The Key to Growth

By Mike Myatt, Chief Strategy Officer, N2growth

I’m going to share something with you that you might not want to hear, and quite frankly, something that will likely send your CFO straight into apoplexy.  You don’t grow a business by shrinking it. The key to corporate growth is not to fall into decline; hopefully not by default, but certainly not by design. If your operating plan is one that involves constriction, contraction, shrinkage or retraction, you should note that this is not what your clients and prospects are looking for.

Do you think your clients will be impressed that you’re cutting staff, shrinking marketing budgets, eliminating service lines or any other item that they perceive as a limiting factor in your ability to help or add value? Know this: your clients and prospects will never see any form of bunker mentality as being beneficial to them. One of the great business myths is the theory of “remaining flat” – it simply is not possible. A business grows or shrinks – it gains ground on competitors, or loses ground to them - there is no third option.

Let me be clear that I’m not advocating for sloppy business practices…If you’re in a business that you shouldn’t be in, get out. If you are spending improperly, correct the errors. However don’t just take out the chainsaw because you can’t come up with the right solution. In the text below I’ll examine the two areas most often incorrectly addressed when executives look at cutting-back – marketing and headcount:

Marketing
Great CEOs know how to generate growth during even the worst of economies. If you want grow your business during tough economic times, simply increase your marketing expenditures. If you’re the short-sighted CEO who cuts back on marketing, branding, and advertising budgets in an attempt to reduce costs, shame on you…Top CEOs recognize that economic slow-downs are not all doom-and-gloom. In fact, the smartest executives understand that swimming upstream against the conventional wisdom of the risk adverse can actually create significant opportunities for growth. By making heavy operating investments into marketing, advertising, business development, and sales initiatives, the aggressive enterprise can create significant competitive separation during a time when many are pulling back on such expenditures. 

Let me start by asking a question with the intent of pointing out the obvious…What better time could there possibly be to ramp-up sales and marketing investments than when your competition is slashing costs and going into hibernation? The answer is, there couldn’t be a better opportunity to increase marketshare, sales penetration, and brand equity than to exploit the flawed business logic of timid competitors. The fallacious thinking which underpins some of the slash-and-burn management tactics that tend to get traction during economic downturns can ultimately devastate a business that adopts a bunker mentality.

If you doubt my logic, all you have to do is look at the research and historical data supporting my conclusions. McGraw-Hill Research assessed 600 companies across 16 different industry categories analyzing their advertising expenditures during the recessionary periods of the early 80’s. The results of the research showed that companies who maintained or increased their advertising budgets during recessions demonstrated significantly higher growth in revenue and brand equity, both during the recession, and for the following three years, when contrasted with competitors that eliminated or decreased marketing, advertising, and branding expenditures. Another study by the Center for Research & Development revealed that companies who aggressively advertised during a recession garnered almost 5 times the market share of their cautious competitors.

The research mentioned above is also validated by examining the historical marketing data for companies that thrived during the Great Depression. The reason that brands like Kellogg, Coca-Cola, Kodak, Campbell’s, and others survived those devastating economic times was their total commitment to continued marketing, advertising, and branding initiatives.

Don’t become a CEO who sacrifices long-term shareholder equity considerations for short-term financial benefits. Because Wall St. often rewards cost cutting measures with a temporary bump in stock price, fiscally conservative CEOs tend to focus on short-term benefits for all the wrong reasons. The smart CEOs realize that cost-cutting does not constitute a sustainable business model, and will therefore forego temporary incremental moves in lieu of long-term, disruptive moves. This more aggressive strategy will ultimately reap more significant rewards from the market when the analysts realize the company is positioning itself to exploit current market disequilibrium while favorably positioning itself for the coming growth cycle. This thinking most definitely applies to your marketing outlook.

The reality is that when Company “A” cuts back on marketing initiatives and Company “B” increases marketing initiatives, Company “B” will take marketshare from Company “A”. As noted above, history has shown us that recessions create new brand leaders as aggressive companies are creating their future while conservative companies attempt to protect their future. Smart CEOs, while certainly aware of risk, spend considerably more time managing opportunities than they do risk.

Headcount Reduction
Workforce reduction is not an operating strategy…Regrettably, tough economic times are often the precursor for ushering in massive rounds of corporate downsizing, rightsizing, layoffs, corporate restructurings and the like. Reducing headcount in an economic downturn is almost a Pavlovian response for many executives. It’s as if workforce reduction is priority number one in some corporate operating rule book. Here’s a news flash…in the 212 pages of my book “Leadership Matters…The CEO Survival Manual,” nowhere do I espouse an unplanned mass reduction in labor as a brilliant business move.

Let me state this as simply as I can…a business should always be rightsized, or better yet, it should always be optimized. If you find yourself carrying too many employees such that you have to eliminate positions to manage cash flow, then your operating plan was flawed to begin with. In a keynote address last year I made my point very clear when I stated: “Managing revenue risk through workforce reduction is simply a sign of poor executive leadership. If an employee is a valued asset one day, and somehow expendable the next day, then I question how valuable they were to begin with.”

If you can layoff large groups of employees, then I question your need for them in the first place. Irrational exuberance and optimism on the part of executive leadership is not viable justification to go on a hiring binge. The thought that people are simply expendable resources constitutes flawed business logic. Good hires should be sustainable hires.

The bottom line is that as a CEO you never want to be too far ahead, nor too far behind the hiring curve. So the obvious question is this: how do you know if the size of your workforce is optimized? You rightsize all the time…My CEO clients have their CXOs justify headcount on a regular basis…They keep them on a short leash to avoid shortfalls or bulges in workforce size. I can already hear the naysayers complaining about not having time for this level of employee evaluation. Oddly enough, these are the same executives that find themselves making massive unplanned cuts in head count because they weren’t proactive in their approach to begin with.

There are any number of financial and non-financial metrics that can be assessed to evaluate whether or not the depth and breadth of your workforce is optimized. Each organization is different, and its not even so important which metrics are used, just that some logical standard is put in place. Whether it be something as simple as revenue per employee, or a complex formulaic approach to contribution margin, measurement needs to occur much more frequently than is the case in most corporations today. The moral of the story is this…Any idiot can grow a workforce or shrink a workforce, but it takes great executive leadership to optimize a workforce.

So my question to you is this: Now that we’ve rolled into Q2, what are you specifically going to do for the balance of 2010 to better serve your clients, to continue acquiring and developing talent, to build your brand, and to grow your business? General George C. Patton said it best: “Never defend, always attack.”