Diversification
Shoemaker, stick to your last!”
The old cliché is still sound advice. The less diverse a business, the more manageable it is. Simplicity makes for clarity. People can understand their own job and see its relationship to results and to the performance of the whole. Efforts will tend to be concentrated. Expectations can be defined, and results can easily be appraised and measured. The less complex a business is, the fewer things can go wrong. And the more complex a business is, the more difficult it is to figure out what went wrong and to take the right remedial action. Complexity created problems of communications. The more complex a business, the more layers of management, the more forms and procedures, the more meetings, and the moiré delays in making decisions.
There are only two ways in which diversity can be harmonized into unity. A business can be highly diversified and yet have fundamental unity if its business and technologies, its products and product lines, and its activities are embraced within the unity of a common market. And a business can be highly diversified and have fundamental unity if its businesses, its markets, its product and product lines, and its activities are held together in a common technology.
Being the Wrong Size
A business that is the wrong size is a business that does not have the niche to survive and prosper.
Being the wrong size is a chronic, debilitating, wasting – and a very common – disease. Being the wrong size is curable in the majority of cases. But the cure is neither easy nor pleasant. The symptoms are clear and are always the same. In a business that is the wrong size, there is always one area, activity, function, or effort – or at most a very few – that is out of all proportion and hypertrophied. This area has to be so big, requires so much effort, and imposes so much cost on the business as to make economic performance and results impossible. The old American Motors furnishes the example. American Motors announced successive plans to aggressively recruit new and strong dealers and push up its sales. In order to obtain the sales volume that would have given the business a viable size, the expenses that made the business non viable had to be increased. And this is precisely what the business nonviable had to be increased. And this is precisely what the business could not afford.
The most rewarding strategy to come to grips with the problem is to attempt to change the character of the business. A business that is the wrong size is a business that does not have the right niche to survive and prosper. A comparison between American Motors and Volkswagen shows the difference between being the wrong size as a result of lack of distinction, and being the right size by occupying a distinct niche.
Eliminating Cost Centers
Would the roof cave in if we stopped doing this work altogether?
No matter how well a business prevents cost inflation, it will still have to cut costs. This is because businesses are like people, and people often get sick no matter how carefully they exercise, control their diet, and avoid substance abuse. There is thus always the need for cost cutting. To start cost cutting, management usually asks: “How can we make this operation more efficient?” it is the wrong question. The question should be: “Would the roof cave in if e stopped doing this work altogether?” And if the answer is “probably not,” one eliminates the operation. It is always amazing how many of the things we do will never be missed. But businesses that actually succeed in cutting cists don’t wait until they have to cut costs. They build cost-cutting into normal operations. They build into their routine operations organized abandonment. Otherwise, eliminating activities and operations runs into extreme political resistance.
Making Cost-Control Permanent
Cost control is not a matter of cost cutting but of cost prevention.
What matters is not really the method. It is the realization that the cost-effectiveness of an activity depends on the way it is being structured. It depends heavily on accepting the premise that cost control is nor a matter of cost cutting but of cost prevention. And costs never drift down, so cost prevention is a never-ending task. No matter how well structured the organization, its cost-effectiveness needs to be looked at again and again. No matter how carefully it controls its costs, its activities and processes need to be put on trial for their lives every few years.
This process also ensures that the entire workforce embraces and accepts cost control. It should actually see it as an opportunity and not a threat. If cost control is seen as cost cutting, the workforce will see it as an opportunity and not a threat. if cost control is seen as cost cutting, the workforce will see it as a job threat and will refuse to support it. But if cost control is seen and practiced as cost prevention, then the workforce will actually see it as an opportunity, or at the very least it will support the cost control for the sake of better and more secure jobs.