The end of the V curve
By Dr. Burkhard Schwenker
Many companies develop in a V curve. First, they "rightsize", then they grow again. There are good reasons why companies follow this approach: they get rid of deadwood, recharge their batteries and then really take off. However, it has always been clear that the road to successful growth requires doing all of this simultaneously.
Excellent operational performance, i.e. continuous reorganization, leads to greater cashflow. This, in turn, can be plowed back into the company, which leads to economies of scale and further improves operating excellence.
This also means reorganizing in good times and then going for growth when others are restructuring. It sounds difficult, and it really is, as two things need to happen. First, employees must be encouraged to cut costs when there doesn't appear to be any real need. Second, employees must commit to growth even if downsizing appears imminent.
Our growth studies have clearly shown that this is possible and beneficial. "Parallel optimizers" among the world's 1,700 largest companies have managed to boost total shareholder return by 18% annually. In contrast, the "consolidators" (companies that have concentrated solely on restructuring) increased total shareholder value by only 10%. Furthermore, the "consolidators" run the risk of undermining their growth base by overdoing restructuring.
The question remains as how to break out of the V curve.
Of course, it's true that there are as many strategies as there are businesses. However, upon closer examination, there is one common denominator for success: companies must be both able and willing to grow. Companies are able to grow if they have a creative growth strategy, the right value chain structure and access to the required resources. They are willing to grow if they have the right "mindset" in terms of the soft skills required. Companies that pursue a successful dual strategy of growth and restructuring focus on clear-cut leadership principles and values such as performance, self-confidence, integrity and a healthy dose of optimism.
(This column was published in "Handelsblatt" on December 12, 2005)
