Put
Volatility and Downturn to Work for Your Company Now
Bill Schneiderman
CEO, The Results Group
Mountain View. CA 94040
November,
2008
Right
behind the wringing of hands and gnashing of teeth over the global
economy lies the hidden truth that volatility and downturn form a
surprisingly effective backdrop for improving competitive position
and seizing industry leadership – witness stark changes already
taking place in financial service and retail industries. Current
conditions form a picture colored with various shades of urgency:
competitors preoccupied with short term financial issues, customers
seeking more from their suppliers, suppliers and employees both more
ready to embrace better business models and processes. Competitive
dynamics do not take a holiday during difficult times; companies not
taking definitive action to move ahead inevitably fall behind. The
real question for senior leaders charged with operating companies is
how to turn these times to best advantage rather than allowing the
company to drift with the falling tide.
Managers
often turn to various traditional remedies, such as: cut product,
service and process innovation efforts, implement across the board
spending cuts and layoffs, beat up suppliers for lower prices,
require CEO/CFO approval for all Purchase Orders, and freeze all
hiring and salary increases. While very short “freezes” and
across the board actions can provide breathing room to plan and
initiate better targeted actions, these stopgaps are never adequate
substitutes for thorough and systematic efforts and actions that
build real value and competitive position. When applied instead of real improvements, stopgaps reduce company value in favor of
financial band aids that do little to improve fundamental company
competitiveness in the marketplace. Most importantly, stopgaps
undertaken in isolation diminish confidence in management (just when
it is needed most) by the key corporate constituencies: customers,
shareholders, employees and suppliers. Management builds both the
value of the firm and confidence in its judgment by not settling for
the easy way out.
Achieving
better performance and improving market position almost always
involves going beyond the competition’s understanding of customer
needs and delivering value propositions better fitted to those
needs. Royal Bank of Canada and Best Buy are both known for
superior business performance driven by re-segmenting markets ahead
of competition through leveraging superior knowledge of customer and
segment profitability. It is surprising how few firms have taken
even the first steps and how much impact those initial steps can
have. For example, we recently worked with a B2B software company
that was shocked to learn that any of their customers were unprofitable (this firm is not alone in
being shocked with this revelation). Hidden in the averages were a
small set of customers who were consuming such a disproportionate
share of technical support resources that contribution margin was
negative. In general, can these unprofitable segments be turned to
profitability or should they be targets for disinvestment? Crisp
answers to this question can always be a major advantage in dealing
with prioritizing development projects of various kinds, but the
decisions about which projects to fund and which resources to let go
take on special impact during difficult times.
The
pressures of volatility and downturn are felt most strongly by
companies making bigger bets for longer term payoffs. High
inventory investment is one such bet. Why not take the initiative
to reduce this risk amplifier, even in the midst of a downturn? Lam
Research Corporation did that during the last major semiconductor
equipment industry downturn. They invested consistently to reduce
the inventory footprint of their supply chains. This created an
overwhelming and enduring advantage, now enjoyed for more than five
years, in inventory turnover relative to a comparison group of other
major players in this industry: Applied Materials, Novellus, and
KLA-Tencor. This advantage was accomplished by leveraging
their suppliers’ worldwide presence and distribution capabilities
through innovative business models and processes, utilizing
web-based information sharing, and better allocating spare parts
around the globe. This
freed up cash for other investments such as new product development,
driving revenue growth. From early 2002, through mid 2007
(corresponding approximately to the recovery and growth phases of
the cycle), the company’s revenue growth and stock price
dramatically outperformed the comparison group. There is no better
time to work jointly with the supply chain than during difficult
times. Not only are suppliers motivated and flexible, but they also
welcome collaboration on something other than unilateral price
concessions, driving a spirit of loyalty and partnership forward
through time.
High
inventory investment is only one of many business operating
characteristics that not only make bets bigger and payoffs further
away, but also make companies less competitive. Long product
development and introduction cycles, for example, have the same
effects. Addressing these kinds of process and business model based
opportunities reduces bet size as well as risk-related pain during a
downturn. Engaging employees in these important efforts provides
the surest salve for stress derived from a bleak present and
uncertain future: working to control destiny. Why not capitalize on
the urgency of a downturn to blunt resistance from cynics in the
organization? Making significant and sustained progress becomes a
basis for advantage through subsequent business cycles, rewarding
investors and other constituencies over a continuing horizon.
Difficult
times also present unique opportunities to upgrade key elements of a
workforce, multiplying the effects of employee engagement cited
earlier. If competitors have cut key innovation projects,
instituted across the board cuts/layoffs, and/or frozen
compensation/hiring, then some of the best people in the industry
may be available. If not already indiscriminately let go, they may
be receptive to joining a company actively seeking to lead its
industry through difficult times and beyond. While proactively
hiring the best, balance the workforce by letting go of the lowest
performers. Companies can usually improve productivity, capability,
profitability and morale simultaneously with careful choice of the
individuals. Employees respect management who address performance
and take action. Customers, suppliers and partners will also take
notice of better performance, raising their confidence in management
at a time this is most needed.
The approach suggested here requires more careful attention and a better understanding of one’s business than relying solely on traditional and across the board reactions to volatility and downturn. But these conditions clearly present unique opportunities to seize leadership and move ahead of competition that can be captured only by intelligent action and prudent risk taking. Investors are frequently urged not to reactively sell stock in a downturn but to concentrate on long term value when making decisions. Senior managers should similarly concentrate on building value and competitive position in making operating decisions. These fundamentals of good business always apply, in good times and bad.