Today's Wall Street Journal wonders whether the current market can be sustainable. The reason: most of the companies have just resorted to the classic, "conventional wisdom" response during downturns: aggresively cutting costs seeking to show a "stronger" bottom line to stockholders.
The problem is -as WSJ points out- that companies' revenues have been also going down.
Companies are certainly facing the limits of downsizing, resizing, restructuring and reengineering -all the classic tools of what C.K. Prahalad called "bottom-line management"- in order to further squeeze their costs often at the expense of human and intellectual capital, quality of services and products -in short, value added to the clients-
Without revenue growth -the "top line" in the profit and loss statement-, as Prahalad put it in 1994 "downsizing, the equivalente of corporate anorexia, can make a company thinner: it doesn't necessarily make it healthier." (Prahalad, 1994, Page 11)
"Bottom-line management" is the default doctrine taught at most MBA schools and companies are increasingly looking toward its many and dangerous consequences.
Some concerned observers like Dirk Van Dijk, chief equity strategits at Zack Investment Research pointed out that "you cannot simply cut costs forever to have sustainable earnings. You need revenues to grow them over time" (Lauricella, WSJ, Page 1)
Which drives us back to the importance and scarcity of good "top-line management" and strategies nowadays.
As Prahalad said presciently back in 1998: "downsizing belatedly attempts to correct the mistakes of the past: it is not about creating the markets of the future" (Prahalad, 1998, Page 11)
Top-line management is focused on strategy, adding value to clients, reinventing industries and markets and competing for a place on the future.
As an example, as publishing and newpaper companies keep shrinking and shedding talented authors and journalists, Amazon and Google push ahead for e-books and online journalism and advertising, increasing their revenues and creating a booming new market with new rules: theirs.
Cutting costs can end in what a publishing executive described recently: "we cut our cocktail parties because after all the other cuts, we had not enough customers interested in attending to our book presentations".
How can we apply "top-line management" to our PII projects?
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References:
- Prahalad, C.K. & Hamel, G. (1994) Competing for the future. HBS
- Lauricella, T. (2009) Can Rally run without revenue? Investors wonder wether profits based on cost-cutting can long endure. Wall Street Journal
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