Setting Goals When the World Turns Upside Down
March 14 2007 by Ram Charan
Goals are tied to how the business is positioned. In a complex and rapidly changing world, the nature of the goals as well as their magnitude may need to be radically different. Ann Moore, president of Time Inc., a unit of Time Warner, faced precisely that challenge as 2005 drew to a close. Ad pages for Time Warner’s flagship magazines, Fortune and Time, were decreasing and it wasn’t the typical cyclical decline. Many magazines and newspapers, as discussed earlier (pages 31-34) are facing a formidable new competitor: Google. Advertising revenue for business magazines like Forbes, BusinessWeek, and Fortune decreased significantly from their peaks. A gaping wound like that would require some dramatic cost cutting and downsizing, but would that be enough?
Within Moore’s portfolio of magazines, there is a wide variety of publications that are positioned in different consumer segments. But almost all of them are experiencing shifts in how consumers consume media and how advertisers are adjusting to the new mix of media, including which devices — PDAs, laptops, or television — will carry what content over what carriers — broadband, cable, or wireless. Each of these uncertainties will affect how each magazine is positioned. Will it remain totally print or will it have to develop a Web presence? Should it be exclusively Web-based? Market research can tell her what the current reality is but can do little to tell her what the future will look like. She will have to assess which magazines should get more funding, which should get less. There is no question that she will have to reduce overall costs, but what key assumptions will she make about the speed and magnitude of revenue declines? Where will she find new sources of revenue and what investments will they require? What kind of talent and money will it take to fund new sources of online revenue? As she cuts costs, how can she be sure that she’s not cutting potential sources of revenue growth?
The answers to those questions will have a critical influence on the choice of goals for Time Inc. Cost cutting as one goal is a foregone conclusion, although it has to be done in the right places, in the right way, and at the right time. But the more important goal, and the one that will be more difficult to set, is the growth of revenues, which means understanding the source of those revenues and the composition of them. It requires examining the new ways people are consuming media and working backward to find a way to increase revenues. Whatever goals Moore selects will carry risks, but failing to adjust the goals in the face of so much change is highly risky.
Not all change is so profound, but change is a fact of life, and leaders have to keep their eye on how it affects their goals. In January 2005, Dell was king of the PC hill, number one in worldwide market share. Dell’s robust business model — selling direct to market and made to order — and unmatched execution had powered a 20 percent gain in revenue in 2004 and bested Compaq, which had been laboring under the strain of the 2002 merger with Hewlett-Packard.
But as the calendar turned from December 2005 to January 2006, conditions had changed. Competition had picked up steam, the market growth was slower, and Dell had missed the consensus estimates of Wall Street twice in the previous four quarters. The rate of revenue growth had not matched expectations. Would Dell need to adjust its mix of margin and revenue goals? Would it need to reposition?
Three major changes had occurred in the competitive landscape. First, IBM had sold its PC business to Lenovo, a Chinese company that was moving fast to grow the PC and laptop business it bought from IBM with a new cost structure and a focus on enhancing the products’ aesthetics. Second, Lenovo had hired a key Dell executive who managed a critical part of Asia for Dell and who is an expert in supply chain management. Third, the conditions at archrival HP had changed radically. Mark Hurd had succeeded Carly Fiorina and had eliminated a major source of confusion by separating the PC business from the printer business. He had a clear focus about where his business was going. Equally important, he had hired a new leader with demonstrated skills in supply chain management and in the ability to rethink the landscape of consumers and resegment the market.
All those changes took place in the context of reduced rates of growth for PCs in different segments and in different ways. There was new uncertainty about consumer buying behavior as Apple continued to move ahead in aesthetics and innovation. Surely the goals for revenue growth, operating margin, and market share needed a closer look.
Even if the goals aren’t adjusted quickly to fit with the changing realities, you can adjust the rewards that are linked to them. In 1996 even the famously tough-minded Jack Welch recognized that changing external circumstances could result in missed goals despite the best efforts of everyone concerned. He set ambitious goals, but he empowered his executives to do what they needed to do in the face of changing circumstances to achieve the best possible outcomes for the business, even if they fell short of the agreed-upon goals. That year Gene Murphy, president of GE Aircraft Engines, missed his goal, yet Welch didn’t take him to task. Rather, he gave Murphy the largest bonus of any of the top executives and publicly praised him. The airline industry was going through an unexpected crisis and while it was true that Murphy missed his goal, he still beat the competition by a wide margin. It was unrealistic to think that in such a short time the goal could be restated and the compensation adjusted to reflect that. Instead, Welch dug into the cause and effect and took into account the changes in the external environment. He recognized that Murphy turned in a great performance amid the changing reality of the industry and that Murphy had earned his reward.
Ram Charan is the coauthor of the bestseller Execution and the author of What the CEO Wants You to Know and many other books. For Ram, the Monday-morning application of his ideas is the entire ball game and the reason why his teaching is valued at companies like General Electric, DuPont, Verizon, The Home Depot, KLM, Thomson Corporation, and many others. For more information about Ram Charan and his work, visit www.ram-charan.com.
The above is an excerpt from the book Know-How published by Crown Business;
Copyright © 2007 by Ram Charan