Margin Restoration and The Law of Holes

Digging and Filling Holes

The business impact of Covid19 is unquestionable. For some, results have been positive but for many, not so much.  Most outcomes have been devastating and the hole (loss of margin over time) keeps getting deeper. This article outlines three types of businesses and encourages leaders to expand beyond their standard playbook, even in this time of uncertainty.

a person peaking out of a hole

The Law of Holes

When you find yourself in a hole… Stop Digging.

A hot topic for all businesses should be Margin Restoration. Owners and investors have shown a degree of patience with their Boards of Directors and executive leaders. So far, they have tolerated low margins. However, this patience and accommodation will end. Their capital flowing from high-risk low margin businesses to low-risk high margin businesses. Getting to better margins to fill the hole is imperative. Waiting and hoping are not good options.

The hole has been dug. Whoever fills it up fastest not only survives, but thrives. Acceleration up the curve is a window of opportunity. The good news is that the pandemic provides a lot of cover for anyone willing to try new things. If something doesn’t work out, one can always blame the pandemic or any other weirdness going on in the world today.

Yet, I find many businesses are still in triage mode with persistent emphasis on cutting, organization flattening and virtual operations. Not much energy is going into solving more complex process and operational issues. Instead, businesses have jettisoned their internal fixers with little thought beyond the next quarter. This isn’t an indictment. On the contrary, with so much uncertainty it’s difficult for any of us to consider much further than a month or two out. But for the same reason; that abnormality is the only certain thing we have right now – we must embrace a more creative approach to close the gap.

In the past, fixing operations took guts, as in: Do we have the guts to do transformative things without the cover of a crisis? Now, since we’re dealing with a crisis of gargantuan proportions, it’s not a matter of guts but rather a matter of survival. In the fog of war, everyone’s distracted. Deliberate and coordinated focus on core operations and processes is key now.

Three Impact Categories:

Let’s consider three categories of impacted businesses you’ll no doubt recognize.

  1. No way out until customers can return – think airlines and airline manufacturers or cruise ships (which are now being sold for scrap), along with the hospitality and entertainment industries. All stunned by the turn of events. There isn’t a clear path forward. Air travel for example, is down between 50-75% for 2020. This trend is expected to continue.
  2. Less than expected revenue and margin – Manufacturing, oilfield services, healthcare, brick and mortar retail, etc. are trying to weather the storm of decreased demand and broken supply chains. Ultimately the margin and cash hole is so deep that fundamental change happens one way (transformative change) or the other (the business fails).
  3. Little or no negative impact – Pharmaceuticals, Amazon, food and several others have been little affected or even positively impacted. People still need medicine, still need goods to maintain their homes and still must eat; the same as before Covid19. The opportunity here is to apply lessons learned from everyone else – like how to make customers and employees feel safe enough to engage or how to make supply chains more resilient.

The Pressure is On

It feels like we are in the flat bottom of a U-shaped recovery and the edge curving up is nowhere in sight. Who knows, maybe next week will feel different? There’s always hope…

Yet, this margin issue is not going away. Pressure intensifies for those businesses that fall short. Cutting and flattening is already done. The objective now must be to accelerate out of the situation. Process redesign, functional integration, simplification and supplier capability are all valid targets.

Where to Start

All can take advantage of the chaos. In the three types of business described above, #2 – places that make products and deliver services – have the greatest potential. By the way… going virtual won’t fill the hole for these enterprises.

Acceleration requires a transformative approach. Major disturbances spell opportunity with indicators such as staff reductions and furloughs, facility closures and material disruptions. Those organizations that embrace fundamental shifts in the way work gets done will take more than their fair share of competitive advantage.

Processes, systems and organizations should be re-defined and implemented quickly. New operating models will emerge. Good initial targets include:

  • Peak performance in manufacturing and service delivery
  • Integrated supply chain – including supplier capability and resilience to reduce risk
  • 1 or 2 core processes – simplification and functional integration vs. a re-designed org chart

Conclusion

How we respond to chaos in the world today sets the stage for everything that comes next. Those who make specific, tangible changes focused on top performance and resilience will accelerate out of this and be set up for better results in an uncertain future. None of this is dependent on a vaccine and frankly, waiting for anything is the wrong approach. Remember, playing it safe and being bold are not mutually exclusive.

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If you’d like some input on how to think through next steps and how to best target your opportunities, drop us a line.