My experiences on the downside, the inevitable ‘dip’…are matched by those with enterprises that have plateaued or flat-lined after a prolonged, painful but usually very profitable uptick. Many famous folks have said it slightly different but the message is essentially the same: success hides a lot of mistakes!
I first encountered the phenomenon years ago while working for a large corporation that had just launched a new consumer brand. We had no competition, grew 40% a year and life was good. Very good! And then, how dare them, an equally capable competitor entered the market and our growth ‘normalized’ down to the 10% range.
Describing the aftermath as a rude awakening is an understatement! Our loose spending habits and inefficiencies, previously masked by extraordinary incremental growth, were now laid bare. Caught off guard, our performance went from a double digit pretax profit rate to a marginal performance in the short span of a year.
Heads up! Most businesses I’ve worked with have faced this cycle repeatedly…about every five to seven years. Whether dynamic growth is caused by economic expansion, extraordinary enterprise performance or both, when it hits, our initial tendency is to do all the things we have always done in order to keep up, but to do them longer and harder since they don’t seem to be working that well anymore. Hopefully when there is a ‘pause,’ we don’t dip, but instead plateau and seize the opportunity to recalibrate before the next growth spurt.
See if you can relate to a few real examples:
• A good sized regional retailer launched an innovative concept that was expected to increase revenues by at least 30%; expectations were exceeded from the first weekend the concept was advertised and the ‘burst’ lasted more than a year before revenues stabilized at the new higher level. What had worked well before the launch was now strained by the increase in customer traffic; there were long waits for on-sight credit applications (a tedious form to begin with), insufficient personnel to assist and worst of all, inadequate space for customers to sit and fill out paperwork.
The ‘plateau’ was the perfect opportunity to recalibrate and that’s exactly what the retailer did. Paperwork was simplified, software systems improved, employees retrained and customer waiting areas expanded and made more comfortable.
• A respected short run job shop was enticed into taking on production runs as its customers’ existing supply chains failed to meet increased demand. What a great ride— a bulging backlog, added equipment, overtime for all, ‘whatever it takes!’ No time to think about anything except deliveries. When the company finally caught up with demand it questioned why it hadn’t met its incremental profit expectations. No surprise; processes that had worked for short runs had impaired the profitability of production runs. Material purchases had not been scaled to achieve best price, inventories frequently were depleted resulting in lines down, production runs had been cut short to accommodate urgent customer requests and, lacking access to production equipment, maintenance procedures had been compromised resulting in breakdowns.
The company recalibrated. Purchasing, inventory and maintenance procedures were revised reflecting the new revenue cycle and a short run cell was created to handle urgent small quantity requests thereby allowing production runs to continue without interruption. Like the regional retailer…they were ready for the next ‘pop.’
Most CEOs know their problems as well as their solutions, but in a dynamic up cycle they often lack the resources and time to implement those solutions. Lesson learned: when the growth curve steadies, and before it re-accelerates, take a deep breath and recalibrate, it won’t be the last time!