I recently came across an article in Chief Executive titled “opportunities for SMEs in the downturn”, which I thought would be a good read. I don’t know if it was good, but I was shocked by what I read. Although everything the author said was true, I was shocked at how the entire article focussed on gains that come solely from the losses of others. I know some people think business is ruthless cut-throat every man for himself, but I believe that it is possible to make gains without slitting your competitor’s throat and possible to get a good deal without forcing your supplier to the brink of bankruptcy. Maybe it’s naive of me, and that’s why I’m just a blogger and not a CEO of some big tech company … but for now, I’m going to think that way because the alternative isn’t very attractive.

Basically, the author laid out the following opportunity “gold mine” opportunities for SMEs:

• Scoop up the nuggets of talent among the layoff streams
  There will be some really capable and talented people coming onto the job market over the coming months. … Grab them if you can and augment your current team. If necessary replace a ‘5’ with a ’10’ … and score big despite the global talent shortage.
• Swoop in and steal your competitors’ customers who fall by the wayside during a downsizing or restructuring.
  Some of your competitors will likely cut back on sales and support as a reaction to slowing sales and adjusted-downward financial projections. When this happens, likely the support level for a few customers will drop noticeably and you’ll have a chance to lure them away with better customer service.
• Swoop in and steal your competitor’s customers who need better applications your competition can no longer provide.
  Some of your competitors will likely cut back on development as a reaction to reduced sales. New product development will fall by the wayside. This is your chance to steal your competitor’s customer from under their nose.
• Look for ways to add value to your existing product or service.
  Then up-sell your customers to extract every last penny they own.

I know this is classic, and rock-solid, business strategy, but what I’d like to know is why these strategies weren’t promoted:

• Reduce your cost of operations, and your prices accordingly.
  Everyone wants a great deal, and in a down economy, everyone needs a great deal. If you can cut your operating costs, by applying good supply and spend management practices, and then reduce your prices, the customers should come to you.
• Increase your efficiency, and increase your support level.
  Have multiple tiers? Unexpectedly promote your bronze customers to silver, your silver customers to gold, and your gold customers to platinum if they have been with you for two years. They’ll appreciate that and you’ve just gained customer loyalty … at no cost to you if you’re operations are more efficient.
• Innovate.
  Better products. Better services. How can you go wrong?

Because these strategies work if the market is up or down, and, to me, that’s better for the long-term health of your business.

A recent article in the McKinsey Quarterly on “Organizing for Value” noted that although the traditional practice of organizing large corporations along a few divisional lines has been an effective way to groom managers for top jobs and limit the number of direct reports to the CEO, the approach creates bulky divisions that obscure the performance of small units where value is often created in these lean economic times. This can lead to organizational blind sports when it comes to investments and decisions between long-term growth opportunities and short-term demands, which can, as you will surmise, lead to unfortunate results — as managers end up optimizing earnings goals at the expense of long-term growth and value creation.

In order to compensate for the blunt tools of traditional planning, that will often implement a uniform freeze across business units in tough times (including those units delivering 50% earnings growth that should be invested in heavily as only sagging units should get the axe), a business should take a finer-grained perspective on individual initiatives within large divisions. If you can identify and define small units around activities that create value by serving related customer needs, then you can better asses and manage performance by focusing on growth and value creation. These units, which the authors call “value cells”, provide you with a more detailed, more tangible, way of gauging business value and economic activity — and allow you to spend more time focussed on specific in-depth strategy discussions, instead of generic tactical plans that are never productive when blindly applied across large business units.

These value cells are often oriented around geographic or vertical markets and integrate their backbone functions, like production, operations, and distribution — and unlike the traditional org-unit structure of classic companies, they have stand-alone economics and are typically “homogenous” in regard to their target marketplace. They are governed off of P&L statements that are created as if the value cell were its own business. This allows a business to determine a market-price for the value cell, and judge the value it is creating relative to the funding it is receiving from the business. Then, it can invest in those value cells likely to create the most value in tough times, which will help the business ride out the storm.

Analyzing the definition of value-cell, one thing springs to my mind, and hopefully yours as well — supply management! What other part of a business is a business within itself? And what other part of a business can easily and naturally be broken down into units that are structured around geographic or vertical markets or product families? And what other part of the business might already be more-or-less broken down in this way? Only supply management really fits, and, specifically, center-led supply management. If you have a well-designed center-led operation, you have a supply management function that is broken down into a number of global business units. Moving to a “value cell” mindset is pretty simple, as the only major difference is that each “unit” is now treated as its own business, which would take advantage of the services of the COE value cell (which would, in turn, be jointly funded by each of the value cells, and be credited with a portion of the savings it helps each value cell generate).

These individual value cells will be able to offer improved reporting, with increased levels of detail in the data, to the center of excellence which will be able to use this data to make better decisions (and take advantage of new opportunities) for the long-term benefit of the company as a whole. The COE will be able to better identify where economies of scale truly exist, and where they do not, and better differentiate which purchases should be against global supply contracts, which purchases should be against regional supply contracts, and which purchases should be completely left up to the local value-cells to manage as they see fit.

Furthermore, as the article points out, even though one might initially think it would be more work to manage a larger number of value cells than a smaller number of positions, the ability to focus on a single value cell at a time, which is a highly targeted business in its own right, reduces operational complexity considerably. Managers can focus on the two or three metrics specific to the value cell that truly driver performance, as opposed to the twenty or thirty that would be required to define a whole division. You can quickly see what needs to be done, do it, and move on to the next value cell. It’s easier than trying to define a strategy that will more-or-less work well on the whole for a large division — much easier.

I think that this approach is probably right for many large companies — but do agree with the authors when they state that the approach will only work if a company has the courage to follow up on the right decision and the willingness to (occasionally) sacrifice short-term profits for long-term growth. Furthermore, the process must give managers of the value cells more freedom and more resources to bring innovative projects with a large commercialization potential to fruition. But I think that, done right, it would be worth it. Any other opinions?