Bankruptcies, foreclosures, the sine wave of the Dow Jones. The credit crisis and the $700 billion bailout. The headlines seem to reflect the current situation with increasing severity. People are starting to speculate about when and where the end of the world economy will come.
But right now, there’s no foolproof advice on what companies should do—or, more accurately, what they shouldn’t do, according to the experts at Harvard Management Update. We’ve distilled their ideas into five mistakes to avoid in these incredibly uncertain times. And for each, we hope to provide you with advice that can help you reposition your company for more stable profits in the year ahead.
Mistake #1: Delaying decisions that could improve your company's long-term health out of fear of short-term market reactions
“Investors want to see good quarterly numbers but not at the expense of the long-term health of the company,” said Nancy Kimelman, chief economist at SEI Investments, an asset management firm based in Oaks, Pennsylvania. “Any decision you make that investors can see—whether it’s hiring, inventory levels, or taking on more debt—you have to accept that your actions are being driven by their expectations.”
Obviously, you don’t want to increase headcount, inventory, or debt if you don’t need to. But the worst decision you can make is not to do what you should do because of your current investment climate. Don’t be afraid to make decisions that go against what investors and analysts think in the short term, but make sure you can demonstrate the value of those decisions. That’s what executives are paid to do: make choices that both boost sales and improve the company’s competitive position. “This is a time to get back to the fundamentals,” Kimelman says. “Companies that aren’t just focused on the next quarter will be successful.”
Mistake #2: Assuming that the smart way to ramp back up is always to be cautious and scale up gradually
The old-fashioned idea that a mild recession will lead to a mild recovery is wrong, says Brian Wesbur, chief economist at First Trust Advisors LP in Lisle, Illinois. At any given time, the economy has an underlying long-term trend and a short-term trend. “What we’ve had in previous recessions [like 2001] is a cyclical downturn within a high-growth trend,” he says. In many cases, “a cyclical downturn is not necessarily bad, and a cyclical upturn is a rocket ship. So I think the executives who underestimated the recovery were wrong, and those who took more risks now will be rewarded in the future.”
“That’s a very astute observation,” says Charlie Tragesser, president and CEO of Polar Systems, a Portland, Orleans-based provider of commercial local and wide-area networks. Many companies are too cautious to expand until they see “convincing signs that the landscape is changing for the better. That attitude will leave you behind.”
Two ways to capture innovation during a recovery are to aggressively attract new employees and customers from your competitors. After a recession, “the best-performing companies think like a patient who has just recovered from a stroke: ‘I know I’m going to live, but I’m worried about the quality of my life later,’” says Jeanie Daniel Duck, a partner and managing director at Boston Consulting Group and author of The Changing Monster (Crown Business, 2001). That means you have to take care of your best employees while also looking outward. As for your competitors, they may “still be quietly hurting,” says Albert D. Bates, founder of Profit Planning Group (Boulder, Colorado). “This is a great time to grab market share and customers from your competitors.” Don't be too shy to launch an attack when “some obvious opportunity is present.”
Mistake #3: Protecting the company by switching to “crisis-proof” business lines
Duck advises looking for growth and acquisitions that can expand and strengthen your core competencies. “When you come out of a recession, it’s natural to ask yourself, ‘What can we do to avoid getting hit so hard next time?’ Identifying your recession-proof businesses—those that continue to grow strongly despite a weak economy—is a dream and a worthy goal for any business, but it’s not always possible. On the contrary, knowing what your company’s strengths are, and even more importantly, knowing how to enhance your core competencies and build resilience, are attainable goals.”
A company that relies too heavily on its product should consider expanding into related areas. “For example, an industrial product company can help its customers improve their performance through maintenance support services, remote monitoring, or outsourcing their entire operations,” advise Adrian J. Slywotzky and Richard Wise, vice presidents of Mercer Management Consulting, in a Harvard Business Review article titled “The Growth Crisis—and How to Escape It.” “Providing insurance or output guarantees are two ways to help your customers mitigate risk. Almost every industry has opportunities for companies to reach beyond their own products and capture the needs of future generations of customers.”
“Automotive supplier Johnson Controls has seized these opportunities by shifting from a purely high-quality parts manufacturing function to one that anticipates the high-end demands of automakers,” Slywotzky and Wise write. “Today, Johnson not only earns more revenue per vehicle produced, but it also reaps greater profits because of the value it provides in custom design, customer research, product testing, and supply management.”
Charlie Tragesser has transformed Polar Systems from a product-oriented company to a service-oriented company since he acquired it in 1993. Previously, only 5% of the company's revenue came from services; now, services dominate. Not only has this shift helped the company offset the steady decline in profits in previous years, but Tragesser believes that a steady stream of long-term profits can "differentiate the company in the minds of customers. Our expertise, our capabilities, and even the personalities of our people can add value to customers and make them feel like they can't get all of those things anywhere else. Customers will be less interested in competitors who have nothing but products at very low prices." Service quality will differentiate your company more easily than product quality.”
Mistake #4: Focusing on expanding the customer base
Pay attention to the customers who have stuck with you through this crisis. They are likely to be the best customers you will have during your good times. Customers who are acquired through special promotions are not likely to be loyal, and they may be the first to leave when a competitor comes up with a more attractive counter-promotion. It is better to direct your efforts to attract as many customers as possible in the industry where your company currently operates.
“In times of uncertainty, a company’s best customers are even more profitable than in good times,” says Mercer Slywotzky. “It’s important to see the world through their eyes, especially now. How and at what stages can digital technology make their operations more convenient, faster, more accurate, and less expensive? What business processes can be linked to their most loyal customers for more seamless self-service?”
These questions all point to the importance of building customer relationships, something many companies have forgotten in the age of the Internet. Peter Keen, a technology consultant, notes that the dot-com bust serves as a wake-up call for any company, whether New Deal or Old Deal: “You can’t survive on transactions alone. What you have to have is a relationship with your customers.” Today, says Keen, president of Keen Innovations (Fairfax Station, Virginia) and author of The Freedom Economy (McGraw-Hill, 2001), achieving that requires characteristics of the Internet and pre-Internet era. “Move fast. Find a niche. Provide great value. And motivate your employees to build relationships.” This won't work if your employees are rewarded for meeting short-term targets, which is the best incentive for the cheapest deals.
According to Chuck Martin, president and CEO of NFI Research (North Hampton, New Hampshire) and author of Managing for the Short Term (Doubleday, 2002), all efforts are focused on finding new deals with new customers while current customers are almost forgotten.
Why? “The rate of new customers is a traditional and widely accepted measure of a company’s growth. It is easy to calculate and easy to understand.” Public sector companies in particular cannot resist the pressure to increase the number of new customers.
Mistake #5: Seeing leaders' actions, rather than their thinking, as the basis of recovery
“Attitude is everything,” says economist Wesbury. If business leaders don’t expect a strong recovery, “their fear becomes self-fulfilling.”
“It’s important to maintain a positive attitude during a crisis, especially when everything else is negative,” says Bates, founder of Profit Planning Group. “Your attitude will be evident to your customers and suppliers, so you can help your company a lot by simply smiling, saying thank you, returning calls promptly, and providing solutions to problems.”
But as recovery begins, executives are often “overly optimistic,” Bates continues. “We tend to neglect the activities that will help us recover, like managing expenses closely. I think it’s human nature, and you see things like that all the time.” Stan Liebowitz, a professor of managerial economics at the University of Texas at Dallas and author of Re-thinking the Network Economy (Amacom, 2002), agrees: “People get optimistic in good times, and then they get too optimistic. I suspect that in this situation, psychological factors are more powerful than economic factors. We start to break down our own standards of trustworthiness and investment. I’m not sure that there’s any technology that can change that.”
“For investors, the only question they are concerned about is, ‘Are you fooling me?’” says Nancy Kimelman. Until investors restore confidence in corporate governance and reporting, a full recovery remains elusive—a prospect within sight, but far away.
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