Long Article, but interesting and very appropriate in current situation. Surprisingly this article was originally published in the September 2002 issue of Harvard Management Update. Good One!!
Misstep #1: Delaying decisions that will improve the long-term health of your company for fear of the market's near-term response.
"Investors want positive quarterly results," says Nancy Kimelman, chief economist at the Oaks, Pa.-based asset management firm SEI Investments, "but not to the extent that they impair the long-term health of the company."With any decision you make right now that's visible to investors--whether it has to do with hiring, inventory levels, or taking on additional debt--you've got to assume that you're going to be second-guessed."
Obviously, you don't want to add unnecessarily to your head count or inventory or debt level. But the worst decision you can make is not to do what you should be doing because of the current investor climate. Don't shrink away from decisions that may be unpopular with investors and analysts over the short run, but make sure that you're able to show the value of those decisions. That's what managers get paid for: making choices that strengthen your company's offerings to clients and improve the company's position vis-Ã -vis its competition.
"Now's the time for a return to fundamentals," Kimelman continues. "Companies that focus on more than just the next quarter are the ones that will succeed."
Misstep #2: Assuming that the smart way to gear back up is always cautiously and incrementally.
Conventional wisdom, which holds that a shallow recession begets a shallow recovery, is likely to be dead wrong in the current instance, says Brian Wesbury, chief economist of Lisle, Ill.-based First Trust Advisors L.P. At any given time there is an underlying long-term trend and a shorter-term trend in the economy.
"What we've had in this recession is a downward cycle on a high-growth trend. In these circumstances, a cyclical down isn't that bad--as we've seen--and a cyclical up is a rocket. So I think that business executives who underestimate the recovery will make a mistake, and those who take more risk today may benefit tomorrow."
"That's an astute observation," comments Charlie Tragesser, president and CEO of Polar Systems, a Portland, Ore., provider of commercial localand wide-area networks. "Some of us may be the type that doesn't expand until we see the whites of their eyes--convincing signs of a turnaround. That attitude might leave you behind."
Two ways of seizing the initiative during the recovery are grabbing new employees and your competitors' customers. After a recession, "a top performer's thinking is like that of a hospital patient who's turned the corner: 'Now that I know I'll live, I'm concerned about my quality of life,'" says Jeanie Daniel Duck, senior partner and managing director of the Boston Consulting Group and author of The Change Monster (Crown Business, 2001).
That means you take care of your own best people, while also casting an eye outside. As for your competitors, they "may still be quite vulnerable," says Albert D. Bates, founder of the Profit Planning Group (Boulder, Colo.). "It's a great time to gain market share by snatching their customers." Don't be too shy to launch an offensive while "some very specific opportunities exist."
Misstep #3: Trying to bulletproof the company by moving into recession-resistant businesses.
Look for growth and acquisitions that extend and enhance your core capabilities, Duck advises. "Coming out of a recession, you're naturally going to ask, 'What could we do so the next one doesn't hit us as hard?' Identifying recession-resistant businesses--those that tend to keep going strong even in a weak economy--is everyone's dream and worthy of pursuit, but it isn't always feasible. However, knowing what you're good at and, even more important, how to extend your core capabilities and build in flexible capability are achievable tasks."
A company that's heavily product-reliant should consider extending into related services. "For example, an industrial products company might help customers improve their operating efficiency by offering maintenance support, remote monitoring, or complete operations outsourcing," write Mercer Management Consulting vice presidents Adrian J. Slywotzky and Richard Wise in their Harvard Business Review article, "The Growth Crisis--and How to Escape It." "It might help customers reduce their risk by offering insurance or output guarantees. Most industries harbor abundant opportunities to go beyond the product and address this next generation of demand."
Automotive-component supplier Johnson Controls seized these opportunities when it "moved from simply manufacturing a high-quality product to addressing automakers' higher-order needs," write Slywotzky and Wise. "Today Johnson not only earns more revenue per vehicle but also reaps higher margins because the value it offers includes specialized design, consumer research, testing, and supplier management."
Charlie Tragesser has transformed Polar Systems from a product-driven to a services-driven company since he bought it in 1993. "We went from 5% of revenues from services to 75% today," he says. Not only has the shift helped compensate for steadily declining profit margins on product sales, but Tragesser believes that a more consequential gain in the long run may be "establishing exclusivity with customers. Our expertise, qualifications, and even the personalities of our people can add value for customers that they find exclusively with us. They may be much less likely to jump to the competitor who comes in with low product prices and little else. It can be easier to differentiate your company with services than with products."
Misstep #4: Trying to broaden your customer base now.Cherish the customers who stayed with you through this slump. Chances are they'll be your best buyers in good times, too. The customers you attract only because of a special promotion are often the least loyal; they're often the first to abandon you when a competitor makes an enticing counteroffer. Your efforts are better directed toward winning a bigger share of existing customers' business.
"In uncertain times, a company's best customers provide an even greater share of the profits," says Mercer's Slywotzky. "It's important, especially now, to see the world through their eyes. How and where can their operations be made easier, faster, more accurate, or less costly using digital technology? Which business processes can be linked to the best customers to permit more convenient self-service?"
Such questions are directed at building customer relationships, which many companies lost sight of during the mad rush to the Internet. Technology consultant Peter Keen says the dot-com crash should serve as a reminder to every company, new-economy or old, that "you cannot live by transactions alone. What's required is customer relationships." Today, that calls for attributes of both the Internet and pre-Internet ages, says Keen, chairman of Keen Innovations (Fairfax Station, Va.) and author of The Freedom Economy (McGraw-Hill, 2001). "Move fast. Find a unique niche. Deliver tremendous value. And provide incentives for your people to build relationships." That can't happen when they're rewarded for achieving short-term numbers--the best incentive to go for the cheap transactions.
No small amount of courage may be required to "gear toward" more business from current customers rather than new business from new customers, says Chuck Martin, chairman and CEO of NFI Research (North Hampton, N.H.) and author of Managing for the Short Term (Doubleday, 2002).
The reason? "The rate at which you're getting new customers is a traditional and widely watched measure of growth. It's easy to gather and easy to grasp." Public companies in particular may find it hard to resist the pressure to rack up new-customer numbers.
Misstep #5: Assuming that a recovery is based on what leaders do, not what they think.
"Attitude matters," economist Wesbury states flatly. "If business leaders don't expect this recovery to be strong or doubt the veracity of the recovery, then I think their fears could become self-fulfilling."
"I agree," says Tony Raimondo, co-CEO of metal building systems fabricator Behlen Manufacturing (Columbus, Nebr.). "My COO and I want to be more confident. But we're not yet going to take the sort of risks we took before the recession." Raimondo says employee-owned Behlen's annual sales dipped from $185 million in 2000 to $160 million two years later. While monthly sales have shown gains versus year-earlier figures since March, "we're on a rocky road to recovery," with highly variable percentage increases. "We're aware of the irony that, if our attitude is prevalent, it could contribute to a double dip."
Raimondo's thinking reflects Chuck Martin's assertion that "there's a physical post-recession in progress right now--physical in the sense that the numbers indicate a turnaround." Nevertheless, Martin adds, "I'm not sure that matters as much anymore as do attitudes--what businesspeople really think." Martin views vacation days as an informal indicator of recovery mindset. "It looks to me like most people took their summer vacations this year. I don't think we saw that in the '90s. Everyone was too busy making money to take their days off."
Even though current economic indicators warrant a certain amount of skepticism, "it helps to be positive during a recession, when everything else is negative," says Profit Planning Group's Bates. "Your attitude is obvious to customers and suppliers. So you can help your company by smiling, saying thanks, returning calls quickly, and providing solutions to problems."
But when a recovery finally arrives, managers often become "overly euphoric," Bates continues. "We let the things slide that helped lift us back up, like keeping a close eye on expenses. I think it's human nature, the sort of thing that will always happen."
Stan Liebowitz, a professor of managerial economics at the University of Texas at Dallas and author of Rethinking the Network Economy, concurs. "People get bullish in good times, and then over-bullish. My suspicion is that psychological factors may be more telling than economic factors. We get lax in our standards for creditworthiness and investing. I'm not sure that any technology will ever change this progression."
But as for when those good times will return?
Says Nancy Kimelman, "For investors, the one issue on the table is, Have you lied to me?" Until investor confidence is restored in corporate reporting and governance, a full recovery will probably remain tantalizingly out of reach--visible, but in the far distance.
Courtesy - David Stauffer, Harvard Business Publishing
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