Managing in a downturn: Strategies for Success Part II

The second area for CEOs to focus on to manage a downturn, is marketing and communication. Again, I have put down some thoughts in an earlier post, so will not go into too much detail now. But I would like to emphasise that a well planned marketing and communication campaign can be carried out at a reasonable cost with a high impact.

The third area relates to new initiatives. I have mentioned earlier that investments dry up and new initiatives are ignored in a downturn. So what is the solution?

Let me emphasise that, by no stretch of the imagination am I recommending that investments continue to be made in the same manner as during good times. Far from that. It is good to be circumspect about investment and new initiatives in a downturn. But the tap should not run dry.

Let me take the example of a manufacturing business. Until the downturn, the factories of this business would have been busily engaged in churning out products for a specific industry, which they had been set up to cater to in the first place. Nothing wrong with that. And the good times witnessed over the last few years would have ensured that the factories performed at 100% levels, delivering a solid return on investment and ensuring growth.

Then, came the bust. And the industry the business supplied to would have been severely affected by the downturn. As a result, output would have dropped, the load at the factories reduced and idle time would have increased.

What are the options in such a scenario? One is the list of mistakes I have outlined since I began this blog. What would those initiatives result in? Definitely not an increase in revenue, or a growth in profitability. All that would be achieved would be consolidation of some amount of revenue and profit or perhaps maintaining a steady loss that does not grow further. And the factories would continue to have idle capacity. Not a great situation to be in.

A second option could be to go for volumes. Take in any business that comes in or that can be grabbed, irrespective of the price or profit margins. After all, in a downturn, all companies are interested in increasing their margins or, at the very least, reducing costs. There would be plenty of takers, beginning with existing customers and going on to customers of competition, who would be happy to give additional business at lower prices. But what would this strategy result in? Sure, the factories would not be idle any more and fixed costs would be spread across a larger output. But what about profit margins? They would be unlikely to increase significantly. In fact, there would be greater chances of profit margins not just dipping, but also sinking into the red, chalking up losses. For the additional high volume low margin (or even loss making) business would not just counterbalance the existing business, but perhaps also cannibalise existing margins since current customers would clamour to shift all their business to the lower prices.

Is there a strategy that could help fuel growth? Perhaps even increase profitability? I am sure you can think of some and I’d like to hear them.

But let me suggest one for now. Suppose the organization were to remove its blinkers that blinded it to new opportunities. Suppose it went out into the market and proactively looked at new industries that it never looked at before, for lack of time and/or inclination. You may be surprised (or not!), but for businesses that have done this, there are innumerable new opportunities just waiting to be discovered. New industries that can be tapped, either with existing assets and resources or with a minor investment. But these new initiatives can result in exponential growth even in a downturn. I’ve seen this happen. I’ve spoken to CEOs who have growth their revenue and profitability by upto 30% over the last eight months, which have been the worst months of the downturn.

The fourth area pertains to efficiencies. In all areas of the organization. Just as managerial inadequacies get glossed over during the good times, inefficiencies within the organization are overlooked and sometimes even swept under the carpet during a boom. The organization can afford to turn a blind eye to these inefficiencies, since the peak of the business cycle provides opportunities for growth and profitability that more than compensate for any negative impact these inefficiencies may have. But when a downturn begins, there are no buffers, and the inefficiencies stand exposed, with their impact on the bottomline a damning indictment of the excesses of the good times.

The downturn, then, is a great opportunity to weed these inefficiencies out of the system and trim the flab. This will create a leaner and nimbler organization which will be well prepared to grow rapidly when the upturn begins.

And that brings me to the topic that is extremely relevant as the downturn bottoms out and the upturn beckons.

How should organizations prepare for the upturn?

Managing in a downturn: Strategies for Success Part I

The first thing to remember: treat the downturn as an opportunity not a threat; attitude makes all the difference!

As may be apparent from my earlier posts on common mistakes made by CEOs in the downturn, there are a few key areas that CEOs can focus on, as a means to navigate any downturn.

The first relates to talent management.

This area can be managed in four ways. I have dwelt on the first method in some detail while discussing the reduction of headcount as a knee jerk reaction to a downturn. A planned, structured and analytical approach to the rationalization of headcount can help organizations manage the downturn successfully. So, I will not repeat myself here.

The second method pertains to the retention and motivation of the talent that the company chooses to retain after a well structured rationalization of headcount. Closely associated with this is the issue of enhancing productivity, since a rationalized headcount is expected, justifiably, to contribute in a greater measure, especially since the basis of the rationalization is to retain the best talent in the key areas of growth, both present and future.

This can be tricky, but not impossible. Any reduction in headcount causes discomfort, at best; and anxiety, at worst, among the workforce that survives the exercise, no matter how sensitively it is handled or how reasonable the logic behind the decisions. Morale dips. Motivation sags. In such a climate, simply maintaining employee morale is a herculean task.

So how does one go about the added objective of enhancing productivity?

There are several ways of doing this, beginning with the basic task of tackling employee morale and motivation issues. Transparency is critical at this point in time. Employees must know where they stand. Any uncertainty can lead to speculation and guessing games, which not only affects productivity, since employees spend more time in speculation than working; but it also affects morale further, when no clear answers are forthcoming. Honesty and transparency can go a long way in improving morale, by simply settling apprehensions and anxieties.

Avoiding negative pressure is another way of enhancing productivity. No one--including you and me--likes to work under negative pressure. It is easy, in a downturn, to be negative. Criticism, doubts about performance and commitment, fault finding and passing the buck are common occurrences when things start going wrong. And all of these have an immediate and perceptible impact on employee morale and motivation. What is required at this time is the ability for senior managers to be calm and composed. The downturn cannot be wished away. But it can be managed. The recognition of this simple truth can help. Managers should consciously steer away from negative communication. Positive feedback, encouragement, proactive support and appreciation, all go a long way in enhancing morale and motivation.

And the best thing is, if managers are honest and positive with their teams, the natural corollary is that employees will reciprocate. This creates an all round climate of transparency and positivity within the organization.

In fact, involving employees in the decision making and planning process while strategizing for the downturn is a great way of not only improving productivity, but also of getting new ideas. First, employees feel great about being involved. It gives them immense satisfaction in contributing to the organization when it is facing difficulties and also gives them a sense of value. Second, it gives them ownership of the final strategy, which always enhances productivity and performance. Third, you’ll be surprised at the ideas employees can come up with when asked…all you need to do is involve them! One great way of doing this is through coaching and I’ll dwell on that in a bit.

Increments is yet another way of managing morale and productivity. Most organizations freeze increments across the board in a downturn. What if organizations were to be creative about this. For example, the hardest hit by an increment freeze are the staff at the lower levels of the hierarchy. Suppose the organization were to give them nominal increments, but freeze increments at the managerial levels, where the pinch is felt less? How do you think that would go down with employees?

Stop here for a moment, and go back to the methods I’ve just described. Do you see a pattern emerging? Put yourself in the shoes of an employee who is managed thus. Do you see your morale and motivation improving? And I hope that by now you would see how this has a direct and tangible impact on productivity.

There are many methods to improve productivity. But I would I like to spend some time on yet another very powerful method of enhancing productivity, albeit one that comes at a cost. And that is: coaching employees. Coaching is not about giving advice. It is not about counseling them on their performance. It is about helping employees find their own solutions to enhance their performance or achieve specific job related goals. It is also not meant so much to fix problem behaviours. It is more to help valued employees find solutions to enhance their own performance and contribution to the organisation. Coaching believes in the potential of each employee to deliver the goods on their own; and the coach simply facilitates the way, invisibly and silently. Coaching employees, especially key team members who have a significant impact on the business, can go a long way to improve performance and productivity.

The third method of talent management relates to the training and development of existing talent. This is also a method that enhances productivity. A downturn, where employees may not be fully occupied, is a great time to enhance skills and learning, along with self development. I will dwell upon this in a bit more detail when I write about preparing for the upturn.

The point about training and development I would like to highlight here pertains to managers, especially senior managers. The present downturn is unprecedented. A synchronized downturn of this nature has not been seen since the Great Depression. However skilled, competent and experienced a manager may be, and irrespective of his/her level within the hierarchy, there is no manager in the world today who has experienced a downturn of this nature. Which means that the skills to manage the present downturn are woefully inadequate. But this blog is about any downturn, and hopefully in the future there will be fewer downturns like the present one.

Some managers ride high with the good times, during which time their strengths are highlighted and, indeed, put to good use for the growth and gain of the organization. But along comes the downturn and their weaknesses are exposed. This is not to say that they are incompetent or that their usefulness to the organization has been outlived. It is simply that their skill sets do not include skills to manage the downturn. It is critical to identify such managers and equip them with the skills necessary to successfully navigate the storm. It is not such a difficult task. And coaching, as I have mentioned earlier, is a great way to create self realization about the way forward.

The fourth method of talent management is the redeployment of skills. This is also closely linked to enhanced productivity. With employees being more productive, they may have time to look at other areas that they may be able to manage, but have not had the time or the inclination to focus on earlier. Profitable redeployment of skills is possible and has been successfully implemented by many organizations.

Building the Sustainable Organisation

I spoke on Saturday, July 25th, at an event organised by SHRM India and MTHR, on the topic of sustainability.

As usual, my session centred around my pet theme of humane capitalism. I spoke about my theory about the evolution of capitalism to a state where business enterprises will embrace sustainability as a strategic initiative which is part of their business model, rather than having corporate social responsibility and triple bottomlines imposed on them from outside.

I had a very engaging audience this time, and I was delighted to find myself challenged at various points of the address, which led to animated discussions on my thoughts and beliefs vis-a-vis the reality in business.

One of the thoughts that generated a lot of heat was my assertion that corporate social responsibility is imposed, necessarily, from the outside on a capitalist enterprise. The basic nature of capitalism is the pursuit of profitability and increase in shareholder wealth. Social and environmental responsibilities, if they fit into the strategy to increase profits, are embraced willingly; however, if they don't, they fall by the wayside. I believe that CSR has been more abused than used as a tool to improve social and environmental welfare, and am a willing sceptic of most CSR iniatives with respect to their intention and ability to improve social and environmental conditions.

The biggest objection to this position of mine was the fact that there are several business houses in India, notably the Tatas, who have been engaging in corporate social responsibility for years. This was the key challenge to my point about CSR. It made me think about my position and evaluate my arguments.

The conclusion, however, is that my views remain unchanged. I believe that the actions of the Tatas resemble those of, say, Bill Gates. The Tatas are philanthropists; giving is in their blood, in a manner of speaking. And they have not given because they believe it is a responsibility. They have been giving of their free will. Because they believe, genuinely, that by giving back to society, they will make some difference to the lives of the people who are touched by their generosity.

Is that Corporate Social Responsibility? Or is that individual philanthropy? I believe it is the latter. And that is because it rests on the philosophies of the Tatas as a family of businesspeople, rather than the enterprises they run.

Perhaps the fault lies in the nomenclature of CSR. From what I have seen through my research on CSR, I continue to believe that it is imposed from the outside on organisations. Some are willing and others unwilling, but that doesnt change the nature of CSR.

Managing in a downturn: Mistakes CEOs Make - Investment

Here's another trap most CEOs fall into when confronted by a downturn. The investment tap is promptly switched off. The justification, of course, is logical and perfectly reasonable.

In times of great uncertainty, like a downturn, the return on existing investment is hard to forecast with any degreee of accuracy. So how does one justify new investments, which may be even riskier from the perspective of ROI?

The solution, therefore: stop new investments.

The unfortunate part about this conclusion is that it is indiscriminately applied to all new investment decisions. In the process, some perfectly good opportunities to grow in the downturn can be missed.

What this also does is to stifle creativity and innovation, whether it relates to process, product or service. People begin to look at consolidation of existing business, existing investments and existing operations -- which by itself is not a bad or wrong thing to do -- and ignore new initiatives which could open up new opportunities.

I think the best way to illustrate what I am saying is to show how companies do it right. It is all too easy to give examples of companies stifling investment. Look around you and you'll spot them; look within your own organisation and you'll probably see it happening there as well. But an example of how successful companies use wisely assessed investment decisions to grow their business in a downturn will illustrate the point I am trying to make.

More on this in a later post, when I talk of how successful companies manage the downturn, I'll show you how this can be done.