Managing in an economic downturn 1

Looking forward to recovery┬áIn an economic downturn, forward-looking executives introduce strategies for survival, but also prepare the business to lead during the recovery, says Rick Burris, Principal, Oliver Wight Americas. Stressful times create an environment of great risk but also of great opportunity. Economic downturns have always produced a winnowing out of weak businesses and ineffective executive teamsÔÇöbut they donÔÇÖt last forever. The best businesses find themselves positioned for growth by executive teams with the foresight to make the best choices under trying circumstances. An economic downturn tests a leaderÔÇÖs skills and mettle. This series of four articles will introduce a disciplined executive process to ensure that your company not only survives but is positioned to rapidly grow when economic conditions improve, as they will. This management approach includes critical thinking, multiple scenario planning, and integrated analysis of management planning and decision-making alternatives.Survival or survival plusMany companies miss the counterintuitive opportunity to fine-tune their businesses during the stressful period of managing in a down economy or market. Typically, senior executives are consumed with addressing the day-to-day turmoil of declining sales and cut-throat competitors, and they fail to prepare to take advantage of the inevitable upturn in business conditions. Surviving until the market turns is obviously a key priority. However, the real future of the company rests in its ability to lead the competition when economic opportunity again becomes the business driver.Companies that have mature, strategic sales and operations planning (S&OP) processes are best positioned to both survive the present downturn and prosper in the future economic environment. Organizations that currently donÔÇÖt have robust processes in place now have the opportunity to improve them when the frenzy to meet customer demand is at a manageable pace. The value of these planning processes manifests quickly in this stressful environment because they set a standard for thoughtful consideration of tough actions in the short term while developing nimble capabilities for the future.The budget trapEarly in my career, I spent time in Financial Planning and was among the guilty who recommended that all discretionary spending stop immediately during a business downturn. This approach is ÔÇ£easyÔÇØ because it avoids some of the tough cuts that adversely affect people. This also appears to be a ÔÇ£painlessÔÇØ cut as it sends the message that business infrastructure improvement needs are on hold until better times. Nevertheless, broken processes and worn tools are allowed to survive while asking fewer employees to operate in this damaged environment. This financial recommendation is misguided because it only deals with the immediate problems caused by the downturn. While discretionary spending should not be totally protected, a more reasoned approach is to evaluate the impact of these expenditures on how they will help ensure future growth with profits.┬á Capital investments are often postponed because returns are further into the future. While building a new office building may not make sense, investment in equipment or software can often create that future advantage in the marketplace. Production equipment also can be acquired at a discounted price (and more quickly) due to the availability of used, but almost new, machinery that shows up in the marketplace during periods of difficult economic times. A timely purchase now can make the NPV (net present value) and ROI (return on investment) more sensible in the short term and still support a rapid ramp-up when the economy turns positive.There are always opportunities for high-leverage improvements even when budget cuts are under consideration. It is essential to keep the employees and other stakeholders informed and to promote the message that you are investing now for the future. This initiative shows that you believe there is a future for the company, and it also can go a long way in preventing the loss of key talent. A key management imperative during this period, it must be emphasized, is to keep the remaining workforce challenged and positive. It also pays to send a message to the marketplace that ÔÇ£we are here for the long term.ÔÇØThe second budget trap is the ten percent initial cut, soon to be followed by the five percent cutÔÇöwith all of the cuts spread evenly like peanut butter across the entire organization. However, this apparent democratic (socialistic) way of sharing pain does nothing to prepare the business for a strategic future. It only allows senior management an easy explanation of apparent fairness, that of everyone having to ÔÇ£tighten their belts.ÔÇØ These ÔÇ£equalÔÇØ cuts impact key resources in an unforeseen and negative manner that hurts both survival and future growth. Instead, a recommended strategy is to ÔÇ£protectÔÇØ the business development and product development budgets to ensure the offered portfolio and customer relationships remain fresh and innovative. The best companies prepare for the future by investigating whether to bring everything back in-house that has been outsourced and for which they still have the capability and expertise to do. In good times, where meeting demand with supply is the driver, many businesses sent work outside as a ÔÇ£cost savings.ÔÇØ Now, however, asset utilization drives these decisions in a down economy. Preserving in-house key competencies allows for better ROA and ROI while providing more control over performance once the growth period starts. Companies need to ensure that they are not paying someone elseÔÇÖs overhead at the expense of paying their own.Integrated business management essentialsIn an economic or market downturn, there are only two priorities: survive today and prepare for the future. The executive management processes of strategic planning, business planning, and sales and operations planning are at the core of integrated business management. Weaknesses in any of these processes will certainly put either or both of the priorities at risk. Tough times present exactly the right environment to strategically define what the company is currently, what it needs to be in the future, and how to bridge the two.Peter Drucker, many years ago, provided a common-sense definition of strategic planning: ÔÇ£It is the continuous process of making present entrepreneurial (risk-taking) decisions systematically and with the greatest knowledge of their futurity; organizing systematically the efforts needed to carry out these decisions; and measuring the results of these decisions against the expectations through organized, systematic feedback.ÔÇØOne of the key risk-taking decisions in the short term is to redesign the organization into an economically viable enterprise that satisfies the investors. To do this while avoiding the budget trap requires disciplined strategic planning, a process demanding the best available information about the marketplace today, and the best intelligence about the future. Strategic planning, at its core, answers three questions: ÔÇó Where are we? (Performance analysis, assessment, and evaluation).ÔÇó Where do we want to go? (Vision, mission, and goal setting).ÔÇó How are we going to get there? (Strategy development and deployment).Strategic planning also embodies three additional questions that define the markets, products, and capabilities required to produce desired financial results: ÔÇó Where are we going to play? (Markets, competitors, territories, customers).ÔÇó What are we going to sell ?(Products, aftermarket, services).ÔÇó How are we going to win? (Cost, price, customer service, distribution).The best executives make the tough decisions about markets and products when the environment is at its worst. For example, carrying unprofitable product lines is easy in good times but deadly in downturns. Unprofitable business must be preserved only if it can be made profitable through an affordable investment with a short-term completion date. Reducing direct and indirect budgets for unprofitable lines often provides the fix for a big part of the short-term need to cut back.Business planning, another key integrated business management process, creates a shorter-term (one- to three-year) financial plan from the strategic plan. It is used to set objectives for the organizationÔÇÖs sales and operations planning. The business plan also defines the standards of performance for market share, customer service, product performance, and other key performance indicators important to the business. The business plan is an agreement on expectations between the business and its investors (whether internal parent or external owners). Sound, strategic planning is the only tool that management can use to negotiate reasonable expectations and defend expenditure plans against unreasonable demands by the investors. An example of this is to be showing an increased market share while explaining declining sales.Sales and operations planning (S&OP) is the strategic, customer- and finance-focused deployment and management process for achieving the strategic and business plans. The S&OP process consists of a series of steps in which the various functional organizations review their past performance and future plans to develop an integrated view of product, demand, supply, and the resulting financials projected over a rolling two-year planning horizon. This closed-loop planning and feedback system is the process for measuring progress against expectations and determining the effectiveness of strategic and tactical actions in achieving the business plan. Strategic planning without sales and operations planning does not create strategies that result in actual actions that meet expectations with feedback. The most effective companies are those where employees can articulate their part in accomplishing strategic imperatives and the expected results. ConclusionIf you are experiencing a situation where your markets have been hit especially hard, and youÔÇÖre agonizing over how to adjust to the economic downturn, it is time to pause and reflect. Consider investing some of those scarce funds (along with the time and energy) in fine-tuning and integrating your senior management processes to produce a positive driver of business activities. Then create an environment where the organization looks to the future with a realistic, positive attitude based on knowledge and action.┬á┬á More specific information regarding the operation and focus of the senior management processes and activities will be discussed in subsequent articles in this four-part series about effectively managing in an economic downturn.┬á