Put Volatility and Downturn to Work for Your Company Now

Bill Schneiderman
CEO, The Results Group
Mountain View. CA 94040
November, 200

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.

There is a better way. Moving beyond stopgaps, we profile several timely and actionable initiatives involving customers, suppliers and employees.

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.