Blue-sky Thinking
The UK is facing some of the most challenging economic conditions for many years. Profit warnings are coming thick and fast, and the sense of gloom is deepening with every new announcement about rationalizations and redundancies. But every challenge
represents an opportunity, and those companies busily cutting their marketing and training budgets and putting freezes on salaries and recruitment could be doing completely the wrong thing.
Jackie Orme, Chief Executive of the Chartered Institute of Personnel and Development, likens companies' current conundrum to a sort of 'glass half-full or half-empty' dilemma. So while the job of a leader gets harder in a downturn, 'maybe the potential for it to be even more rewarding just got greater,' she points out.
What is incontrovertible, however, is that while all organisations go through tough times, the test of their leadership mettle is how they respond. So although 'knowing how and when to batten down the hatches is undoubtedly an important leadership skill,' says Orme, 'it won't support growth, nor an advantaged position, for the longer term.' As such, she concludes: 'Riding out to meet the storm takes courage.'
It may take courage, but there is no alternative, says Steve Frobisher, a Member of PA's Management Group. 'Over the past 15 years or so companies have had it relatively easy,' he says. 'But globalisation, climate change and the war for talent are examples of
challenges that are rapidly intensifying, and a downturn just accelerates further an already accelerating pace of change.' He continues: 'You can get away with 'me-too' approaches in an upturn, but not in a downturn. Doing more of the same won't give you the answer, because that's what everyone else is doing and you get into a vicious cycle that leads
nowhere different. You are actually likely to need a completely new business model' and even in a downturn you get whole new types of customer demand.'
So a downturn should be a catalyst for a step change, he concludes. 'Treat it as an opportunity to sharpen your thinking about where you want to be in the future and how you're going to get there.'
The last recession, in 2000 to 2001, is within most people's working memories,
and some of the lessons to emerge from that are salutary. Indeed, some of them were encapsulated in an article entitled 'Preparing for the next downturn' in the pring 2007 issue of the McKinsey Quarterly.
Authors Richard Dobbs and Tomas Karakolev, partners, respectively, in McKinsey's London and Prague offices, along with Rishi Raj, a consultant in the Delhi office, found that while many companies were unprepared for the last recession, those that were prepared emerged stronger from the recession than they were when they went into it.
According to their research 40% of the US's leading industrial companies toppled from the first quartile in their sectors during the 2000-2001 recession, with one-third of leading US banks suffering the same fate. However, 15% of companies that had not been industry leaders before the recession vaulted into leadership positions during it. The post-recession leaders shared some common characteristics. Entering the downturn they typically maintained lower debt on their balance sheets, controlled operating costs well and diversified their product offerings and geographical spread. This gave them a high degree of strategic flexibility which
came into its own during the recession. 'We believe that flexibility can make a notable difference by allowing managers to take advantage of the opportunities that ' recession might provide,' write the authors.
Many of the post-recession leaders expanded their businesses during the recession, both organically and
through activities such as mergers and acquisitions (M & A), alliances and joint ventures. But pre-recession they had focused more on organic growth than M & A, giving them the flexibility to be able to buy cheap assets from distress sellers and pay their suppliers faster ' possibly in exchange for lower prices and better service.
The more successful companies also focused on reducing costs without damaging the long-term health of the business. They were able to cut selling, general and administration costs ' which are notoriously difficult to cut in the short term ' by making their overhead costs and operations more flexible before the recession. This allowed them to redeploy their funds, assets and personnel as conditions changed.
The less successful companies cut their research and development and advertising more deeply, which compromised their ability to exploit opportunities that this expenditure might create. What's more, before the recession their productivity per employee was lower than that of the leaders, so they had to lay off more employees during the downturn ' something that may well have damaged their ability to attract and retain talent in the future.
But, notwithstanding the help that strong advertising and marketing can provide in a downturn, companies must ensure that they sustain a relentless focus on their customers during the downturn and not be seduced into what Jean-Claude Larréché, Alfred H Heineken Professor of Marketing at INSEAD, calls 'compensation strategies'.
Compensation strategies, as Larréché explains in his recent book The Momentum Effect, are strategies ' not least marketing strategies ' that attempt to compensate for a poor product, service or customer proposition. Companies ' especially the larger ones ' waste lots of time, money, effort and people on such strategies, which are a proxy for the kind of 'origination strategies' that create real momentum growth, he argues.
Origination strategies create breakthrough products and services like the iPod or First Direct which, 'because they change people's lives, virtually sell themselves,' continues Larréché.
But such 'power offers' are less the result of marketing and sales, or even 'the kind of linear R & D activities that most big organisations do,' but rather 'spending more money and time upstream on the kind of teambased exploration and discovery that characterises the best entrepreneurial organisations. Taking people out of their normal environments for a couple of days at a time is very empowering and has an amazing effect on their ability to think creatively,' he says. It's a judgement that AG Lafley, CEO of Procter & Gamble (P & G), would no doubt agree with. When he took on the role in 2000, there were, he admitted recently, 'too many managers on their mobile phones, or buried in spreadsheets ' in essence 'showing the customers their behind'.' It was a culture he quickly set about changing. The customer is now at the centre of P & G's innovation activity, and Lafley expects his business units to have between 10-30% of their innovation portfolio focused on disruptive innovation. The downturn is unlikely to change that. 'Companies need to take the long view,' he concludes.
Previously published in the Business Review, http://www.impactexecutives.com/our-services/interim-management.html'\">Impact Executives
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