Positioning for Recovery
Recent Economic History
Article by: James R. Webb
Consulting Partner - Strategy - Stratus Partners
Heading into the Autumn of 2001, the Federal
Reserve had been desperately trying to revive a sick economy for nearly a
year. It was fighting a collapse in the manufacturing sector as capacity
utilization dipped to less than 75%. Further, it was fighting a collapse
in the technology and telecommunications industries after a period of
super heated growth. Worse yet, it was fighting a large collapse in the
stock market at a time when people had more of their wealth tied to stock
market than ever before. Fed Chairman Greenspan's prescription was to cut
the Fed Funds rate an unprecedented seven times in eight months. Despite
this strong move, the economy continued on a downward slope - then came
the disaster of September 11th. The Federal Reserve responded by providing
the banking system with tremendous liquidity and dropping the Fed Funds
rate to 3% - forcing rates down to a scant 1.75% - where they remain
today.
RECOVERY
Most of the recently issued reports indicate
that a relatively healthy business upturn is in place. Specifically,
housing starts are rising strongly; sales of new and existing homes are
holding at high levels; consumer confidence is up; new jobless claims are
down; and the market for semiconductor is improving.
Downside risk for the general economy is found
in two areas. First is the threat of hostilities in the Middle East. The
second is that the snapback in economic activity will be accompanied by
modest inflation. The end of an accommodating Fed as they respond to
inflation with higher interest rates could severely hamper an economic
recovery.
POSITIONING FOR RECOVERY
Back to the basics. Many of the basics of good
management had been forgotten through the bubble years as pundits
proclaimed new economic models and a world turned upside down. While there
is little doubt that some things have changed through the adoption of
e-Business, many fundamentals remain just that - fundamental.
We agree with the results of the survey by the
Economist that good management needs to re-focus on three key foundations:
- Be honest
- Be frugal
- Be prepared
Honesty
Honesty finds its way to the top of the list in an era of scandals at
Enron, Arthur Andersen, and others. One of the key components of strategy
formulation and implementation is the understanding of the corporate
culture. Indeed, when a strategic initiative meets a strong corporate
culture, the corporate culture will win most every time.
Being honest goes beyond the letter of the
law - it is doing the right thing. Warren Buffet, the Chairman of
Berkshire Hathaway, has built an empire on recognizing intrinsic
business value. This goes beyond financial analysis. Often at the front
of the annual report, Chairman Buffet will provide the corporate
financial results in several views, all of which are proper under the
United States Generally Accepted Accounting Principles. A manager does
not need to read the classic "How to Lie with Statistics" to know how to
spin numbers to meet a preconceived position. The business hype of the
bubble economy failed to adhere to the lessons of searching for doing
what is right for the company - being that which will add to the
fundamental value of the business.
A frequently quoted dictum is that "for every corporate crook there are
at least ten corporate deceivers." Of course, deceit demands more deceit
until the pile collapses. For example, in "The War for Talent" several
McKinsey consultants heaped praise upon former-McKinsey consultant Jeff
Skilling until the time he resigned as Enron's CEO. Another example
would be the concealed trading activity by Nick Leeson that brought
about the fall of Baring Bank.
Frugality
The foundation of frugality goes beyond cost cutting in a downturn.
There are far too many examples of extremes. We have experienced a
company that demands that their managers search for the cheapest airfare
(weekend stays, multiple stops), share hotel rooms, and even ask that
they bring back pens from the conferences. These counter-productive
messages repel able managers and discourage travel that may be needed.
Frugality in the business world includes the avoidance of extravagance.
The wild extravagance of the dot-com era included rivers of champagne,
trips on the Concorde, and a lavish image. Good management is searching
for value in every dollar spent while avoiding the downside of cutting
efficiency and employee moral.
The
frugality question is always the balance between cutting unnecessary
costs in the short term without endangering future potential.
Be Prepared
The third foundation is to be prepared. Managers are returning to
the idea that it is worth planning for the future. The dot-com era
brought about the myth that planning was futile as nobody knew what to
be prepared for. Nokia, Hewlett-Packard and EDS have revitalized their
strategic planning efforts. The Chief Executive of Emerson spends sixty
percent of his time meeting with the heads of divisions to challenge
their plans. Most strategic planning efforts are now focused less on
pure financial models and are now taking such intangibles as innovation,
future customer requirements, business processes and employee learning.
At the heart of strategic planning is that
it is a continual process. Once the ink is dry on the plan - it may be
time for an update. The business strategy provides a rallying point
around which managers are finding the basis for decision-making. As the
assumptions in the strategic plan change, so then should the
decision-making guidelines for management.
As Louis Pasteur (the 19th century French
Chemist) once said: "Chance favors only the prepared mind." In an era of
dynamic markets, intense competition, demanding customers and
competitors that seem to come out of nowhere - the prepared mind is an
essential.
