efficiency

As a retired HP person, I have been reflecting on ‘cutting your way to greatness’. There are not too many examples of success. Let’s look at one example, then suggest a more balanced approach.

Yahoo

Consider Marissa Mayer’s term at Yahoo. Consider the various stakeholders and whether it was good for each of them:

• Customers: No. The number of customers went down. Offers became more complex. And of course every single one of the 3 billion Yahoo accounts got hacked.
• Partners, whether advertising partners or others: No. The various mergers and splits were difficult to deal with, compared to relatively stable situations at Google and elsewhere.
• Employees: No. Lots of cuts.
• Shareholders: Yes, yes, yes! While revenue and EBITDA (Earnings Before Interest Taxes, Depreciation and Amortisation) declined in 2013, 2014 and 2015, the Yahoo share price went up 151% under Mayer’s tenure. That’s quite a performance.

This is what I was taught at INSEAD

Digital Equipment Corporation put me through the International Advanced Management Program. I remember the very first lecture as quite surprising. The professor asked the class, “What is the purpose of a company?” We got to debate the topic for a while. Then he became quite insistent, and his message was clear: “The sole purpose of a company is to provide a return to its shareholders.” I don’t think anyone agreed with him. We were young and innocent. However, if you believe this, Marissa Mayer is a genius. So is Meg Whitman.

Is this what happens when activist investors join your board?

The term ‘activist investor’ refers to people who don’t believe a company is doing enough for its shareholders. Based on what I have seen in various companies, and am observing close to home where an activist has joined the Nestlé board, your reaction to activist investors depends on who you are. If you are a shareholder or potential shareholder, happy days are probably ahead. If you are a customer, partner or employee, you will live in paranoia, and should consider fleeing the company. But at least the shareholders will be happy.

Of course all companies need to cut from time to time

All companies have lots of investment ideas. More than they can fund. In most cases, simply going to shareholders to ask for more money is not a worthwhile option. Companies have to reduce their spending on existing people, buildings or what they pay suppliers so they have enough money to invest in their new ideas. There are no other sources of cash within a company, putting aside one-time accounting changes. Ideally, you need to work out what is important to customers first. Maintain or increase spending in areas they find important. Cut in areas they don’t care about. Just to pick one example; customers could not care less where you put your headquarters building. If it is in an expensive place, consider putting it somewhere else if you need to find money to invest. Similarly, if you have a call center, its location is invisible to customers. They also don’t care about things like your credit card approval process, as long as it works. It should therefore cost as little as possible.

Resist the temptation of trying to appear to be fair by giving all departments the same reduction target. Customers care about some, and not about others.

Clarity for employees

You owe it to your teams to tell them where you are investing and where you will be cutting. Be clear that the attractive career development opportunities are in the investment areas. People will not get the security or rewards they may expect elsewhere. You owe them the clarity, even if you believe that shareholders are all that matters.

Feel free to disagree below, or by writing to me at mfg@customerstrategy.net.