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The S Curve

Rocks NB2

I recently stumbled across an article by the CEO of a performance management firm that made a declaration, which caught my attention. Making a point centered on the basic premise of their business approach, the article proposed that you can achieve improved performance through one of only two approaches:
- increase output while keeping cost steady
- drop cost while keeping output steady
The CEO also conceded that there was a third approach formed essentially as a hybrid of the two above. This executive then went one step further to hint that the hybrid approach was preferred.

Perhaps it is a character flaw, but when I read an article that makes a strong statement about a certain way of doing things being the best, I tend to reflexively examine whether this is true and then look for reasons to support or refute the claim. I just can’t help myself. In this particular instance I came to the conclusion that the assertion made by this corporate leader was incorrect on at least two points.

First, I think there is a fourth option – increase output significantly by making changes that increase costs less significantly. And, I also reasoned that the better answer to which option is best is, like most things in business, it depends.

As a consultant it has been ingrained into my head through expansive training to answer, “It depends” to a myriad of business questions. Further, that training has often included as a chief illustrator of this answer the infamous S curve.

Picture if you will the ubiquitous business chart with investment on the horizontal axis and return on the vertical axis. Under many circumstances when we examine the relationship between investment and return a curve forms that takes the shape of the letter S. At first when you increase investment the return slowly rises. Eventually as you pour more investment you reach a critical threshold where the return rises more sharply. Then after yet more investment the rate of return drops and further additions cause diminishing returns. A classic S curve chart.

Chances are there are reasons why you will be able to improve throughput with some additional investment – but it completely depends on where you are on the S curve. When you are on the bottom half then this is the option for you. If you are on the top half, going after more output with extra investment may not give a favorable payback. Taking cost out seems like a more reasonable approach.

However, this increase-the-investment solution option is best when you have the ability to go after more market share. On the other hand, if there is no more market to go after, pulling cost out may be your best bet while maintaining output and share. This is a popular approach in a declining market (although it perpetuates the declining market when everyone does the same thing all at once.)

Now, if you find yourself on the bottom of the S curve but you can’t get any working capital from lenders, then that hybrid approach mentioned above starts to look attractive. Take some cost out, and then go after a little improvement in output by reinvesting the savings. Repeat as needed.

So, the bottom line in this case is that there are a number of options for improving performance should that be something you would like to have happen with your marketing, sales or service teams. How you go about achieving that performance should be contingent upon a number of factors best considered prior to embarking on that performance improvement initiative. Good luck and stay tuned for a lively discussion on another favorite, the O curve.

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