This is a major problem, and it has its roots in the day-to-day needs of business operations. Most businesses are organized in functional groups, usually including a Finance group, and a separate Marketing group. This silo structure results in a lack of cross-skills; Finance recruits accountants, Marketing recruits product managers (for the most part). Insightful dissections of markets to find cash profitability require a blend of both skills; cutting through GAAP is itself a challenge, to say nothing of properly segmenting a market in a measurable and actionable way. Layered on top of these problems are the other usual inhibitors, differing motives (GAAP reporting in Finance, revenue in Marketing), incentives, turf-stakes and others. Furthermore, management generally focuses on immediate and near-term issues, which are difficult enough to get resolved in the day without sorting out cross-function and long-term issues.
Without being organized to understand the long-term economics of markets, it is no wonder that businesses have such a poor understanding of cash profit potential and drift into a market strategy governed by serendipity. A conscious effort is needed by business leaders to continuously develop information and orient decisions around Profit Pools.
Functional managers become engrained with their silo’s views and skills over time (reinforced by incentives schemes) as they work so well at the tactical level. Their ability to shift to a broader, longer-term perspective can be very difficult. In one case, the Sales/Marketing lead of a pharmaceuticals manufacturer, whose incentives were based on revenue, expended enormous amounts of energy over the course of a year attacking information that roundly demonstrated that a large revenue earner would never return a cash profit. Initially, the use of cash profits was disputed, and when this was resolved, the discussion moved to how allocations were done (primarily sales expenses), despite the possible scope of error being well within what was needed to make the axe decision. The last point of contention was in the course of action (whether any was needed at all).
Unfortunately, since the only place where high-level cross-function decisions come together is at the every top, just a very limited number of people have exposure to what really drives value. When business leaders get to the C-suite, the mandate to drive for business value is not entirely familiar. It demands a mind-set shift on many levels; from specialist to generalist, from honing current performance to growing future cash flow, and from mostly inward-facing issues to mostly outward-facing ones.
|