driving Complex Change® methodology addresses the six areas of Direction, Ability, Incentive, Resources, Structure, and Action that can impact your effectiveness of change management.
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