Can CEOs Create Value by Focus on a Single Thing?

Recently a well-known consulting company issued a press release. The claim was simple; after a merger, a

CEO can create value by focusing on just one thing: cost.

This is of course, silly.

But it is also seductive; so, it seems worth cataloguing why this is, and a better alternative.

First, the “one thing” in most cases is cost in the supplier ecosystem.

Most large companies spend most of their money on suppliers. And of course, large companies are the targets of large consultants. From a consultant’s point of view, suppliers are a great target. They have the least voice in the corporation. They lack political capital.

Hence, the focus on suppliers.

But the idea of gutting supplier spending is an old idea that peaked in the 1990s. Slashing the supply chain is easy to do post-merger. Vendor management has a story to tell. The story is about the need to reduce the number of suppliers, to get a better deal because of increased volume. But after 20 years, this story has worn thin.

Today, most good suppliers know the promises of more volume are suspect, and they have defenses against strong arm tactics.

They have multiple tiers of pricing. If you negotiate hard and slow pay them, they simply use a different rate card. Some suppliers quietly call this a “tax on stupidity.”

The savvy ones are happy when customers demand crazy terms. They walk away, and let their competition be bled dry. The strategy leaves the buyer with weak, second tier suppliers. Hardly a winning formula.

Second, most post-merger strategies based on cost cutting fail.

This is true for several reasons. One reason is “finance façade” or the idea that some numbers on your financial statement don’t mean what they seem. This is also known as “getting great gas mileage as you coast to a stop.” The point is that value and cost are only loosely connected. A purely financial analysis can’t see the fiction. The façade seems real.

A Wall Street analyst once told the story of a firm who did this in the 90’s. The firm’s finance folks believed their own numbers, though nobody on the street did. The internal finance team was the last to figure out they were being misled.

A more difficult problem in post-merger cost cutting is the difficulty in understanding the functions and operations to be merged.

Both organizations will use the same words, but they won’t mean the same thing. Cost slashing will slash the wrong things in many cases.

It only takes a few mission critical mistakes to wipe out the savings from “good” cost cutting. Being right “most of the time” will not work when more than half the value is created in the supplier base.

In the 1990’s there might have been some excuses for a single, cost reduction focus. But today, more powerful analytics are available. Complex organizations are interconnected in ways the C-Suite struggles to understand. Merging two such organizations is daunting. It requires real analysis, not focus on a single thing.

Modern analysis methods make single focus strategies obsolete.

There is simply no reason to promote this approach, unless you are a consulting company focused on billing lots of hours.

At Lone Star, we have successfully mapped large, complex organizations with a bewildering number of functional silos and operational lines. Our TruNavigator^TM analysis suite provides clients with transparent understanding of their problems, and allows quick exploration of alternatives. We believe making mission critical mistakes in a computer simulation is preferable to real life. And, real analysis can improve organic operations, not just post-merger operations.

At some point, a grown up told you “if it sounds too good to be true, it’s not true.” CEOs are supposed to know this. A CEO is supposed to lead the entire enterprise. Focusing on just one thing is both too good to be true and, abdication of responsibility.

Don’t fall for this.

About Lone Star Analysis

Lone Star Analysis enables customers to make insightful decisions faster than their competitors.  We are a predictive guide bridging the gap between data and action.  Prescient insights support confident decisions for customers in Oil & Gas, Transportation & Logistics, Industrial Products & Services, Aerospace & Defense, and the Public Sector.

Lone Star delivers fast time to value supporting customers planning and on-going management needs.  Utilizing our TruNavigator® software platform, Lone Star brings proven modeling tools and analysis that improve customers top line, by winning more business, and improve the bottom line, by quickly enabling operational efficiency, cost reduction, and performance improvement. Our trusted AnalyticsOS^SM software solutions support our customers’ real-time predictive analytics needs when continuous operational performance optimization, cost minimization, safety improvement, and risk reduction are important.

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