Are You Funding Problems or Solutions?

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Posted: 01/27/2017

It's a classic problem. Most senior-level executives have, at one time or another, been forced to decide whether or not to abandon a venture or project which seemed so promising when first proposed.

The story is almost always the same. A new venture successfully launches a new product. It grows fast with respect to sales and profits, which leads to rosy forecasts and gains much media attention. 

Then, without warning, it suddenly becomes awash in red ink. 

Lack of cash, inability to raise the capital needed for expansion, runaway expenses, bloated inventories, and overdue receivables always seem to be the major afflictions. 

The telltale symptom usually presents itself as a “cash flow problem.” However, in most instances, the venture is experiencing a “cash flow consequence.”

Stated differently: Inadequate cash flow is a symptom. What's the cause?

It could be a pricing problem, lack of salable products, or inadequate or wrong distributive channels. It could be poor financial planning, that is, a lack of financial foresight that would have prepared the organization for rapid growth. 

It could be a failure to craft and implement a unique selling proposition, an irrational product line, inadequate customer service, or poor product design leading to out-of-control field sales costs.

But quite typically, savvy investors or established companies in the market look for the "root cause" of these afflictions. They know they are "symptoms" of a deeper, underlying problem. 

Giving an organization more cash to make up for the shortfall, without diagnosing the reasons for the deficit, can be called “funding the problem.”

If no realistic solutions are offered, abandonment is the only choice.

However, in rare instances, the root causes of the problem are identified. If needed corrections can be made to make the company/venture profitable, then “funding solutions” could be a wise decision when the return on the additional invested capital is attractive.

Everyone agrees with this. It makes great sense. Plenty of yo-yo nods when this is explained. Yet reality is a different story. Pulling the plug is never easy.

Abandonment Is Not Loss; It Is Opportunity

Purposeful abandonment frees up valuable resources (i.e., people and monies) to concentrate on what is working and will, in all likelihood, significantly improve profitability through healthy growth.

Healthy growth is equivalent to muscle (i.e., improved performance capacity); unhealthy growth can be thought of as obesity or fat. Build muscle and cut fat. Easy to say. Hard as nails to do.

But successful executives and organizations understand this. Through disciplined, relentless practice continuously improve productivity by systematic abandonment and asset re-allocation.

Concentration, Concentration, Concentration

The principle of concentration is arguably the most violated discipline of management.

Get rid of the fat; focus on building muscle through focused attention or concentration on the smallest number of activities that produce the preponderance (i.e., the majority) of results.

Said Drucker: "Economic results require managers concentrate their efforts on the smallest number of products, product lines, services, customers, markets, distributive channels, and-uses, and so on. 

Managers must minimize the amount of attention devoted to products, which produce primarily costs because, for instance, their volume is too small or too splintered…

Economic results require staff efforts be concentrated on the few activities that are capable of producing significant business results." 

How to Get Started in the Abandonment Process 

Drucker offers us some sage advice on this issue. He pointed out that effective executives never start out with what should be abandoned: "They start by thinking through what should be strengthened and built. They do not start by trying to save money. They start by trying to build performance."

After it's decided what should be strengthened, the process of deciding what should be abandoned begins.

Drucker's Prescription

Every organization, unless challenged, tends to gain weight; resources are allocated by habit, inertia, and tradition rather than by results. Reallocating resources from low-yield activities to high-yield activities produces the results required to survive and thrive in today's unpredictable, disruptive, rapidly arriving future. 

According to Drucker, organizations must practice “weight control” by implementing a continuous program of what he called “turnaround management.” In his book Post-Capitalist Society, he outlined three essentials turnaround management steps: 

(1) Abandon the things that do not work, the things that never worked; the things that have outlived their usefulness and their capacity to contribute;

(2) Concentrate on the things that work, the things that produce results, the things that improve the organization's ability to perform and; 

(3) Analyze the half-successes. Achieving more with less requires abandoning whatever does not perform and doing more of whatever does perform.

To regain and maintain continuously improving performance every institution—a nation, a business firm, a social-service agency, a hospital, a university, a labor union, a government agency—to regain and maintain continuously improving performance must always put into practice these three Drucker steps to increasing organizational productivity.

Resistance to Abandonment

Systematic abandonment of non-performing activities contains an irrefutable logic. Yet it is typically opposed in most organizations. In short, it's very hard to stop doing the unproductive.

Among the organizational foes of abandonment, Drucker mentioned the following: 

1. The passion to rescue those products that are getting old and getting into trouble.

2. The proclivity to do more effectively (i.e. continuously improve) what should not be done at all.

3. The tendency to believe that with a little more time, everything will succeed. (Nobody wants to admit failure.)

4. The propensity of functional specialists to take a one-dimensional view of the organization and to protect activities related to their function. 

John Flaherty, an authoritative Drucker disciple, observed: "All these resistance arguments are convenient rationalizations for postponing the inevitable or excuses for doing nothing." 

Drucker's take-home message: "Abandoning anything is difficult—but only for a fairly short spell… Six months after such efforts have been abandoned, everybody wonders: 'Why did it take us so long?'"

Complicating the Uncomplicated

In Michael Lewis's astonishing new book, The Undoing Project: A Friendship that Changed Our Minds, Daniel Kahneman (a Nobel Prize winner in economics) tells the following story:

"'A donkey placed equidistant from two bundles of hay… can't decide which bundle is closer to him, so dies of hunger.'"

The story continues with the original teller emphatically stating, "No donkey would do this; a donkey would just go at random to one or the other and eat… It's only when decisions are made by people that they get more complicated."

Kahneman, in a remarkable partnership with his collaborator Amos Tversky, studied why people make the same kinds of irrational mistakes over and over again. “We study natural stupidity,” Tversky once quipped. 

In decision-making, Kahneman found “certain flaws are easier to identify than amend.”

Drucker's pioneering work with respect to principles and practices of abandonment is strengthened when one understands the Kahneman/Tversky “behavioral nudges” that encourage executives to do the right thing without having to force them.

In future articles, we discuss the science and application of "nudges" derived from Kahneman/Tversky's pioneering work in psychology and behavioral economics that prompt people to make decisions consistent with their long-term productivity improvement goals.

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Posted: 01/27/2017

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