No pain, no gain - strategic planning and management

Chief Executive, The, March, 1997 by Armand V. Feigenbaum

It's sometimes possible to confuse good management with a good year. But a true corporate winner is the firm that builds the competitive muscle to succeed in spite of a favorable business climate - not because of one.

Jockeying for position in an increasingly competitive business environment, the successful companies of tomorrow will clearly be those that develop and implement business strategies that fit 1997 and beyond. Those who continue to cleave to the slash-and-burn fixes that defined past improvement initiatives will soon find themselves left in the dust.

Looking at the strong pacesetter companies, such as Tenneco, Union Pacific, and Cummins Engine, that have successfully emerged from the economic crucible of the 1990s with sustained and increasing profitability, two primary characteristics stand out. The first is a respect for and responsiveness to today's enormously savvy customer. The focus here is a corporate-wide concentration on serving the customer, with a simultaneous emphasis on continuing to fulfill growth and productivity objectives.

The second characteristic is an emphasis on relentlessly enhancing business efficiencies. This involves developing strong ongoing management processes that are effective in fair weather, and work equally well when the wind blows cold.

Bringing these two critical characteristics together creates a formula for success that encompasses the following: building customer satisfaction by meeting quality and price demands; achieving the operating cost leadership that makes this economically possible; inspiring the employee enthusiasm that will power both of the above; and developing close alliances with suppliers - all four, all the time.

THE FAILURE FACTOR

Adopting a rigorous, day-by-day design and distribution emphasis on visibly increasing product and service value should be a primary objective. In the current marketplace, consumers and industrial buyers place more emphasis on value and quality than ever. Furthermore, dissatisfied customers in today's brutally competitive market are apt to spread the word to colleagues and friends.

At General Systems, our studies of consumer buying patterns show that, on average, completely satisfied customers tell six others about the product or service they've bought; while dissatisfied buyers tell 22 others. Satisfied industrial buyers are seven to eight times more likely to buy again from that supplier than from its competitors.

The second key objective involves equally rigorous productivity improvement measures geared toward reducing what we call "quality failure costs," or the excessive costs to the company in fully meeting customer expectations. These costs are wide in scope, covering everything from the expense of responding to consumer complaints about defective products to sales lost as a result of dissatisfied consumers spreading the word to potential customers. Yet, despite 75 years of cost accounting, some companies still don't understand the real cost of failure and may not recognize the enormous profitability-increasing opportunities this area represents. For example, our data show that for many companies, the cost of delivering customer satisfaction can amount to as much as 25 percent of sales as compared to the 10 percent or less achieved by pacesetter corporations. Furthermore, in most cases, any reduction of these quality failure costs goes directly to bottom-line net operating income and simultaneously results in the kind of improved customer satisfaction and service that drives growth.

This cost-reduction method differs radically from the approach popularized in the early 1990s. The prevailing strategy then was an internal focus on enhancing productivity that translated to slash-and-burn tactics, which merely reshuffled customer problems from one department to another without solving them. Unless synchronized with specific improvements in the company's way of working, trying to cost-reduce yourself to business prosperity this way is shortsighted - a bit like embarking on a crash weight loss program without a fundamental improvement in lifestyle. The improvement usually doesn't stick, and before long you're back where you were.

Because we are in an era where a strong market can reward past performance for a while, there's a temptation "not to mess with success." When your organization is already an industry forerunner and has a full plate of projects underway, it can be a lot tougher to build incentive for improvement - which requires change - than it was a few years ago when the barbarians were clearly at the gates of many American companies. Yet, it is essential, even for those already in the lead, to establish a process for continual improvement, because, no matter who you are, once momentum is lost, it's difficult to get it back.

For example, just a short decade ago, economic experts were opining that Japanese industry - having taken a strong lead in building operating efficiencies and quality standards - would supplant America as the global industrial leader. But the country's corporate powerhouses rested too long on their laurels and these predictions did not come to pass. This example is an important lesson about what can happen frighteningly fast to business results when successful companies lose their momentum.