Continued From Post On 11/09/19
Another common thing that happens is what I call the misapplication of the Shared Services concept. Most graduate schools over the past 20 years have taught there is an uptick of nearly 30% in productivity with a Shared Services approach. This works beautifully if the acquisition is within the same discipline such as a banking merger where similar practices are observed. In practical application, what this leads to is workforce reduction. The natural progression usually goes from senior management to accounting, to marketing, to sales, to engineering, to manufacturing, to customer service and finally distribution. Each of these already exists in the current organization and is invariably deemed to be redundant. Eliminating duplicate overhead is a quick way of putting dollars back into the bottom line while leveraging current resources. In businesses with multiple channels or product categories, Shared Services become more difficult but not entirely impossible if you limit the scope.
However, this has not been historically translated well when large companies in the outdoor industries combine completely different categories or in some cases competing brands. The need to assimilate business platforms like ERP systems and internal processes often leads to friction. Different, culturally in large corporations, isn’t viewed positively. Different is often squashed like a bug regardless even if the difference is what made the acquired company who they were and what attracted you as the buyer. Friction between business units gets leadership’s attention fairly quickly as problem after problem is brought to them by their team. In the cases I have seen, the decision is made to start scaling back operational functions that are redundant and sides are chosen. Once the ball starts rolling and the home team starts to calm down it tends to follow the path laid out above. The acquirer knows how to run a business; after all, they bought the other company. They have engineering, sales, customer service and so on. In some cases, there is a reverse integration but both tend to end after a long drawn out turf war. In the crossfire of this war, good people often leave and the default is an application of a Shared Services model.
Where the misapplication occurs, in this case, is the near utopian expectation that tribal knowledge and previously dedicated efforts by others solely focused on one brand can be effectively replicated by a team with no prior experience who are already managing multiple spinning plates. It is further compounded by a reduction in budgets and headcount. The problem with this is a matter of a learning curve and output. If you were an optics brand who bought a holster brand, there is a sharper learning curve than if you had bought another optics company. Tasking a team who doesn’t know anything about the acquired category or market with running it, might not be the best idea. With respect to output, an injection molding machine can only produce “x” number of parts given “z” cycle time in so many hours. There is a known output. Humans are no different. When you pile on more responsibility to your engineering team or sales team at some point you reach maximum output. Stack on top of that the learning curve for products they had no history with and you might begin to see the picture no matter how talented they are. Trying to keep all brands under one conglomeration moving ahead as they once were prior to acquisition with fewer resources can quickly run into the snag called declining sales.
When this happens a meeting to discuss why Brand A’s sales are declining gets called. Many companies will even hire a consultant firm to come and do a complete review to better understand the issue. In the many years, I have seen this happen, the consultants almost all spout out the same exact conclusion. To sum it up, for free, here are the three major points:
- You need to reduce the number of products you offer through SKU rationalization, follow the 80/20 rule. This will free up capital so you buy more inventory of products that turn better.
- Focus your resources on Lead Brands and Lead Initiatives to get bigger returns.
- Invest in more consumer research and be sure you have the data to back up #2.
The first point is simple in theory but not in practice. SKU Rationalization and product life cycle management are necessary for every company. However, freeing up cash to invest in more inventory of a product doesn’t necessarily lead to more sales. Using holsters as an example, roughly 11% of the world’s population is left-handed. If you discontinued all left-handed holsters that does not mean you sell more right-handed ones. Or if you discontinued a Beretta holster it doesn’t mean you sell more Glock holsters. In all cases, when the SKU rationalizations came down to stuffing holsters into four quadrants 1) Low Mix/High Run 2) High Mix/High Run 3) Low Mix/Low Run 4) High Mix/Low Run, left-handed holsters were in the later. Additionally, with a diverse product mix, freed inventory dollars don’t necessarily go back to the product lines that generated it after rationalization. This can further the decline in sales for some categories starved for inventory. Especially if those inventory dollars are diverted to other categories. Consumption happens in this case because you may be cutting things you shouldn’t with little to no plan on how to recoup further lost sales.
The second point illustrates and admits Shared Services were misapplied. Without calling it out by name, what the consultant is basically saying is your team has way too much on their plates, not enough product experts and you need to prioritize. In some markets, established products don’t have many innovation needs versus marketing needs. Coke comes to mind as an example. Millions of dollars are spent every year to market Coke but the recipe hasn’t changed for some time. But let’s say the executives of Coke decided to cut the marketing budget for the product and focused it on water instead. You can imagine that Dasani sales go through the roof while Coke sales decline. This is important to understand. Picking a lead brand after you already cut marketing budgets means the auxiliary brands don’t get even a minimal lift from messaging. This is where major consumption happens. You are now making the active decision which prior or acquired brands are more or less important for growth, prioritizing them and effectively setting the other brands adrift. One of the more noticeable examples of this was Stoney Point Shooting Sticks. Today the brand doesn’t exist and what’s left of the few holds out products are now part of Primos.
The third point is the failsafe of paralysis by analysis. Data becomes the sole source of truth. If you have the data to support your business case than you will never fail. This is a falsehood. Failure is part of life including business and sometimes can be the result of inaction. I remember talking to a consultant at SHOT Show the year Kimber introduced their first-ever revolver, the K6s series. The consultant was spouting off that we should never do a holster without having six months to a year of sales history to support it. I asked him to walk over to Kimber’s booth, look at it and tell me if we should do a holster for the revolver. He dutifully did as asked. Upon his return, I asked what he thought. He said it looked okay, people seemed genuinely interested but I still should wait and see. At this point, I explained that Kimber was the world’s most prolific manufacturer of 1911 handguns. This was their first revolver. People love their Kimber and a Kimber person will want this revolver because it is not only in a popular form factor but represents a new era. It was at this point I informed him if I were still Product Manager I would have already submitted the paperwork to do the project. Waiting six months to a year hoping a retailer would share sales data would result in lost sales and questions from management on why we failed to see this opportunity. Yes, we should understand our customers. Yes, we should know more and better data. However, it doesn’t build companies in this industry, these are just tools. Consumption happens here because you failed to keep pace with the market because data is typically rearward looking.
Another area of consumption is when the sole focus of leadership is managing profits and shareholder value. This can have a negative impact to building a company because it demonstrates a lack of vision and purpose beyond the basic functions of a business. In fact, authors Jim Collins and James A Autry have identified this in their works. If you are hiring that consultant, it is probably because things have gone wrong. Just like my weight, it didn’t happen overnight and it will take a while before my waistline looks thinner. If your focus isn’t true, too often, the end results of these consultant exercises is a well laid out plan that gets tossed the closer year-end or a quarterly report get. Leadership then starts looking for “fad diets” as a cure-all and a round of changes get rolled out so the quarterly numbers look better. Trading long term goals for short term gains isn’t leadership and it drives good people away.
The Shooting and Outdoor Sports Industry is one of personal passions and past times. What has driven innovation in the industry is solving common problems shared by those who choose to spend their time, money and resources pursuing the same. Consumers want to spend their discretionary dollars on company products they believe were designed and built for them by people just like them. To do that right management teams need to have authenticity, integrity, honesty and be driven by the same passions, not Microsoft Excel or shareholders. If you are going to combine multiple companies under one umbrella, you need to keep those authentic people and listen to them.
- L. Yarbrough, Bucks & Beers
