Editor's Note

We remember a cartoon of a gentleman jumping off the Empire State Building. As he passed the 19th floor, his associate in business saw him and screamed, and he yelled back, “Don't worry, so far so good.”

Now, every time we hear people say: “Don't worry, so far so good,” that cartoon comes streaming into our minds. We think a key question in the mind of many executives is: How can we avoid “hitting the pavement?”

Almost every organization of significant size practices cost control. And most CEOs and CFOs proclaim (or silently believe) they are prepared for the sharpest possible economic setback past experience could lead them to expect.

Simply put, the implicit assumption is profit margins in various operating units are sufficiently high and could weather an economic storm if sales dropped, say, 20%, 30%, 40% and perhaps even higher.

Yet all the available evidence indicates when significant downturns suddenly occur, most executives engage in hasty hatchet work or "amputation before diagnosis" to stop the flow of red ink.

This article, in essence, demonstrates why effective cost control requires continuous, systematic and purposeful abandonment of the obsolete and the unproductive.

Please Note:

We are offering a Drucker Master Class Day (March 30), which will discuss in more depth the points made in this article…Plus, the program will relate  Drucker's four-step approach to Leading/Mastering Change to the need for all organizations to begin to take action against what appears to be unfolding – a near-certain turbulent economy.

Businesses cannot wait for public policy to be enacted. So what options do companies have nowadays? There are two broad alternatives: cutting costs and/or re-strategizing for growing revenues.

Drucker Master Class Day will demonstrate why Drucker's approach to Leading/Mastering Change enables executives to systematically and correctly carry-out permanent cost-cutting and re-strategizing for growing customers and revenues.

Reducing Costs In A State Of Panic Is Rarely Effective

Worse, when the panic mode prevails, future performance capacity is simultaneously abandoned with result-less activities, projects, and businesses because of the failure or inability to distinguish between muscle (performance capacity) and fat (non-productive assets).

By working systematically on directing efforts and resources toward opportunity and results when things are good maximizes the productivity of the organization and enables it to survive and thrive even in worst-case scenarios.

Profitability, observed Drucker, comes from exploiting opportunity…

… One cannot exploit opportunity if productive resources – and especially the scarce resource of high performing people – "are committed to keeping yesterday alive a little longer, to defend the outworn, outgrown, obsolete, and to making alibis for the unproductive and the things that should have worked but did not…"

The Need To Constantly Shrink To Grow

A fruit tree grows stronger and fuller when it's pruned periodically. In a long out of print book entitled The Folklore of Management, Clarence B. Randall, a retired President of Inland Steel, expressed this thought most elegantly:

The Message Is Clear

Every enterprise, business, or nonbusiness public-service institution, must systematically and constantly slough off the unproductive and the obsolete in order to devote more resources to growing opportunities.

Every organization is likely to be loaded down with yesterday's promises. These include activities and programs that no longer contribute; the ventures that looked so enticing when started but now, five years later, are still unproductive.

It's true: many organizations (even those that consider themselves extremely successful) are guilty of continuously allocating resources out of habit, tradition and just plain inertia.

Paraphrasing Drucker: "Even the mightiest companies eventually get into trouble, if it has not worked on concentrating resources on what it does exceptionally well and fails to abandon or re-strategize activities, programs, and businesses that make the total business vulnerable… impede its full effectiveness… and holds down its performance and profitability."

Effective Cost Control Requires Continuous Abandonment

… Maximizing opportunities is, therefore, the principal road to a high effort/result ratio and with it to cost control and low costs."

One truly effective way to cut costs is to cut out an activity or program entirely.

If our economy goes into a tailspin many organizations will inevitably resort to "hasty hatchet work." Drucker called this "amputation without diagnosis."

To try to reduce costs, according to Drucker, is rarely effective. There is little point in trying to do cheaply which should not be done at all.

By working systematically on directing efforts and resources toward opportunities and results maximizes the wealth-producing capacity of an organization.

In short, abandoning ongoing efforts to make room for concentrating on the things that do work… the things that produce results… the things that improve the organization's ability to perform is the best form of cost control.

But make no mistake: this is easy to say; but hard as nails to do. Distinguishing among today's breadwinners, tomorrow's breadwinners, and yesterday's breadwinners is never easy.

But when executives are equipped with the right methodologies, the task is made easier.

To Reiterate

Abandonment of low-yield programs and activities is the only sure-fire way to reduce costs and increase profitability.

Once more: Every organization must be able to move scarce and expensive resources – especially first-rate people – from areas of low productivity and non-results to areas of opportunities for achievement and contribution.

This requires the ability to stop doing what wastes resources rather than maximizes them.

More Advice About Abandonment From Drucker

If changes are needed and the people in charge of an underperforming business unit fail to make the needed changes, it may be time to change the people.

Take-home for executives: What do you have to abandon to create first-rate resources – competent people and sufficient monies – for building on identified strengths and to create the new and different (i.e., innovation)?

To Summarize

The best therapy for any organization – from the point of view of performance – is to purge itself of marginal mediocrities.

Every organization needs to know how it performs. The most important thing is to find out what the organization does exceedingly well so it can do more of it. Abandoning what does not perform enables the organizations to "feed the opportunities and starve the problems."

(At our Drucker Master Class Day (March 30) a world-famous Drucker authority explains a methodology for making this determination).

In Conclusion

Systematic sloughing off of yesterday frees energies and resources.  It makes available the people and funds required for new things and/or to concentrate on building on success, strengthening/expanding what does work.

The best rule according to Peter F. Drucker and many others is to put your efforts into your successes. You will get maximum long-term results.

Indeed, observed Drucker, "When you have strong performance it is the very time to ask,' Can we set an even higher standard?"

By freeing resources, greater efforts can be concentrated on promoting more frequent usage of the product/service among current customers… creating new customers for the product by expanding the market… and in technology-based organizations finding new uses for the technology (e.g., home alarm systems technology companies expanded into health monitoring devices for senior citizens using existing their existing technology).

No organization (businesses, governments, not-for-profits, nations) has infinite resources. This reality seems to have been forgotten or never learned by many people now in influential positions.

Perhaps every organization needs a VP in charge of abandoning things that never worked, the things that have outlived their usefulness and their capacity to contribute, the things that build managerial egos (e.g., multimillion-dollar sales revenues but marginal profitability) instead of building superior customer value… and long-term growth in strategic market segments and impenetrable/well-fortified market positions.

Take-Home Message

Concentration and abandonment are opposite sides of the same coin. Examining habitual processes, and even all strategic business units or associated autonomous companies to determine whether they are still effective is a worthwhile exercise.

Abandonment should and can lead to concentrating efforts. Concentration is vital. But every organization must choose the right concentrations.

There are structured Drucker-Inspired methodologies for helping executives identify what should be abandoned… how to abandon… and where to concentrate efforts for strong, profitable growth (i.e. new opportunities and/or proven successes that need more attention).

These methodologies will be discussed in our Drucker Master Class Day program on March 30. Click here to view the brochure.