Overview

While you cannot shrink your way to greatness, it is imperative for every business to drive continuous performance improvement in both good times and bad to stay one step ahead of the competition.   This involves both improving efficiency through cost reduction and increasing productivity by doing more with existing assets.   However, management must avoid common pitfalls such as pursuing deep cuts only during bad times or requiring ostensibly egalitarian cuts across the board.

Properly managing performance improvement opportunities can create immediate profitability impact while also positioning the business to benefit from future profitable growth.   Avondale has advised clients on a range of operational issues including the following:

• Profit enhancement through operational and capital efficiencies in
• Manufacturing
• Supply chain and distribution
• Overhead and support
• Productivity improvement in customer support, sales and channel management
• Revenue enhancement through pricing optimization
  

Our Perspective

Effectively driving efficiency improvements requires integrating both a top-down and bottoms-up approach.   Top-down mandates to achieve "egalitarian" across-the-board cuts should be avoided - they typically fall short of target due to internal resistance.   Similarly, purely bottoms-up approaches without specific targets typically also fail to identify even a fraction of potential savings.   Instead, we recommend first setting differential top-down targets informed by extensive internal and external benchmarking of major activities, departments and cost items.   With a fact-based understanding of what others can do and sharing best practices (especially from other units within the organization), resistance becomes much more difficult.   Next, management must drive and own a bottom-up assessment of the actual opportunity for each unit and develop a detailed implementation plan to capture the potential cost saves.   Providing management with adequate support to push forward during this phase is often the critical success factor.

Often overlooked, productivity initiatives are a viable alternative and often necessary complement to efficiency campaigns.   While efficiency initiatives seek performance improvement through cost reductions, productivity initiatives approach performance issues from the other side of the coin by seeking ways to drive improvements in top-line performance, whether in actual sales or other throughput measures.   As such, productivity initiatives may be beneficial across virtually any step in the corporate activity chain, but in our experience are especially conducive in managing the sales force or customer service activities.   Yet whatever the situation, it is important to follow a similar fact-based approach, mapping out and analyzing the key processes, looking for redundancies or unnecessary steps, conducting benchmarking and sharing best practices, much like in driving efficiency improvements.

Finally, pricing optimization presents another avenue for performance improvement through revenue enhancement.   However, in our experience, many organizations fear making strategic pricing decisions, and instead abdicate decision-making to competitors by becoming price followers.   Yet these perceived risks can easily be mitigated by taking an analytical approach to strategic pricing.   Typically this begins with developing an understanding of the customer's purchase decision including the relative value proposition of available products (from competitors and substitutes) across different customer segments.   And combined with testing and modeling of price elasticity, pricing strategies can be developed which effectively segment customers by willingness to pay and thereby minimize total consumer surplus, thereby ensuring that money is not left on the table.

Typical Questions to Consider

For efficiency and productivity opportunities  

• What are the key cost drivers in the business across the activity chain?   Where are those costs concentrated across functions, activities, businesses, etc.?
• How does our cost position compare with competitors overall and within specific functions or categories?   What can we learn from competitors in areas in which they have a cost advantage, and how can we translate these insights to driver operational improvements to our bottom line?
• Are there opportunities to examine internal cost benchmarks across similar business units, geographies, manufacturing plants, etc. to identify and share best practices to drive improvements in lower-performing segments?
• Besides cost reduction opportunities, are there ways to improve performance with throughput initiatives to drive productivity improvements?
  

For pricing opportunities

• How do our prices compare to the market?   Have we historically been a price leader or follower?
• What is the predominant price structure in the market, e.g. consider bundling, volume discounts, distributor vs. end-customer pricing, capacity utilization issues, etc.   What impact do current pricing structures have on the market, and are there additional alternative structures to consider?
• What is the customer value proposition for our product and competitive or substitute products in the market?   How does that compare to pricing for our product and other products?
• Are there ways to segment customers along differential value and thus develop strategies to address different willingness to pay across segments?
• What is the price elasticity for each target segment and what implications does that create for pricing?