We all know that senior management likes to see a sales volume graph that is a smooth line sloping upwards from the lower left of the chart to the upper right. If the economy and the market are growing and the customer demand grows along with the economy and the competitors don’t change their product’s or price and the government does not change any of it regulations and none of the multitude of other demand affecting factors changes, it is possible that this utopian state can exist…for a little while. However any unanticipated change in any of the listed (or any of the large number of unlisted factors) can and will change the profile of the slope from its desired direction.
Senior management must then lead and decide if the change is just a normal process within the market cycle, an aberration in an otherwise stable situation, or a longer term portent of an ongoing decline. As with most management decisions and strategies, only time will tell.
If time shows that it is indeed either a part of the normal market cycle or an aberration in an otherwise stable market, then there is no problem. Sales improvement can and will continue. On the other hand, if sales do not improve and the downturn turns out to be part of a longer term economic, market, customer or competitive event then significant business issues will ensue.
I have long been an advocate of the axiom: The best way to generate a good bottom line is to start with a good top line. This only makes sense. The more good revenue you have, the easier it is to generate good earnings. Good revenue is defined as revenue that includes a business sustaining profit margin. However if revenue has fallen, and the cost structure has not followed suit, then earnings too must eventually fall.
Senior management, the market analysts and the stock market in general do not like it when earnings fall in a company. Like the sales and the earnings, the price of the stock will also fall. Soon the investors and stock holders will request that senior management take action to improve their investment’s stock price, or they will request that they get a new senior management team.
When sales are stagnant and costs are relatively high with respect to sales, there are usually two paths that management can choose from in trying to rectify the situation. They can try and cut costs in order to resize the business to be more in line with the new revenue levels and hence generate a reasonable profit on the new lower revenue levels; or they can try and embark on a growth strategy in order to drive the revenue levels back up to where the desired earnings can be generated with the current cost structure.
Several factors can influence which path management may decide to take. Is there a cyclic nature to the sales profile where downturns and following upturns are common? How deep is the downturn? How prolonged is it? Is it industry wide? Is it part of a greater economic event? The answers to all of these questions, and many others can influence management’s decisions and responses to the reduced sales levels.
The general response to a sales downturn is to refocus on sales, but also to begin reducing costs. While layoffs are painful and take their toll on both the employees and the company, they do invariably succeed in resizing the company’s cost structure to be more in line with its current revenue levels.
This is cold. This is hard. It is also the truth. If we are to assume that the company must survive in the face of a prolonged reduction in sales, then this is in general the selected way to assure that a business is moved back into a profitable state as quickly as possible. Focusing on sales while reducing costs will eventually generate the earnings that a company needs for continued operation.
However some businesses decide that they may not want to adjust their cost structures in response to a downturn in sales. There can be any number of reasons for this. They may decide that the downturn is only seasonal, or will not be prolonged and sales will recover. They may decide that they were understaffed prior to the downturn and hence are right sized for the reduced sales levels. They may be culturally averse to the separating of employees. Regardless, they may choose to embark on a sales growth strategy as the solution to a sales downturn and the accompanying earnings and profitability issues.
While sales growth strategies are laudable approaches to a reduced revenue / high cost base issue, for the most part they generally prove unsuccessful. This again is directly due to the fact that sales levels have already fallen. Something must be changed in order to get sales levels to increase. This new event can take the form of adding additional sales personnel to address and sell to a larger number of customers, modifying the product offering to make it more appealing to the market, increasing marketing programs and promotions in an effort to generate more demand in the market, or a number of other modifications to the business equation.
The point here is that all of these and many of the other sales improvement modifications require that incremental investment and cost be put into the business in an effort to drive more sales out of it. Adding sales people, modifying or redeveloping the product, creating and implementing marketing programs and promotions, reducing prices, etc all take incremental investment and increase costs.
That means that even if you were successful and found a way to drive sales back up to the previous levels where they sustained the previous cost levels, the very act of driving the sales back up increased the cost basis. That means that you cannot be satisfied with just getting back to the sales levels you were at, in order to maintain the desired profitability levels, you must drive sales to levels above their previous amounts.
This too could be a good plan except for the fact that the market like nature, abhors a vacuum. There are relatively few “green field” opportunities where growth and market share can easily be obtained. Unless the overall size of the market is growing, it usually means that new business must be taken at the expense of another market competitor.
Obviously no one likes to lose customers and market share.
Market research has shown that in general it is five times easier to sell to existing customers than it is to sell to anyone else. This makes sense as you would suspect that if a customer has already made a buying decision in your favor in the past, that they would probably be disposed to make a similar decision in the future. But in a market growth strategy you are not only trying to sell more to existing customers, you are trying to sell to new customers. Someone else’s customers.
Logic would show that if it is five times easier to sell to your own customers that it would be five times more difficult to sell to someone else’s customers. This logic does not bode well for a growth strategy.
Sales and business growth are always part of the objectives of any business. Sometimes however, businesses fall short of their sales and growth objectives. This can and does happen in even the most stable of markets. Leaders must actively recognize and anticipate what is occurring. If the change is cyclical or just an aberration, then normal business processes should continue. If it is judged that there are other forces in the market affecting sales and that recovery is not imminent or expected of its own accord, than action must be taken.
As always, the sooner that action can be taken, the less severe it usually needs to be. Increased sales focus or cost reduction activities taken in March or April will avoid the desperation and severity of actions that must be taken later in the year. Regardless of when actions are taken, the costs associated with a business must be in line with the profitability objectives and existing sales volumes of the business. To focus on just the growth component of business solution (or just the cost component for that matter) would be similar to trying to adjust both the volume and the tuning of your car’s radio by turning just one dial.