BUSINESS IMPROVEMENT SERIES:
Strategy 1 - What’s wrong with a short term focus when improving a business?
In our article Business Improvement Series: The Strategic Approach we promised a series of strategies to aid you in taking your business to the next level. To kick the series off we take a look closer at what’s wrong with a short term focus when it comes to improving business.
Quite often the first step people go to when they look to improve or turnaround a business is to cut costs or identify other immediate changes. They squeeze everything a little harder to achieve savings or better results that will have an immediate impact on the bottom line. For example:
- Reducing staffing levels
- Demanding increased productivity from staff
- Cutting back on marketing and advertising
- Reduce staff training
- Look for cheaper suppliers
- Discounting prices to boost sales
These changes can be superficial and produce only short term improvements to the bottom line. The most important questions to ask is how are these changes impacting on the long term success of the business?
- Reducing staffing levels or staff training could lead to a drop in customer service, annoying existing customers who eventually decide to patron your competition.
- Demanding increased productivity from staff through the implementation of KPIs without the appropriate consideration to the business culture or effective change management techniques can lead to the turnover of staff that may include highly talented future leaders.
- Cutting back or significantly changing marketing and advertising could lead to fewer potential customers finding out about your business, hurting future growth including replenishment of customer numbers that have gone to competitors.
- Engaging with cheaper suppliers could lead to quality issues for customers such as the products they purchased. It could also lead to quality issues for supplies into the business operations that may impact on efficiency/productivity that in turn leads to higher costs elsewhere in the business.
- Discounting prices to boost sales and improve cash flow in the short term can be a good move. However if that exercise just brings forward existing customers spending then the business is worse off in the longer term, with sales in future periods lower by the higher prices that customers would have paid if not for the discounting now. Further this can diminish stock levels that could impede the businesses ability to service customers in the immediate future after the sale.
A recent high profile example of this short term focus is Dick Smith Electronics. Venture Capitalist purchased the business from Woolworths in November 2012 for $20million. They embarked on a rapid change program that took the EBITDA of the business from $23m in 2013 to $71m in 2014. They then sold the business via an IPO just a year after acquiring it, making a profit of approximately $500m in the process. On face value an exceptional achievement in such a short period of time.
However the subsequent failure of the company two years after the sale demonstrates that the changes that were made to achieve the extraordinary turnaround in the short term results appears to have caused irreparable damage to the long term prospects of the business.
Therefore before jumping headlong into a business improvement process that could send you down the wrong track, pause and consider the long term strategic objectives of the business.
In our next instalment we will cover why thinking long term is important and outline a process to follow that will increase your chances of success.
Hanrick Curran has many years experience supporting SME business owners to improve their business performance. If you would like to review how your business is currently performing and discuss strategies that can have a significant impact on your business please contact your usual Hanrick Curran advisor or alternatively Robert Pitt on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.