Revised version of Volume IX, Number 2
"Owing to past neglect, in the face of the plainest warnings, we have now entered upon a period of danger greater than has befallen Britain since the U-Boat campaign was crushed... The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to a close. In its place we are entering a period of consequences..."
- Winston Churchill, November 1936
Churchill spoke to the House of Commons in the aftermath of Germany's reoccupation of the Rhineland. All it would have taken at the time to force an immediate German retreat was a commitment by Britain to provide diplomatic support for a French counterattack. That commitment never came. The consequences would prove catastrophic.
HOW DOES IT HAPPEN?
Churchill's warning following Germany's march into the Rhineland may be an extreme example for a business letter about strategic management. Though the consequences of a failed business are serious to particular owners, employees, and communities, they are small relative to consequences impacting much of humankind. Nonetheless, businesses can be faced with crises brought about by prolonged periods of deteriorating performance, denial, wishful thinking and indecision. Such businesses must eventually confront the consequences of inaction. The consequences can be severe. The reasons for a company's inertia can be many.
- Refusal to rethink cherished beliefs, such as quality "costs too much" or that the only route to prosperity is to get bigger
- Failure to see dramatic changes in customers' perception of value
- Underestimating a renegade competitor that isn't playing by the rules
- Unwillingness to restructure or discontinue some major activity-- a division, product line or function-- despite clear evidence urging decisive action
- An aging chief executive or family patriarch who won't let go and facilitate the transition to a new generation
- Paralysis caused by dysfunctional relationships among executives and/or shareholders
Part One identifies symptoms of such businesses, dividing the quantitative warnings from the intangible signs. Part Two will present three case studies in which the companies were able to bring to quick ends their own eras of procrastination by mustering the will to act and thus avoid permanent damage.
"IN THE FACE OF THE PLAINEST WARNINGS"
Britain's procrastination could not be blamed on any lack of clear and timely data.
Intelligence reports were available, comprehensive, accurate and known at the highest levels of government. Sadly, the same is true of many troubled businesses. In fact, the quantitative symptoms are very recognizable and usually unmistakable.
One particular business was in an era of procrastination. Over four years competition had captured over $20 million in new orders from its leading customers. Interviews with many customers and industry sources uncovered some scary facts. The business was becoming more and more non-competitive while industry rules were changing. Over 80% of these orders were lost because of high prices, and the competitiveness gap was becoming huge. Actions recommended to management were tough and not what they wanted to hear. Unfortunately, profitability and cash flow still looked good, a not uncommon occurrence leading to a dangerously false sense of security and inaction. "Half-measures" and "soothing expedients" continued. In several more years the consequences hit in force, and by then, the price to be paid was painfully high.
- A healthy company does not give up market share-- certainly not without a very good, well thought-out reason.
- Sales growth without profit growth is a clear distress signal.
This picture in Exhibit 1 is classic and almost always present in businesses in trouble. Whether because of price cutting or rising manufacturing and marketing costs, the sales growth actually made things worse as the added volume hadn't come close to earning the cost of the incremental capital required. Alas, strategies to "grow our way out" fail much more often than not, and yet are typically the only alternative considered by managements mired in procrastination.
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- Gross profit margin is a critical measure of a company's competitiveness. It indicates how its products, quality, service, costs, and marketing effectiveness stack-up versus competition. Changing margins always signal something.
Small year-to-year declines can accumulate into something more threatening. The business in Exhibit 2 suffered a huge thirteen point decline, and its response could only be characterized as "half-measures" and "delays" - cutting marketing, product development or administrative costs rather than addressing the fundamental causes of what had become serious erosions of competitiveness.
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- Declining asset productivity is one of the "plainest warnings" of all and it often goes completely unnoticed.
The picture in Exhibit 3 shows an unmistakable era of procrastination in a business about to face very tough consequences. By the end of year 5, sales per dollar of investment had declined by one-third, coupled with a precipitous 75% drop in return on investment. The business was in a downward, self-liquidating spiral-- not earning the cost of capital, and thus no longer able to afford the investments needed to stay competitive. Ultimate consequences always include deteriorating operating cash flow, rapidly rising dept and an eventual liquidity crisis. In the case shown, tough medicine was the prescription - the business would have to reduce its scope and become more focused.
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THE INTANGIBLE SIGNS ARE EQUALLY AS IMPORTANT
Intangible warning signals are usually more difficult to see, but equally crucial.
Whatever the root cause this symptom is especially insidious when shortfalls in one year are followed by ratcheting down expectations for the next, and so forth. Such willingness to lower performance expectations and then tolerate failure to meet the reduced standards prolong the agony. The downward cycles must be stopped.
- Eras of procrastination are often characterized by repeated failures to meet sales and profit goals.
Procrastination can only be broken when management accepts responsibility for performance and stops blaming the economy, the competition, the government, the customers, the minority shareholders, the directors, the lawyers, the accountants, or the weather.
- Lack of accountability is most dangerous when it radiates from the front office.
A company's physical environment can provide clues, but the best insights come from the employees themselves. They usually see the true problems, who or what is not pulling its weight, where the resistance to change is, and what the true strengths and weaknesses of the company are. They are usually eager to talk to someone - anyone who will listen.
- Blindness, denial, and resistance to change at the top is a critical danger sign, and is usually easy to spot.
In such cases, a company's ability to act is extremely limited, and an era of procrastination will not come to an end until such issues are resolved.
- Management stalemates can occur when the CEO is at or beyond normal retirement age with no successor in sight, or if key positions are blocked by weak performers.
As almost immovable obstacles to solutions, these forces can perpetuate organizational paralysis, sometimes deliberately. They must be identified and confronted as part of a plan to bring an era of procrastination to a close.
- It does not take long to discover the existence of disruptive influences and hidden agendas.
Procrastinating top managements often do not listen to their chief financial officers and can even turn on them for not being "team" players as the numbers deteriorate. Beware CFO turnover.
- Lack of respect for the financial function is a characteristic of most businesses headed for trouble.
- The ignorance of IT as an integral component of business strategy and organizational design leads to organizational inefficiencies and a deteriorating competitive positioning.
Information technology is treated as a cost center rather than a tool for strategic advancement. Although vital management information is not readily available or inaccurate, badly needed investments are postponed indefinitely. Failure to evaluate the company's IT applications, including their strategic value, inevitably leads to a misallocation of resources.
EXECUTIVES ARE HUMAN
In a more perfect world, eras of procrastination would rarely, if ever, exist. After all, anticipating, even initiating change is the essence of good strategic management, and most top executives deep-down know that. Thus, it shouldn't take the threat or reality of a crisis to bring about positive change in a business. But people aren't perfect. When too close to a situation, otherwise intelligent and capable individuals are unfortunately very susceptible to hanging on too long to past successes in vain attempts to avoid the uncertainty and unanticipated pain of change.
The good news is that it is possible to cut short these destructive
eras and take decisive action while the cost is still small and
the accrued damage of delay relatively minor. Part Two of "Procrastination
and Consequences" will
examine three examples.