Friday, March 8, 2013

Stragic Management gone wrong!

In The Lords of Strategy, Walter Kiechel writes “ the transcendent purpose of strategy became clear, at least to Wall Street: its aim was to enrich shareholders boost the stock price.”

The fallacy of this view is obvious; stock prices are a by-product of a well-managed company, not a goal in and of itself. As no less than Warren Buffet points out: “If a business does well, the stock eventually follows”.

The concept of the three Cs central to Strategic Management are Cost, Competitors and Customers. While I admit that the three Cs are important, nowhere in the book’s description of strategic management did I see any focus on the Product. As Robert Lutz found when he went to GM, management was so focused on their “strategic” numbers that they lost sight of the product, to the ultimate detriment of the corporation.

I submit that this is the major problem with American business today, most are so focused on target numbers they have lost sight of their product.

Whenever you begin making design or quality decisions based on how much profit you can make if you do it differently than the designer originally wanted, you’ve “said our profit level is more important than what we deliver to the customer”.

In the book Wheels, Arthur Hailey described a conversation at the automobile company his character worked for where they were discussing the need to add a $5 brace to remove a vibration in their latest car. Their big concern was that it would cost them three million dollars, not the quality of what they would deliver to the customer. $3,000,000 is a lot of money but it was not the difference between profit and loss, but a difference in how much profit.

While the book didn’t discuss how the frame came to be poorly designed enough to allow that vibration, my personal experience would lead me to look at the frame design process. I would look for the same cost-over-quality decision when the frame was being finalized. A mind set of “if we can save $1.00 on the cost of the frame we will get credit for the additional $600,000 more profit. That shortsighted focus on short-term profits ended up costing $4.00 more in the long run.

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