Do You Face the Sword of Damocles?
Balancing go-to-market investment with aggressive optimization
Companies that can balance go-to-market programs with deliberate expense optimization have a better chance of reducing profitability swings and shareholder disappointment.
Far too often, companies are placing steep bets on market strategy without simultaneously tightening and streamlining processes and optimizing operating costs.
This leaves them in a precarious position: Heavily invested in high-stakes go-to-market and new product development (NPD) programs. This in turn imposes a substantial “must-spend” cost structure on the business. This high operating leverage (fixed to total spend) becomes a norm, not a choice – with dramatic implications.
It’s like the sword of Damocles – the Greek myth about the courtier who trades places with the King. After a day of lavish feasts the courtier looks up from the throne, only to see a sword pointed at his head, dangling by a thin thread. Success – indeed, existence – hangs on the slimmest of balances.
The MOTO Experience
Motorola’s performance over the last few years illustrates just how much competing in today’s high-stakes markets mirrors the message of the Greek myth. At the peak of success, in early 2006, MOTO had captured 22% of the global handset market with its winning RAZR product line. Financial performance was solid and leadership was riding high.
MOTO continued to invest in new products, incurring the same high R&D, product development and marketing costs that had propelled it to the top. This time, though, the products fizzled. By June 2008 Motorola’s global handset market share had fallen to 9.5%.Failing to shed its high cost structure as go-to-market efforts sputtered cost the company dearly, to the tune of $30 billion in lost market cap. Some would say that for Motorola, the thread holding the sword of Damocles had, indeed, snapped.
The good news is that Motorola may have managed to sidestep the falling blade. Its handset business has announced plans for a “product-led recovery” with 11 products released in the second quarter of 2008 alone and plans for 50 total releases in 2008. In recognition that this kind of aggressive go-to-market plan cannot succeed without concurrent improvements in cost structure – especially in R&D, product development and marketing – the company also said it planned to take out $1 billion in costs, 60% of those in the handset business.
It’s too early to tell if Motorola’s efforts will be successful, but the combination of a product-led recovery with a leaner, more fixed -cost efficient operation is certainly a step in the right direction.
What Managers should do
Management of any company in a high-stakes competitive market, be it electronics, autos, financial services or elsewhere, can learn from Motorola’s experience. The key lesson:Don’t become a victim of your own success. Just because a go-to-market approach worked once doesn’t mean it will work again. If your market position or market conditions change, both your go-to-market approach and the accompanying fixed cost structure must change along with them. Here are a few fundamental guidelines:
- Re-evaluate which costs are really necessary. Our client studies indicate that companies have developed “traditional” perceptions for what is an “acceptable” cost structure. Unfortunately, this perception is both value destroying and self-perpetuating. In fact, most clients we have worked with consistently UNDERESTIMATE the cost structure savings that can be achieved – short-term – by as much as a factor of ten. Most companies we see still have costs to shed, with immediate payback. Locked in tradition, they simply lack the perspective to see the possibility.
- Reinvent the business model to diminish the role of fixed costs required to bring a product to market. Leverage strategic partners for R&D and product development, move to a standard product architecture to speed product development, restructure and outsource manufacturing and supply chain. These are just a few of the steps you can take to build a business model that can be profitable in dramatically smaller total addressable markets.
- Shake up your go-to-market processes to avoid repetitive failures. Re-engineer product development and R&D to drive market and customer insights into new product requirements. Make the investments to reduce the cycle time for product development.
Balancing value-creating go-to-market initiatives with relentless cost optimization is a better way to get more from your best market bets – and keep the sword of Damocles dangling at a distance.
For more information on these how others have succeeded at programs like these contact info@mkt-strat.com