For purposes of this discussion, “performance analysis” is the analysis and scrutiny of business results in hopes of identifying ways of improving these results. This “performance analysis” is often part of “performance improvement” efforts. During “ordinary” times, this type of performance analysis (also referred to as “business analysis”) is often neglected or done in an ineffective manner. One way of identifying whether such business analysis is being properly performed is to gauge its results – if it seems to be of no or little value (i.e. not illuminating ways to improve revenues and profitability) then it is likely being performed in a suboptimal or incorrect manner.
Performance analysis is especially critical now, during this period of low economic growth with substantial ongoing economic uncertainty.
Companies across the business spectrum have, over the last few years, adapted to the challenging economic conditions in a number of ways, including such standard actions such as job cuts, price cuts, and expense reduction measures. But are these, and other actions such as tighter “cash management”, appropriate and adequate given the complexities of the current and future economic environment?
Performance analysis is in many ways the answer to this question. Obvious “common sense” solutions to garden-variety economic weakness may be inappropriate and/or inadequate actions during this complex economic situation. Furthermore, during these complex times, to the extent that a company is able to adapt properly, it could attain significant competitive advantage, in addition to standing apart via superior operating results.
Although performance analysis seems attractive, given the complexities of today’s business environment it can be even harder to properly perform. In addition to the difficulty of assessing and adapting to the fundamental drivers of success, the unpredictable changes in the dynamics of this (at best) low-growth economy may well present factors that could render traditional performance analysis ineffective, if not destructive. In order to accurately navigate, businesses may have to conduct such performance analysis at a level that is considered “beyond sophisticated.”
While there are almost innumerable areas and processes that can be analyzed – and, of course, the areas that should receive scrutiny varies among companies – a few common areas include:
- Industry Cost Structure – On a basic level, are the costs fixed v. variable? Having a very good idea of this dynamic, and how it relates to the changing economic landscape, is key.
- Company Cost structure – How does the company’s cost structure compare to that of other companies in its industry? How might the company gain competitive advantage? How important is scale?
- Sales Analysis – What are the trends in sales, and how might they be optimally viewed in order to make outsized improvement in sales results?
- Forecasting – Ordinarily, forecasting encompasses what is expected or what can be reasonably expected. However, during this time of economic uncertainty, conducting Scenario Planning as part of the strategic review is critically important. (More on Scenario Planning can be seen in the “Scenario Planning…” page)
- Cost-cutting – Rapid, severe cost-cutting is often instituted during difficult economic times. Due to the rapidity and severe nature of 2008-2009 decline, cost-cutting was very prevalent. What were the impacts of such cost-cutting, from a performance improvement perspective? Should such expense reduction be increased or reversed? While it is impossible to generalize the importance among firms, this topic likely deserves scrutiny.
Given the (at best) low-growth economic environment, the need to conduct performance analysis has increased in value. If done correctly, it can provide immense benefits in many areas, and allow a company to possibly thrive, despite challenging overall business conditions. Conversely, those businesses that don’t engage in meaningful analysis might find themselves in rather inhospitable conditions.