Goal Setting
“Begin with the end in mind.”
The late Dr. Covey is a businessman, international best-selling author, educator, and keynote speaker. In his many books on leadership and effectiveness, he coined the importance of having a clearly defined goal. While he meant for it to apply to people, I believe that having a clearly defined goal is of great importance to organizations too. No matter if a company is public or private, for-profit or not-for-profit, I truly believe that every initiative within an organization should have the following 4 goals:
1. Grow revenue
2. Cut cost
3. Protect revenue
4. Avoid cost
There are many ways to achieve these goals. Just as the saying goes “there is more than one way to skin a cat”, organizations have a myriad of strategies they can deploy to achieve their goals. We will discuss strategies and how to optimize them in a future blog. For now, let’s talk about the 4 organizational goals above in more details:
1. Grow revenue
Revenue, or incoming flow of money, is important to any organization because it is one of the two components driving profitability, cost being the other component. Profit (revenue minus costs) is the lifeblood of any organization. To sustain profitability, an organization can grow revenue, or by cutting cost, or both.
The for-profit or not-for-profit nature of an organization will influence how it goes about growing revenue. For example, a not-for-profit organization may decide to apply for grants or endowments, seek corporation financial sponsorship, ask for donations, or apply crowd-funding approaches. This list is not exhaustive.
A for-profit company may go about growing revenue by getting more new customers in the markets it is already in, more wallet share of each existing customer by upselling or cross-selling (selling the customer more products or services), expanding its geographical markets, and by developing new products or services to be sold. It is important to remember that each of these efforts will incur costs, and profitability only occurs when the resulting revenue is greater than these costs.
2. Cut cost
Cost, or outgoing flow of money, can range from the expenses needed to develop a product or service, to set up the infrastructure that enables delivering the product or service to its consumer, and to the actual delivery of the product or service.
Cost cutting is a major concern to all organizations. As a major driver to profitability, keeping costs to the minimum determines how well an organization can sustain itself and grow. Cutting costs should be done by strategically removing redundant labor, equipment and/or facilities, or activities that don’t meaningfully contribute to the bottom line.
One common form of cost cutting is by spreading more customers over the existing cost base. To get more bang for the buck, some companies chose to overload their employees with more work than can possibly be done. Done in the name of “creating value”, these companies often create high-churn labor forces, not unlike sweatshops in developing countries. While exercising financial discipline is a good practice, taking an extreme position in human resource (HR) management will result in short and long term impact. It is a good practice to consult HR and industry benchmark in making personnel decision. Cost cutting should be strategically positive, not negatively harmful.
3. Protect revenue
Protecting revenue is important because of the effort and cost to obtain the revenue in the first place. Every single customer won and every single market obtained requires capital allocation. The cost of winning a customer can range from marketing efforts such as formulating a marketing strategy, implementing an advertising campaign, generating leads, to closing on those leads. The cost of winning a market can range from competitive efforts such as defending the poaching of a customer by a competitor, defending against negative ads from competitors, generating positive press for one’s company, to acquiring a distribution channel that one heavily relies on.
One can’t fully discuss protecting revenue without discussing customer retention. There is an old adage: “The best customer is the one you already have.” The thing is, only a handful of organizations realize, recognize, and actively retain customers effectively. I have seen many companies chase after new sales at the expense of servicing existing customers satisfactorily. In the long term, that approach almost always results in higher customer churn and negative reputational impact that makes it harder to land new sales. When resource constraints force an organization to choose between chasing new sales or servicing current customers satisfactorily, choosing chasing after new sales will result in a fruitless filling of a leaky bucket.
4. Avoid cost
At the risk of sounding like a broken record, cost is one to minimize and avoid strategically. Certain costs – R&D, marketing and sales, and operations for example – are unavoidable, yet can be kept to the minimum with good financial discipline.
Then there are the avoidable costs – fines and penalties from regulatory bodies for example. Compliance is something that should be taken very seriously. Certain industries, such as healthcare and financial services, are filled with these traps. It is a good practice for companies in these industries to have counsels who liaise with the regulatory bodies and monitor the cost avoidance of fines and penalties.
In closing, I would like to note that no organization will win in the long run if they only focus on some of the four goals. To be sustainable, companies must pay attention to all four with a portfolio approach. The allocation of effort for each goal can be different – x% for growing revenue, y% for cutting cost, and so forth. Further, to keep up with the changing business conditions and strategic priorities, the emphasis on each of the 4 goals should change based on the company’s current condition. When there is plenty of capital and a blue ocean market, it would be ideal to emphasize revenue growth. When capital is tight, it would be better to emphasize cost reduction and revenue protection.
Hopefully, you have enjoyed the article above. We will delve deeper into the topic of growing revenue in future articles. Stay tuned!