Translating Costing into a Winning Strategy
I had the good fortune of spending some time with one of our customers recently and the story they told me reminded me of a recently published book I've just finished reading about the evolution of the strategy called Lords of Strategy by Walter Keichel III. The book details the evolution of competitive strategy by following the history of the leading innovators including the strategy consulting firms such as Boston Consulting Group, Bain and McKinsey. The author describes how back in the late ‘70's most of the work done by pioneer strategy consulting firms such as Boston Consulting Group and Bain were in the area of cost analysis, specifically the fully loaded costs that included expenses associated with all the end-to-end processes required to deliver the products to the customer. He goes on to describe that at that time that, without exception, most of their clients didn't understand their costs which made it impossible to be certain which products were making and losing money. Without this knowledge, executives and managers are unable to make important decisions, including decisions about strategy. Sadly, the author notes how surprised one of his interviewees was about the number of times these firms still had to provide cost analysis today. Linking costs to competitive strategy is one of the key insights identified in the evolution of strategy because the odds are pretty good that a competitor may not have this kind of intelligence.
This was exactly how our customer described their strategy: we're focused on eliminating waste and knowing at what cost we can compete profitably in any of the market segments we're engaged in. To hear them describe it, it really does sound simple. On the one hand, they are focusing their efforts internally using lean principles to eliminate waste. Many times lean efforts can take a while to show up on the bottom line and then it's difficult to correlate the initiative with the results. This customer has accelerated their profit realization by using their deep understanding of their costs to laser focus their lean efforts. It allows them to quickly identify the opportunity to eliminate waste and reduces the decision to act down to a matter of seconds. More important, they know the outcome even before they've implemented it so that they can act quickly and with the supreme confidence of a strategy management consultant who's done this many times before. They've translated their cost knowledge into a deep understanding of the economics of their business and how they can play to win by improving their operations.
Armed with this knowledge they've also examined the competitive landscape. Transportation costs are one of the key drivers in their business so a regional focus was one of the keys to their market segmentation analysis. The other key element was knowing their product costs beyond just standard costs or gross margins. This allowed them price with confidence in a challenging market. Once again, the confidence to act is derived from their deep understanding of their operations and the costs that drive them. They have used this knowledge to create a competitive advantage for their company. The results are astounding. In arguably one of the toughest economic climates since the Great Depression in one of the hardest hit industries, they've managed to increase market share and boost their bottom line significantly.
Top-line growth isn't an option for many companies. Elaborate strategies can be risky. Sometimes it's the simple ideas that carry the day. It does require effort and commitment, but the payoff can be substantial. So much so, that you probably wouldn't believe it when you heard it. However, the evidence is there and it probably takes less time than you think. This customer was able to identify in a single decision, made in seconds, which virtually paid for the initiative within a few months after they started. There's never a better time than right now to start this journey to a more confident strategy.