Today, high energy prices and sluggish economies have put a damper on organizations globally.
The biggest problem they face is undercapitalization. Most organizations don’t have enough capital to sustain and accelerate their growth and profitability. Very often, they don’t have a written cash flow strategy.
They’re worried about bills and they concentrate their effort on that, at the expense of revenue generation. Increasingly, organizations are turning to internal cost savings including staff reductions.
The pitfalls of cost saving
This commonly accepted business practice tends to compel people to believe that they need to cut costs to improve revenue and profit, making expenses the focus of the business strategy, not revenue generation. This often leads management to make decisions that actually harm the organization.
Cost saving, by a reduction in spending is widely considered a virtue. Whenever revenue is flat or in decline for one or more accounting periods, management starts looking at the money going out and figuring out where they can scale back.
On the surface, this may seem like a reasonable reaction. It is, after all, what organizations are accustomed to doing when revenue suddenly decreases. Everyone knows that you can't spend more than you bring in—at least not for long—without severe consequences.
However, cutting indiscriminately or too deeply may severely hamper the ability to grow revenues. Profitable revenue to an organization is like oxygen; without it, the business is dead very quickly. You either make a profit or you don’t, and if you don’t make a profit, you won’t stay in business very long.
Penny-wise and pound-foolish
This conventional 'cost saving' business tactic calls to mind a British saying: "penny-wise and pound-foolish". The maxim refers to people who make foolish financial decisions; making decisions with small amounts of money (pennies) that end up making bad sense for affecting larger amounts of money (English pounds).
The best example of "penny-wise and pound-foolish" is the person who is always trying to locate the petrol station with the lowest petrol prices, but drives 20 minutes out of their way to save $0.05 per liter, or looking for the lowest petrol prices but buying a car with poor fuel economy. Penny-wise, but pound-foolish.
So what can this maxim teach us about business tactics? More than you might initially think especially if the management team doesn’t understand the difference between cutting costs and raising revenue.
Arbitrary cost reduction based on conventional business practices and rationale is no longer sufficient and risks cutting muscle as well as fat. If you’re an organization who’s facing tough times, the temptation is to reduce expenses by cutting indiscriminately.
Often people make serious blunders when trying to reduce costs. Here's what often happens: they grow frustrated with weak revenue, so they have a knee jerk reaction and jump into a cost-cutting frenzy, slashing spending on everything from letting staff go, to drastically reducing the marketing budget.
This is short-sighted because they are closing down their principal source of cash flow. In other words, they play defense. Organizations that choose to play defense and conduct business-as-usual often fail to look beyond the scope of their immediate financial results. This traditional approach is not sustainable. When organizations focus on cutting costs, they are actually not looking at what can be expanded upon.
To avoid these mistakes, organizations should consider a fundamentally different approach. In our view, vigilant generation of your revenue is a better road than cutting expenses, and it can result in substantial increases in profits. To thrive and flourish in harsh environments, senior executives must expand their awareness and formulate generative strategies for their organizations.
A need for innovation
The ability to develop and implement innovation is what sets surplus-creating organizations apart from ones that are barely scraping by. Innovation is a principal determinant of economic growth. In recent years, the capacity to innovate has become one of the most significant influences on economic performance.
Innovation is the key to your success no matter what your business may be. The minute you stop innovating is the minute you become irrelevant. A successful business innovation is not an end in itself, it’s everything that gets you there.
Innovation isn’t something you do once and then sit back and forget about it. Growing the organization is all about how we find distinctive market positions and sustainable advantages in a multitude of ways.
It's how we generate revenue where revenue hasn’t existed before. Transforming the organization is about operating beyond the goal of competing to actively seize new and different possibilities.
Being innovative demands a new way of being, agility and flexibility. How can you keep operating the way you do, with the same business procedures, structures, conventions and methodologies when the rate of change that envelopes your organization is so dramatic and so dynamic and speedy?
You must cultivate the skill and insight to prepare for a future that is rushing at you and your organization faster than ever before. You have to be willing to change the points of view and beliefs that keep you moored in conventional business practices or nothing will change in your business.
Instead of operating based on what has worked in the past, start generating in the realm of possibility. Give up the question: "how can I fix this?" Ask instead, "what can I do differently that would generate different possibilities?"
Can you feel the difference in the energy of those two approaches?
When you choose to ask the second question you are no longer constrained by previous successes. You are free to generate something different. As long as you are consumed by trying to do the same things better or committed to making what’s not working work, you will keep creating and operating from the same limited set of options.
To thrive consistently over the long haul requires discipline and a reliable strategy for dealing with new opportunities and unforeseen adversities. If you’re going to out-create and out-perform other organizations, you must choose to operate your organization differently.
If you would like to achieve financial sustainability with your organization in today’s environment, you need to become an insatiable innovator. You have to let go of the business-as-usual paradigm. When you move beyond that, a whole new universe opens up to you. Your power comes from your ability to choose.
5 tips for cultivating the skills of an innovator:
1. Be open and intensely curious about everything you encounter.
Insatiable curiosity is the key to innovation. If you have the awareness to know what is happening and where you are going, you will be able to generate something different.
2. Cultivate the courage to stand alone, even in the face of unfavorable consequences and be willing to be a nonconformist.
You must be willing to let go of all the timeworn conventional business models that keep your business from being remarkable. Instead of operating based on what has worked in the past, start generating in the realm of possibility. Give up the question, "How can I fix this?" Ask instead, "What can I do differently that would generate different possibilities?"
3. Expand your awareness and be persistent and relentless in your search for insight, inspiration and ideas.
Continuously ask yourself these questions. What else is possible? What can I do to run this business better? What can I do to grow this organization? What can I do to transform this organization? What processes are we using to deal with change? What could happen? What will people need and want in ten years?”
4. Challenge yourself to do something different.
Change your focus. Let go of the fixed points of view, assumptions and conclusions that are based on your past experience. Stretch your perception beyond reality to possibility. It’s time to abandon the thinking that has had you anchored firmly to the past and to shift your focus to the future, with enthusiasm, motivation and imagination.
5. Cultivate a full-spectrum perspective.
Stop functioning from a linear perspective. Start looking at things from different standpoints and be willing to embrace and deal with complex and diverse ideas.