By Paul C. Godfrey, Academic Advisor
I love to hike. There’s an interesting challenge that all hikers face as we ascend some lofty peak; we have to get through the foothills first. The problem is that the foothills hide the peak. Sometimes that view is so obscure that we lose our way. We lose our way when we look for the easiest and most convenient way, but what seems easy often makes our ultimate journey harder and longer. In what follows, I’ll discuss three powerful tools to help; having the right goal in the front of your mind, consulting a good map, and using the best compass available.
The Right Goal
Elihu Goldratt changed the world of operations management with his book The Goal. The protagonist, Alex, must improve productivity at one of his company’s production facilities in order to save the plant. Alex crosses paths with one of his old college professors, Jonah, who spends the book tutoring Alex on how to save the plant. Alex sees problems with inputs, throughputs, and all sorts of efficiency issues around the plant. Jonah first helps by helping him see the real goal. Business isn’t about making products; it’s about earning profits.
Too many managers focus on revenue, not profit. The challenge of the foothills is to meet that quarterly revenue target. That target isn’t bad per se, but revenue goals often encourage employees to go for the revenue instead of focusing on profit. The ongoing challenges faced by Wells Fargo stemmed from a culture that rewarded a false focus on revenue (new accounts) rather than profitable and sustainable customer relationships. Employees stepped over a proverbial dollar of profit to pick up a dime of revenue.
Bottom line: Banking isn’t just about growing revenue; it’s about growing profits over both the short and long term. Smart leaders learn, and then teach others, how to avoid quick sales and revenue that doesn’t generate long-term profits for the bank.
A Good Map
If the destination or goal is profit, then the map is strategy. Your strategy isn’t to turn a profit, your strategy is a set of coordinated actions that help you do just that. The basic question of strategy is “how do we create value for our customers or clients?” Businesses create value in one of two ways: saving customers money or providing them with products or services they can’t get anywhere else.
Your commercial clients pursuing cost leadership strategies will tend to shrink their own margins in times of inflation and supply chain uncertainty in order to keep long-term profitable relationships with their own customers. Those relying on differentiated or unique products won’t face price pressures, but they will see more disruption from what will be a several-year process of reconfiguring global supply chains. Your bank may need to tailor product offerings and relationship management practices to ensure continued growth among your commercial clients.
Bottom line: Plan for a future that not only preserves your strategy but enhances it. If you compete on cost and convenience, find new ways to capture volume from customers looking to cut their own costs. If quality, dependability, brand, or some other difference maker drives your business, tread lightly and make sure you meet the needs of your most demanding customers. If you can satisfy them, profits will follow.
The Compass
Compasses and maps go together; having one but not the other doesn’t work. Direction and location fit hand in glove for a hiker. Your business compass is the set of shared values that holds your coalition of stakeholders together. Values underlie strategy and enliven it. Values allow you to make long-term investments that drive down costs or create unique differentiation for customers. Values give strategies time to mature.
Be clear about the core values you share with each important stakeholder group. Profitable growth in this tough environment isn’t about letting one set of values trump the others, it’s about finding balance. Your core, shared values with each stakeholder group provide a set of guardrails for you as you climb the hills just ahead. They don’t necessarily tell you which part of the trail to take, but they will help you see where not to go.
Climbing the foothills is always a challenge, and I’ve gotten off track many a time. As you focus on profitably in an uncertain environment, in a way that leverages your core strategic advantages, and preserves your commitment to core values, you’ll navigate the foothills pretty well. Remember, though, that once you’re out of the foothills, the big mountain is yet to come. More challenges, yes, but more beauty and greater payoff as well.