Four questions to be asked of any piece of work you are running this week

This post is also recorded as a video. You can listen to Michael here.

Some scintillating news from Porsche over the last few days. They have announced that they are going to be cutting 5,000 more jobs after seeing a cratering of sales in China. There is an interesting article in the Wall Street Journal with just enough details to make you wonder what they are going to do to fix this problem.

The way Porsche presented it is that the cuts come in labor savings, and they can reinvest it. The numbers are a bit scarier. You have 5,000 jobs agreed to be cut now, on top of the 3,900 that had been cut previously. Unless the rules of math have changed, that is 8,900 positions out of 42,000 employees. That is about a 21 point something percent reduction in the labor force. That is a massive culling of the labor force for Porsche.

The question becomes: is what they are doing and where they are going right for the business?

Not to be outdone, their friends at BMW announced 8,000 job cuts for the same reason, because they have lost the Chinese market. Bottom line, they are not as competitive in China as they wanted to be or could have been, and it is a scary place to be.

Michael was in Berlin recently, and he does not think the German government and the German industry and the leaders are taking the changes seriously enough. He is very worried that Berlin and Germany will go through a kind of a Detroit curve and a Pittsburgh curve, like when those cities lost their automotive sector and their steel sector. That is for another discussion.

Below is how we analyzed it. Everything in here you can use on your own problems this week.

How to grow by cutting

Michael took the headline, cut 5,000 more jobs after sales collapse in China, and made one slight change. He wrote, “How to grow by cutting.”

That is the entire problem statement that went into our system, Michael. No elaborate prompt.

The way Michael works is that he is analyzing this for someone, so we created a composite of our most likely client profiles. Most of our clients are very senior people in either consulting, investing, or industry. The composite is called Jim Jones. He is a consulting partner in manufacturing in the United States, and he is running the study.

Michael produces two problem statements. The one we gave him, and his own.

The first thing he says is that you do not want to just cut costs. Cutting costs is good, and it is not going to mean anything unless you can reallocate this to fix the erosion in the commercial capabilities, which is a fancy word for saying sales.

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Is this actually worth fixing

Before any analysis is done, Michael asks a question: Is this actually worth fixing? It is called a materiality test.

Michael concludes yes, this is worth fixing, provided you can compound this and generate sales in the United States and the Middle East. The condition is critical here. Without it, the cuts are just cuts.

Two things must be considered alongside that test.

The first is the data. We are pulling live data from the SEC. That means we are not reading news articles. Anything that is not updated in the SEC filings, we do not read it, because we cannot rely on unvetted media reports.

The second is a health and performance check. Is what Porsche is proposing going to increase the performance of the company at the expense of the health, or the other way around, and what is the critical tension here?

The order problem

This is the one point to take away even if you take nothing else.

Porsche probably knows they have to grow in the United States and the Middle East. If you cut the 5,000 people before you develop a strategy for those markets, and the strategy would dictate what skills and capabilities you need, how do you know you are not going to cut knowledge from the 5,000 people that you need for those markets?

Corporate strategy, the way it is normally done in a kind of a turnaround, cuts costs first and then takes time to develop the strategy. This is not a turnaround, by the way. Porsche does have enough cash, and they are on a very, very bad downward slope.

If you cut your costs first before you develop your strategy, how do you know the costs you are cutting will not have assets and capabilities you need for the strategy you are yet to develop?

Every restructuring you will ever undertake has this sequence buried in it, and almost nobody pays enough attention to it, because the cost programme is running on a different calendar to the strategy work.

Can the leadership team actually do this

Then Michael asks a different question. Ignore the quality of the proposal. Can Porsche’s leadership team do this?

It is a very simple question. The proposal could be good, could be bad. Assuming the proposal is correct, and it has been checked to our standards, will Porsche’s leadership team do this?

He looks at the alignment amongst leadership. The CEO’s track record. Who has been assigned to do it. The board’s composition. The financial readiness. The conditions of the business.

All other things being equal, Michael says there is only a 10% chance of this working.

The proposal is not the reason. He has found problems in the way Porsche is set up. Then we recalculate by looking at recommendations we can make to the Porsche board and management to increase the odds of the proposal working.

Think about it: a 10% implementation probability means the analysis is the easy part.

Michael also tells you your role in the implementation, because he is built for the person using the system. Based on what we know about Jim Jones, these are the roles you can undertake, and these are the roles you cannot take. There are flags on what this partner cannot do, should not do, and who they need to bring alongside them to make it work.

Scenario living

In scenario planning, the limitation was created because humans cannot hold more than a few ideas in their mind, and they can only analyze scenarios on two dimensions and four quadrants.

What Michael does is use an actual quantum engine.

This is very important. Most companies, when they talk about using quantum tools, they talk about using a quantum simulation. They are not actually running it through a quantum engine. They are running it through a Monte Carlo simulation to simulate a quantum engine, and they are not doing a quantum calculation. As far as we know, nobody is using quantum for this. We have built that capability, and we run it through IBM. Users can verify that this was run through an actual quantum engine.

Michael has built a digital clone of Porsche, which is trying to optimize the return on invested capital spread, which is the amount of money you earn over the cost of capital, and then reinvesting that to grow.

Then he instantiates that. He puts Porsche’s digital clone into the future. In this case we have given 100 different scenarios, where the old tool would have given you a quadrant. Michael also calculates what the two most likely important uncertainties are for Porsche. If you run a different company through this, like BMW, you are going to get different uncertainties and different tipping points.

Of the 100 scenarios run, 65 create value and 19 are in serious difficulty. Conditions are deteriorating. Early action changes the outcome.

Cost centers were built for a labor-intensive era

For the area you are analyzing, Michael then develops an AI strategy.

If you are analyzing Porsche’s supply chain in Mexico, if there is one, then Michael confines his thinking to how we would redesign Porsche’s supply chain in Mexico for an AI-first era. All of it is calculated from the proposal.

For this to work, Porsche will have to segment its market very differently from what it is doing now, geographically and by income. It is detailed. It is very precise for Porsche. Nothing generic here.

Then we look at what drives value. You have seen us do this before, where we plot all of the clusters of activity that Porsche is doing for this problem. Which parts of Porsche are currently worse, equal, or better than competitors, and which ones are core, critical, and support. Some of them need to be better than competitors. Within each cluster, we look at the flows, and flows mean work processes, ranked by which ones add the most value to the business and which ones add the least. Then the flows that cause the most value destruction.

Here is the point that is relevant to your own company.

Cost center and service center workflows are in the cost center or the service center because they were built for a labor-intensive era. Old analysis would tell you that if it is labor-intensive, maybe we should outsource it. If we rebuilt it for the AI-first era, you could turn some of these into investment centers.

The classification was a fact about how the work had to be staffed at the time it was designed.

Is this project safe for your career

We looked at whether this is something Jim could do. We looked at the proposal, the probabilities, scenario living, and the AI strategy. Now it’s time to ask if Jim Jones could do this project; it would be good for his or her career.

Jim Jones adds his resume.

Why the resume? Because the way people describe themselves when they set up Michael may be different from what their resume actually says. Michael compares the resume to the work and says, you said this about yourself in the beginning, and your resume does not support this.

Jim Jones presented himself as a partner. When Michael read his resume, Michael said, well, partner does not mean the same thing at different firms. Are you a partner at an elite firm, a partner at a minor firm, a partner at a boutique firm, or a partner in a one-person firm? Where does your skill level actually sit?

Based on what Michael reads in the resume, he says, look, you are more of an executive assistant kind of capability to a CEO, and you are not really partner principal level in your thinking, yet.

Then he goes through the things you need to consider. Was the proposal invited? If it was not invited, what is your standing to present it? What experience do you have that could help you?

At the end of the day he gives you a verdict.

Final thoughts

The bottom line is that Porsche needs to really focus on reducing the cost base in China. It needs to reallocate the cost savings into the United States. It needs to figure out how to be profitable in the United States. And it must remember that the big problem it is facing is getting regulatory approval for the hybrid transition.

The challenge Porsche is facing is much deeper than what the articles are talking about.

Four questions came out of this analysis that have nothing to do with Porsche and can be asked of any piece of work you are running this week.

1 – Is this worth fixing, and under what condition?

2 – Is the thing I am cutting a symptom, and what is the full capital base sized for the world that is going away?

3 – Am I cutting before I know what the strategy needs, and how do I know the capability I need is not included in the cut?

4 – Assume my analysis is correct. Can this leadership team actually do it, and what would raise the odds?

I wish Porsche the best. I think it is going to be a rough ride for them.

Take care,
Kris Safarova