A losing strategy? Welcome!

A corporate strategy is a complex set of managerial decisions determining, among many factors, the content of the company proposal, customer targets, marketing policies and brand positioning. And clearly a strategy is considered to be winning if it generates growth and profits to the company. However, it is well known that in the general framework, even in successful companies, there are activities or products that do not perform, and therefore the task of managers is to monitor the various areas and introduce corrective actions to improve performance at all levels. At any rate, this task is far from easy, for two reasons: the company's activities are intertwined, there are many common resources shared between products or functions, and separate the activities that generate income from the non- profitable ones and is sometimes a very delicate task. It is indeed necessary to assess the impact that the dismissal of one activity, judged unprofitable or underperforming, has on the performance of other areas or products, and therefore, in summary, on the overall income statement of the company.

However, even if the measurement system of the performance and the exhaustive mapping of business activities can make this intervention easy, this action may be not recommended. Yes, the message is clear: do we have a division, a product, a business area at a loss? No problem, we keep it.

Although the motivations can be multiple, depending on uncountable factors, it is possible to identify some situations where such a strategy actually produces positive effects, if not in the short term, at least in the long run. This happens in two circumstances, that is to say, when the strategy is successful and it is just matter of time to bring substantial results, or when the activity is at a loss contributes positively though indirectly to the company performance, i.e. generating higher profits in other business areas.

WAITING FOR THE PROFITS

The entrepreneur studies a clear strategy, aligns managers to the company vision, communicates and shares with all staff the overall goals, the path to reach them and the short to medium-term activities necessary for the effective implementation of the plan. We are therefore in the (positive) hypothesis of an organization that acts in a united way for the application of the business plan, with the active and coordinated participation of the personnel in the execution of the defined activities. However, the company (or business area) does not produce profits. The reason might reside in the quality of the plan (a strategy to be abandoned) but also in the timing (it takes time for the project to bear fruit with the first adoptions of the product triggering a positive loop to the business growth).

The problem of the underperforming strategy is to understand in which of the two contexts we are, in order to avoid abandoning in advance a winning strategy or, conversely, insisting on a path that will not be able to properly repay the investments. If it is impossible to give advice to the entrepreneur in this case, it is possible to suggest a methodology that helps to evaluate the perspectives provided by the current plan, implementing a performance measurement system and constantly collecting feedback from the market. Indeed, although a strategy can be fundamentally correct, it often needs progressive adaptations to increase its effectiveness, and ultimately to achieve its goals.

The focus on the market and the collection of comments, objections or requests from customers therefore becomes essential, source of input able to suggest changes to the ongoing strategy, although it is necessary to assess carefully and not be too timely in experimenting with new solutions with the risk to miss the vision of the long-term plan and to navigate at "sight-seeing". At the same time, it is necessary to balance well the changes and to adopt them whenever they are in line with the broader entrepreneurial strategy in place (alternatively, it is better not to intervene, mature the results, and eventually change the whole development plan).

CONTRIBUTING TO THE SUCCESS

There are many cases in which a business unit, at a loss, contributes to the significant acquisition of company profits, including:

A) ensuring economies of scale, on the side of demand or supply. For example, they increase the customer base by enhancing visibility and consumption growth, or optimizing used assets or management costs, therefore pursuing cost-effective policies. The final effect is an overall increase in total margins or cost savings able to overcome the losses of the unsuccessful unit;

B) contributing to the brand's positioning, and therefore to holding or strengthening its market position, and in this sense incurred losses should be regarded as a marketing investment;

C) guaranteeing the market presence, maintaining an active customer base, holding a distribution channel, etc., effectively constituting a barrier to entry for a new competitor, which must raise the investments granting the acquisition of a targeted market share;

D) generating indirect revenues, addressing customers to purchase other higher merging products or services, either through cross-selling or by creating set of packages with product mix, which, together, ensure tangible profits.

Antonio Borello
GruppoBPC Consulting