The Unintended Consequences of Growth

Can you think of a more emotionally-loaded business topic than price increases? Food industry CEOs are feeling pressure in the tension between rising costs and customer pricing. Pressure comes from customers resistant to increases, but other pressure comes from inside your organization where market share and sales volume are aggressively defended.

According to a McKinsey study, a 1% price increase contributes an average increase of 11% to your bottom line. Before forwarding this blog to your marketing team, we would like to take the pricing topic in a direction that you, the chief executive, may not have considered.

As you recall from business school, the cost curve is a graph that illustrates the total costs of production as a function of total quantity produced. Costs are high when production is new, but the cost line dips and unit costs decrease as output increases. Economies of scale are derived from purchasing, management and labor skill, finance, marketing, technology and basically, learning by doing.

At a certain point, however, economies of scale level off, and leaders contend with the effects of diseconomies of scale. We like to call this the “elephant effect”. The elephant moves more slowly and heavily as he grows and matures. Powerful and fascinating in the animal kingdom, the elephant effect can erode profitability if not managed carefully in the corporate world.

Examples of diseconomies of scale, or unintended consequences of organizational growth, are:

• Slow or distorted information as it passes between multiple layers of management and across functions
• Delayed decision making
• Congested or reduced response time to problems and opportunities
• Resistance to or poor execution of change initiatives

All these and more carry costs that slowly and deliberately creep up on your bottom line.

Blueberry offers three recommendations for dealing with diseconomies of scale to keep profits robust:

• Strategize only with your organization’s ability to execute in mind. Structure should not follow strategy; strategy should follow structure.
• Thoroughly and objectively quantify the risks, expenses and trade-offs associated with expansion. Its easy to get caught up in the thrill of growth without a clear-eyed understanding of the hidden risks and costs.
• Identify and contain the scope of activities across the organization associated with growing market share, product development, or mergers and acquisitions to ensure faster success, highest quality and lowest cost.

A new twist on the price increase topic but still focused on the health of your bottom line, Blueberry believes this is a great time to take a close look at how decisions, communications and activities are impacting profits as you lead your organization into 2011.

Galileo, Chief Executive Officer

The primary role of the food industry CEO is to reconcile the company with the external environment. One of the uncontested methods of doing this is by maximizing organizational strengths and minimizing weaknesses.

I am puzzled by the number of c-leaders who rest on this line of thinking.

A supplier’s strengths that were relevant as little as 6 months ago may be irrelevant today--or matched by a competitor to level the playing field. A weakness once considered an inconvenience or annoyance in the larger context may now be the deciding factor in supplier selection when that weakness does not exist in a competitor.

Customers we talk to are doing great things and taking big risks to adapt to changing consumer demands and tastes. They realize their strengths from yesterday will not necessarily carry them into the new competitive environment: A major restaurant chain is diversifying its casual dining brand with a fast-casual variation. A new system-wide breakfast program is threatening other giants’ share of the morning day part. C-stores are focused on enticing consumers away from QSRs—and its working. A mass merchandiser is opening hundreds of smaller concept stores. Retail private label continues to grow, influencing new shopping behaviors with quality as good as national brands and at a better price.

These expanded customer models require an evaluation of a supplier’s ability to keep up, to educate themselves on the new business, to help them be competitive and reach their goals, and meet other important performance metrics. Those that fall short add costs and complexity to the accounts they are trying to win, maintain or grow.

“A lot of manufacturers don’t get it,” one chain executive told me. “They miss the mark in areas critical to our business today. The problem isn’t necessarily their price; it’s that the cost of doing business with them is just too high.”

Internal meetings that review supplier performance have a direct impact on the financials supplier CEOs are tasked to deliver. It’s disturbing how often problems, negative experiences or perceptions that lead to volume loss are discovered too late. When all factors are tallied, RFPs or sample requests from competing suppliers can result in split volume, price pressures that drive down margins and extend ROI on investment, missed opportunities…or the volume disappearing completely.

Think about it: Changing or adding a new supplier carries with it considerable cost and risk for the customer. What does it say when the benefits of making a change or foregoing one supplier in favor of another outweigh the costs or risks?

Uncovering and avoiding these scenarios ultimately rest with one individual. Only CEOs possess the total-enterprise perspective and authority to reconcile their company with the realities of customer perceptions and feedback. That requires a willingness to look at hard facts--a job that should not be delegated or filtered through vice presidents or functional managers. It means getting the most unbiased, clear-eyed read from an independent, experienced resource with no stake in the outcome. A two-way direct dialogue between the customer and an experienced third party food industry specialist who knows how to probe and gather input from multiple areas of the customer organization to determine what’s being said, what’s being decided, the “why” of past decisions, and extract perceptions and experiences that affect future business decisions is essential. This information becomes the basis for improvements that drive more customers and cash towards winning suppliers.

Galileo said, “All truths are easy to understand once they are discovered; the point is to discover them.”

How will you discover what customers believe are your organization’s truths?

The Supplier/Broker Dance

Cutting the rug with a food industry CEO doing the Customers and Cash Boogie, our rhythm stalled for a few moments when I asked how broker reviews improve his organization’s financials.

Broker reviews do not improve sales. Their costs are buried in supplier financials, offering no insight into the supplier/broker relationship or processes that guide it. Supported by data, they also include storytelling, guesswork and opinion--all in good faith but insufficient for solving problems, making decisions or producing predictive outcomes: “XYZ account went out of business”, “You’re not paying enough attention to our line”, “Competitor X bought the gold level program”. Comparing period-to-period sales or results-to-quota when market conditions, leadership, personnel, competition and strategy keep changing is an exercise so imbedded in sales management culture that its cost-to-benefit is unknown and unchallenged.

Estimate the total number of salaried hours required to source data, assemble, analyze, travel, and conduct broker reviews. You can conservatively estimate a cost of at least $6,500 for each. Multiply times 20 brokers, and your company spends a minimum of $130,000. In net income terms, that equates to tens of thousands of case sales.

Have broker reviews really increased sales revenues for your company? Lifting a section from management handbooks, brokers and suppliers benefit less from this practice and more from consistent, reliable, collaborative processes between your company and theirs.

Resuming the Customers and Cash rhythm with my chief executive client went like this:

• Discard this costly, long-standing practice. Just as you would remove barriers to production efficiency, challenge any practice that is a barrier to sales productivity.
• Re-route broker review costs to curtailing or preventing firefighting in the sales system.
• Define and analyze the functions in your supplier/broker relationship before trying to measure them or drawing conclusions.
• Drill into the flow of activities brokers undertake on behalf of your organization: Scheduling, selling, communicating the voice of the customer, supporting customer programs, administrative paperwork, invoicing. Work with your organization to help take out complexity, cost and time wherever possible.
• Pay attention to the inputs and outputs of these primary functions because that’s where the real costs and inefficiency reside. Brokers don’t resist or resign lines that pay too little; they resist or resign lines that cost too much to represent.
• Effective supplier/broker relationships should be based on reliable, repeatable processes that are consistent across all markets, even when a change in leadership occurs on either side. Business can only be managed by the set of processes that define its activities.
• Collaborate with forward-looking sessions that estimate the resources required to deliver the numbers and cascade responsibility for achieving them throughout both the supplier and broker systems.
• Whether results are up or down, let your sales leaders review the processes that either contributed or derailed them--but only after you, as CEO, have been involved in establishing and imbedding them.

The supplier/broker relationship should be organization-to-organization, not sales manager-to-account executive: aligned with missions, actionable, consistently measured and reported, tracked as a time series, predictable and compatible with the way brokers do their job. CEO involvement in establishing guidelines is critical because broker performance is directly related to many of your organization's most important metrics: Gross revenue, salesperson productivity, strategic execution, new product introductions, customer acquisition, retention and turnover, and more.

Socrates said, “The unexamined life is not worth living.” Unfounded, calcified beliefs could be costly and slowing down your organization, preventing more effective practices from emerging.

Broker reviews is one of them.

From This Day Forward

As in a marriage, successful coupling has far less to do with the excitement and mechanics that lead to happily-ever-after and more to do with people themselves. Each brings utensils, habits, personal issues, dreams and expectations to the union. By the time both parties say, “I do”, the idea is to ride off into the sunset to begin a long, loving life together--or as the analogy lends itself, integrated as a profitable company equipped for the challenges that lie ahead.

The importance of human due diligence is vastly underestimated in pre and post-acquisition activity. Failure to thoroughly do so is the primary contributor to two-thirds of newly-blended companies losing market share in the first quarter after the deal. Culture clashes, misaligned processes, confused employees and lost productivity are common occurrences that weaken the structure, brand, customer relationships, ability to innovate and morale of employees, offsetting or eliminating anticipated gains. Even the best organizations can get stuck in neutral when executing new company standards, or miscalculate the stamina required to bring about quick, effective and sustainable change.

All reasons not to try going it alone. Very talented and capable executives are caught off-guard by the many human complexities of integration, but a focused contracted expert not hindered by the demands of running the business can be one of the acquisition's greatest assets. As a neutral third party, the expert can change the "we" and "they" to "us" quickly and beyond the rhetoric, help navigate through the pain of hard decisions with clear-eyed rationale, provide objective insight and feedback on where the organization is stuck, and diplomatically work through difficult political and interpersonal issues from a base of industry knowledge that aligns the new company with the needs of the market.

Assuming business integration mechanics are in place or scheduled, Blueberry’s experience suggests a few additional key steps:

• Priority #1 is to protect business. Competitors are aware of acquisition turmoil and may be quick to swoop in to leverage their relatively-stable position with your accounts, so make sure customers are contacted (by a neutral party, not someone on the payroll) to gain insight into how the acquisition is perceived and whether any business is at risk.
• A clear understanding of the purpose and implication of the acquisition helps define the new organizational culture and its goals, which is an important factor in communicating to employees and customers. Caution: Over-statements and commitments are common during deal-heat; back up what you claim to be, right now.
• A false assumption is that the adopted culture is always the one of the acquiring company, but the financial acquirer may not necessarily be the one setting the tone for the new organization. Again, the purpose of the deal points the way here and in other business considerations.
• Management from both entities will fight to retain their position. Individual styles, skills gaps, business philosophies, ideas about organizational structure and other business issues should be assessed carefully but quickly and efficiently in order to make decisions that prevent a ground swell of misunderstanding. If not, the pattern will be repeated in the ranks and the business will suffer.
• Skills must be separate from personality and tenure when considering the future needs of the company. While an obvious statement, its surprising how often these personal factors blur decisions.
• Don’t assume the acquirer’s resources are better or more advantageous than those of the acquired company. Tread carefully when discarding long-standing processes that may be outdated and no longer valuable in the new model—expecting people to discard and replace what they have spent years creating can generate negative undercurrents and opposing camps that can linger for years and disrupt business.
• Finally—and very importantly—dig deep and objectively into human issues at the top and throughout the ranks to uncover reaction patterns to change: Areas of friction or conflict, rumors, trust levels, resistance, bottlenecks that slow down workflow, how communication and direction is received and carried out, decision-making methods, perceived authority thresholds and who’s in the dark. These are the messy areas that derail progress in bringing the two entities together and should not be overlooked.  

There are no shortcuts to making one company out of two. The question is whether to extend confusion, slow progress and even losses over a longer period of time or assign priority status to resolving the people issues that lead to acquisition success.

 

So What Happens If...

Today's tweet from Nouriel Roubini, professor of economics at New York University’s Stern School of Business:

“V shape recovery is dead; anemic U growth is baseline; probability of a double dip is now 40%; and a L shaped near depression is possible in US/Eurozone/Japan.”

If 2008 taught the food industry anything, it was that leaders must not wait for conclusive evidence before incorporating critical dimensions of preparation and urgency into their business. It taught us to be ready to discard plans, behaviors and processes that are outliving their purpose, replacing them with a contingency designed for a new economic scenario. And by all means, execute flawlessly -- tolerance for shooting and missing is extremely low.

Blueberry believes that the success with which organizations change to cycle through the current turmoil and uncertainty will distinguish the winners from the losers in 12-18 months from today, tops. Our advice to c-leaders:

• Develop plans that work with the flow of the tide rather than against it. Avoid denial.
• Maintain a close eye on economic tailwinds and headwinds that impact our industry -- specifically, your business. React quicker.
• Find the new white spaces of customer and cost saving opportunities. They are probably not where they once were.
• Keep three contingency plans at your fingertips. Design them now.

2008 caught our industry unprepared. Applying what was learned, leaders do not have to be caught again.

Your 2011 Strategies: Guiding Lights or Candles in the Wind?

“Strategy” is now considered a catch-all business term: Corporate, Operational, Acquisition, Growth, Brand, Supply Chain…a dozen or more adjectives may be used to describe a few of yours. Their development, planning and execution however often lead to piecemeal, conflicting activities by failing to meet three important criteria:

1. Relate to the company’s business model
2. Provide positive, measurable top and bottom line impact
3. Answer the question, “Where are we heading?”  

Your organization has no doubt spent plenty of resources and manpower to develop and implement its 2010 strategic plans. How are you as the leader measuring their effectiveness so far?

• Are they improving your organization’s performance?
• Are they changing the way decisions are made?
• Are they being judged successful, failures, or have some simply disappeared?
• Some of the facts and hurdles brought about by traditional planning methods include:
• Surprisingly few of those tasked to execute strategies that someone else developed understand them, feel committed or even connected to them.
• Their interpretation can be difficult, making successful execution almost impossible.
• The senior-most people in the organization usually decide which strategies are important. Decisions are sometimes based on best-guess, or limited information and data.
• Strategies intended to deliver the numbers are often just a set of activities with no meaningful financial impact--but continue nonetheless.
• Reviewing history to determine where the company came up short is often addressed by doubling efforts, adding or changing manpower, applying capital, designing new techniques or ramping-up various forms of support activity—but the underlying problems remain unidentified or unresolved.
• Strategies are often created in silos that burden other areas of the business. For example, expanding production capacity when there is a less-than-optimum sales process to fill it. Or acquiring a company but losing market share by failing to integrate properly. Or a plan that improves customer fill-rates results in quality problems from time pressures on the production team.  

It’s no wonder executives agree that the rate of successful strategic execution and impact on the financials is astonishingly low. While many sound effective in theory, they may not meet the criteria listed at the beginning of this article. Their translation and execution could be difficult. They may drive the wrong activity for growing revenue or profit, creating burden and transferring costs to other areas of the organization. Most importantly, they may not uncover the obstacles to progress that remain hidden in your business.

Blueberry Business Group facilitates a thorough, repeatable strategic planning process which leads to successful outcomes. A few features:

• Before strategies are set, we undertake two critical steps in identifying areas of the organization to apply focus. Forces that have either been supporting or hindering progress come to light.
• A problem or opportunity statement gives each strategy a purpose that does not waiver because it is defendable with data.
• They are evaluated and then ranked for their impact on organizational performance. We recommend 3 and no more than 5 at any given time, and they are not calendar-based.
• Customer requirements and business goals are linked to every strategy.
• Each strategy must be SMART: Significant, Motivating, Attainable, Relevant, Tangible.
• Natural balance must be maintained throughout the set of primary and supporting activities that define the flow of the business.
• Associated metrics monitor progress and are integrated into the company’s scorecard. Efforts that have no impact can be stopped; efforts that do can be optimized.  

Food industry executives are thinking about their organization’s strategic moves and risks that respond to hopeful but troubled market conditions in 2011. Blueberry will work with you to develop a sustainable process that can be used in all future planning sessions to achieve better organizational performance.