Page 32 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

18 The Complete Guide to Executive Compensation

Administrative expenses become an increasing percentage of total costs as productivity
improvements chip away at direct expenses. However, staff functions are increasing faster
than the reductions in direct labor. Reducing costs is important, especially if sales revenues
have flattened out; however, cash flow (because of various deductions) may be stronger
than ever.
Job descriptions and organization charts have appeared, as have management succession
charts to ensure adequate depth of management to meet organization needs. Corporate poli-
cies have been written to cover the full gambit of business issues, and an extensive financial
record-keeping system has been developed. Managers find their freedom to act restrained by
both. Due to policy limitations or dollar ceilings, the manager must now recommend, rather
than decide. Such recommendations require considerable time to prepare and justify.
Committees have become popular during this phase and are often part of the decision-
making process, resulting in both a slowdown of this process and a diffusing of individual
responsibility. Transactional rather than transformational behavior is dominant. Business
abounds within a complacent culture.
Companies in a mature stage often undergo a “consolidation” whereby they trim their
management ranks and narrow their marketing focus. Usually, the latter is focused on
their high-profit product lines in a more concentrated area. Product areas where the
company sees little hope for increasing low profit margins are abandoned or spun off. Many
conglomerates in the mature stage return to the businesses in which they have excelled.
Others expand in acquired business lines. The need to develop new products or find new
markets for existing products has surfaced, but fear that a new product will reduce sales of
existing products makes for hesitancy. To be successful, however, it may be necessary to
abandon the existing products and take the risk with new products. Productivity improve-
ments are critical, especially those lowering costs; however, in some situations cash flow is
aided by depreciation write-offs.

Decline. The decline phase is the period during which market share is falling or the market
itself is disappearing due to technological obsolescence. Inefficient companies will be replaced
by those meeting customer expectations. Cost-improvement programs take on strong
importance, many times in the form of amputation of unprofitable operations. The need to
develop new products or find new markets for existing products is now critical. The focus is
on survival. An industry in the mature stage often has a global focus, with large companies
having established major entry barriers.
In an attempt to jump-start the company and return it to a growth phase, sometimes a
new research group is set up to think beyond the borders of the current research and devel-
opment group. Because of such a group’s isolation from the organization, it is often referred
to as a skunkworks. Unfortunately, because of their isolation there is no effective way to
capitalize on their efforts, which often are not relevant to the business.
To protect income on declining revenue, some companies may increase prices, which is
the beginning of a vicious death spiral because the resulting decreased sales will trigger
another round of price increases, followed by further decline in sales, and so on. Others may
reduce the size of the product (while holding price) or combine decreased size with increased
price—actions unlikely to increase sales. Others may introduce new features or benefits of
the product in the hope this will help sales.