In a 2016 Harvard Business Review article, Scott Anthony shared some insights from a study on S&P 500 companies:
- 61-year tenure for average firm in 1958 narrowed to 25 years in 1980 – to 18 years in 2012
- At current churn rate, 75% of the S&P 500 companies will be replaced by 2027
Business leaders commonly refer to the military acronym VUCA (Volatility, Uncertainty, Complexity, Ambiguity) to describe the world today. The external environment is changing at a rapid pace and companies cannot afford to be caught off guard. How can companies continue to thrive, in this ever-changing external environment? While there are several challenges, and there are also plenty of opportunities. Deep-rooted assumptions hold us back from unlocking this hidden potential.
Today’s information and digital systems are capable of providing a huge amount of data at the click of a button. Most organizations measure a large number of metrics for each business unit, division, department, employee level etc. The underlying assumption is that the more we measure, better we are! Most senior executives are quite familiar with their local measurements (e.g. tons, units produced, order book, number of subscribers etc.) but are ignorant of the overall financial measurements.
Everyone in the company should understand financials; it is not just for Accounts or Finance function. In most organizations, the top management team does not have a good understanding of Free Cash Flow. In his book, Conspiracy of Fools, Kurt Eichenwald writes that in 2001, just a month before the collapse of Enron, its chairman Kenneth Lay, CEO Jeffery Skilling, and CFO Andrew Fastow did not know that Enron would run out of cash in a matter of weeks!
Dr. Eli Goldratt, author of the best-selling book The Goal, repeatedly emphasized that “Measurements Drive Behavior!”. The purpose of measurements is to take decisions for corrective actions. At the organization level, a few simple parameters are good enough. Timely data and corrective actions can help individuals to connect the dots and see the big picture.
Most companies review performance monthly. This leads to a significant time lag in getting key data or MIS. We recommend a weekly review mechanism with focus on 3-5 key metrics. The objective of the review is only to take decisions for corrective action. The weekly report should be simple and accurate, leaving no room for analysis paralysis, and facilitating effective decision-making.
Increasing digitization of data across the organization has been a key enabler for running the weekly reviews successfully. Companies that have adapted this methodology, provide a very high degree of focus on getting the reports right first time, as soon as the week ends. Many companies have integrated their digital systems (based on ERP such as SAP, Oracle, Tally, Zoho) and provide simple excel based reports and dashboards which can be accessed across devices such as mobile phones or tablets.
During the last two years of the pandemic, there have been lot of uncertainties in supply chain. Moving to a digitally enabled model has allowed these companies to be extremely nimble and agile in their decision making. Several companies have pivoted their business model quickly in order to capitalize on the emerging opportunities in the market. These decisions have been backed by analysis of marketing trends using simple AI and ML based algorithms, dynamic decision making matrix and partnerships across the digital ecosystem.
Technology acceleration has also helped some companies to take specific actions to address business challenges posed by the pandemic. For e.g. to deal with the disruption in logistics, companies have invested in GPS based end to end tracking systems. In manufacturing businesses, use of IOT based sensors has picked up significantly to collect data, and share timely alerts for predictive maintenance.
At Goldratt India, we have been working with Indian companies for over 23 years to help them increase their sales, profit and cash flow by an order of magnitude. Weekly reviews have been the cornerstone of all our engagements. Companies have been able to achieve quantum improvement in performance, just by changing a few metrics and review processes. Some of our learnings are encapsulated below:
- Measure performance weekly instead of monthly
- Don’t get stuck in analysis paralysis, focus on corrective actions only
- Instead of chasing benchmarks or budgets, always strive to “Better than Before” with respect to own past performance
- Monitor plan vs. actual every week: The more our planning improves, the gap between plan vs. actual reduces
- Better than Before: Each week, strive to improve upon past 13 week moving average, irrespective of the external environment
Our client JSPL has been practicing these principles for over 5 years and is well on its way to becoming a debt free company. The company has reduced debt by over Rs 25000 crores in the last 4 years.
Short video from the case study presented at TOCICO international conference in USA: