Bankruptcies, foreclosures, the Dow's roller-coaster ride. The
credit crisis and the $700 billion bailout. Each headline seems to
deliver worse news.
Just where and when it will end and the world economy will start to turn around is anyone's guess. But the experts Harvard Management Update consulted
say there's far less uncertainty about what companies should do--or
more precisely, what companies should not do--right now. We've
distilled their thinking into five missteps to avoid during these
highly volatile times. For each, we offer advice to help you position
your company for healthier gains in the year ahead.
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-à-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 wrong, 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 [the 2001] recession is a down-ward cycle on a
high-growth trend." In such circumstances, "a cyclical down isn't that
bad, 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 local and wide-area networks. Overly cautious companies
don't want to expand till they see "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, [knowing] 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.
The company used to derive only 5% of revenue from services; now
services predominate, 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: Focusing on broadening your customer base
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 can be 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 says. If business leaders don't
expect the recovery to be strong, "their fears could become
self-fulfilling."
"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."
by David Stauffer
