I was recently in a meeting where we were going through the prior year’s financials for the organization. The new financial person made a point of discussing every overhead account to see where the organization could save money.
After we spent over an hour discussing a variety of minor variances – both good and bad – for about twenty expense categories, I pointed out something that seemed glaringly obvious to me. Just three categories – out of about thirty line items on the Profit and Loss Statement – accounted for almost twice the negative variance of the bottom line.
Unfortunately, this message was lost as we spent the rest of the meeting continuing to go through revenue and expense items one-by-one, instead of focusing on the major factors that impacted profitability.
I have seen this same phenomenon in non-financial areas as well. For example, instead of focusing on how we can better utilize the strengths of a good employee, the tendency is to spend time trying to fix their weaknesses. The time would be better spent figuring out how to focus the employee on value-added activities where they have talent.
The same issue surfaces with organizations when setting corporate strategy. Instead of fully exploiting their competitive advantage in existing markets, organizations frequently spend the financial and human capital on poorly thought out new initiatives. Or instead of dedicating resources to a new opportunity where they have an advantage, they try to initiate new ventures in multiple areas. Thus, they dilute their ability to maximize their success in any of them.
One of the keys to success is focus. Focus on what you do best. Focus on what your organization does best. Focus on what your employees do best.
Instead of spreading your resources trying to be good at everything, focus the strengths of your products, your employees, and your organization on the best opportunities.
Value is the result of providing a product or service at a cost that is far exceeded by its impact or economic value. Ultimately, any person or organization can only truly provide value in a small number of areas.
The mandate here is to focus your efforts on areas where you have unique talent and a competitive advantage.
In his classic book, One Up On Wall Street, Peter Lynch talks about the perils of successful companies getting into new businesses that they don’t understand. He calls this tendency “De-Worsification.” It is defined as committing valuable resources to new initiatives that are unlikely to succeed because of a lack of competitive advantage. When organizations do this, they divert valuable resources from activities that have made them successful. Instead, they focus these efforts on opportunities with poor economic returns. Ultimately such efforts can become the downfall of a successful organization.
We do this with employees that we manage as well. How often do we – with good intention – move a high performing employee to a new position without making sure that the employee has the talent for the new responsibilities? I have learned that people tend not to perform well in roles where they do not have talent or in positions that they don’t want to do. High performance is the product of matching people’s talent and motivation to the requirements of the position. The fact is that most people can only be successful when they are put in a position that lines up with their skills and attitude.
The key to success – both for the organizations and the people within the organization – is to match the abilities of the organization and its employees to activities where they have a competitive advantage. For example, it is extremely hard to move from an organization that has focused on added-value to one whose focus is being the low-cost producer.
I am not against change. In fact, change is required to succeed in the competitive marketplace. But instead of revolutionary change, think about evolutionary change. Changing the business plans incrementally to respond to or anticipate changes in the market is an effective strategy. It is much less risky than making radical changes that move your organization into unsound strategies without clear and disciplined plans.
The discussion outlined at the beginning of this article is a classic example of focusing on the trivial instead of the important. In most cases when financials changes are analyzed, the difference between success from year to year is confined to a few categories. Are sales up? Did margins drop? What areas of overhead increased? Is a particular product line’s poor performance heavily impacting the business? Was too much spent on marketing.
The fact is that most of the significant items affecting profitability become quite obvious within a short time of analyzing the Profit and Loss Statement. Getting bogged down in a complicated and time-consuming analysis of most items on the P&L is a waste of time.
Why? Because even if fixing ten to twenty items would help the business, the reality is that most organizations cannot focus effectively on more than three to five initiatives at a time. It is much better to clearly identify a few significant areas for focus than to try to fix too many areas at once.
Focus is essential to success in organizations, as well as for the individual. In fact, if we adopted the motto, “Do a Little Less, a Little Better,” we would be far more successful than trying to fix multiple things all at once.