Preparing for the Upturn: Part III

The second implication for business leaders is planning. Vision helps stay focused on the big picture, so we don’t miss the woods for the trees. Planning ensures that the vision is articulated and the organization works towards achieving the vision.

Vision, by definition, is warm and fuzzy. It lacks structure, but provides purpose. It is all too easy to get lost in the swamplands of the downturn. Planning helps the organization to stay on track.

And this process begins during the downturn, concomitant with the vision.

Based on the vision, a long term plan needs to be drawn up. This plan should reflect not just short term measures to negotiate the downturn, but also long term strategies to capitalize on the recovery. And the short term measures should be evaluated in the perspective of the long term strategies. Each measure should be judged by the value it adds or subtracts from the achievement of the long term strategies. This ensures that short-sighted measures that dilute the resources of the firm are not chosen over actions that will silently reinforce the ability of the firm to accelerate its growth when the upturn begins.

Some of these short term measures that add value to the long term strategies have been discussed in earlier posts, and juxtaposed against those measures that detract from the firm’s long term abilities and resources.

I can hear howls of protest from certain quarters when I speak of long term strategies during a downturn.

The volatility and uncertainty engendered by the current global recession has given rise to a short term mindset.

Where is the ability, you may ask, to forecast sufficiently accurately in the long term, when short term visibility is low? To use the analogy of the ship again, this is like steering a ship through a dense fog, aiming for land thousands of miles away, when you cannot see three feet ahead in the mist.

There is certainly logic in this suggestion. But there is also a solution. And I will explore that solution in my next post.

Preparing for the Upturn: Part II

Following up from the last post, the first implication for business leaders is the need for consistency of vision. Vision is long term and by definition, cannot change irrespective of the change in the external business environment. If this sounds like a paradox, consider this.

Imagine the organization to be a ship that sets sail from Port A, with the destination as Port B. There are several routes across the ocean that can be followed to get from the port of origin to the final destination. There will be a direct route, but that may have challenges and dangers that lie in the path of the ship, which could endanger the ship and crew (read the business and its human capital). So, the ship will need to take a route that circumvents these ocean based perils, which may involve tortuous detours and the deployment of additional resources. Based on the knowledge of the ocean, a route is fixed (read strategy for business).

However, there will always be dangers that are unknown or that may come upon the ship unexpectedly. For example, the weather could change suddenly while at sea; storms can blow up and ocean currents can change without warning. These are changes in the external environment of the ship that cannot be predicted. At best, the ship’s captain and crew can anticipate the probability of encountering such unexpected challenges and prepare contingency plans to counter them.

Does this sound familiar? Can you relate this metaphor to business?

So how is this related to vision? The long term vision for the ship is not confined just to the ship’s journey. It relates to the big picture: the fact that the ship must make multiple journeys back and forth across the ocean and must remain sea worthy to do so.

What is true of the ship is equally true of the business enterprise. It is an animal that needs to endure the hardships and challenges of the business environment, weather all kinds of economic and financial storms and skillfully negotiate the adverse currents of risk.

It must do so to survive the short term and make it out of the downturn, much as the ship must emerged unscathed from the storm. But, as importantly, just as the ship needs to stay seaworthy to make all those future trips across the ocean, the enterprise must stay equipped to flourish in the long term.

This is the vision that must guide business leaders through the downturn. And this is the first step to prepare for the upturn.

Preparing for the Upturn: Part I

Strange as it may sound, preparing for the upturn actually begins in the downturn. Yes, that’s right! Most of the strategies that I’ve described in earlier posts, which help manage the downturn, are double edged strategies that also help organizations prepare for the recovery. And that is why I’ve been at pains to emphasise that while managing a downturn, it is imperative to keep a longer term focus and not resort to knee jerk reactions that may have short term benefits that are superficial in nature, but may simultaneously chip away at the long term competitiveness of the organization by depriving it of resources and competences that will be required once the recovery sets in.

Preparing for the upturn is all about ensuring that processes and resources within the organization are in place to exploit opportunities that will begin to present themselves once the recovery begins. And, as we all know, rigorous preparation can never be done in a day. It takes time, patience and planning. Which is why the downturn itself is a good enough time as any to start. If an organization decides to wait out the downturn, in order to conserve resources, reduce costs and manage profits during the downturn, it may find itself lagging behind competition once recovery sets in, and it may miss the bus when opportunities present themselves. And this will happen precisely for the reasons the organization has waited so long. Since it has conserved resources, it will not have the time to begin building up the resources in time to seize the advantage; its cost reduction measures would have become hardwired in the system and difficult (and costly, ironically!) to reverse, proving to be the proverbial millstone.

What does this mean for the leadership of the organization? The implications will be the subject of the next few posts.

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: Mistakes CEOs make

I've never understood this. Whenever there is an economic downturn, organisations go into "survival mode". They begin slashing costs, retrenching employees, restructuring the organisation, cutting marketing budgets...in sum, a host of "priorities" take over. I can't help comparing it to a kind of preparation for hibernation, where the metabolism begins to slow, the body tries to conserve energy and in general, the organism becomes sluggish and sleepy.

Does this analogy extend to the world of business? In today's competitive scenario, I believe it does. The impact of all these strategies for survival is to stifle opportunities which the organisation would have otherwise aggressively pursued in its endeavour to grow profitably. It reduces the inclination to be innovative and experiment with new business strategies, especially those that are the most innovative and, therefore, appear to carry the greatest risk. The net result of these measures may well turn out to be the equivalent of commercial hibernation; stagnation or even reduction of revenues and profits, and it may be difficult to recover in the long term.

While I do not for a minute believe that organisations should not attempt to protect their bottomlines when the market for their products or services is shrinking--and I would not like to generalise, since there are organisations who have genuine cashflow problems which can only be tackled through drastic measures--I would like to argue that organisations should not adopt a blinkered approach or ignore opportunities for growth.

The purpose for the existence of any firm is to grow through acquisition of new customers, increasing the business, profitably, from existing customers and retaining their existing customer base. I believe that organisations would be better served if their managements were to focus on these three key areas in a downturn; strategies to achieve these objectives would be more effective in at least maintaining revenues and profits in a downturn, as well as ensure that the organisation is well prepared for the upturn when it happens.

The next few blogs will dwell on some of the issues I have outlined in this blog, and explain:
a) how an organisation in survival mode can harm its long term prospects and weaken itself when the upturn arrives
b) what are the strategies organisations can and should adopt in order to protect themselves from the downturn, without any adverse side effects
c) how these strategies will benefit organisations during the downturn and when the upturn finally arrives