Surviving Tough Times

Warren Buffet famously remarked that it’s only when the tide goes out that we see who’s swimming with no trunks on. But how can businesses ensure they’re not caught with their pants down when the recession hits? Senior Editor Ben Thompson reports on how some of America’s biggest companies are dealing with the downturn.

You’re probably all fed up with hearing about the downturn – but the fact is, we’ve never seen a recession like it. The metrics are bad enough. CEO confidence is at rock bottom in the face of a recovery that is likely to take years rather than months. Consumer spending is plummeting, with recent figures showing the sharpest decline since 1980. Economic growth in the world’s largest economy is predicted to shrink by 1.9 percent this year and a total of 2.8 percent in the current downturn, the most since the 1973-75 slump. Employment numbers are falling at their fastest rate for years with over two million US jobs lost last year, while a recent study by the National Association for Business Economics predicts another 3.2 million Americans will be cut from payrolls in 2009, pushing unemployment to nine percent by year-end. Debt levels are way up, credit is in short supply and both consumers and businesses alike are deleveraging with alarming speed. Tough times indeed.

No wonder the world’s CEOs are preoccupied with how best to manage through the downturn. “The speed and intensity of the recession has rocked the psyches of CEOs and created a global crisis of confidence,” says PricewaterhouseCoopers’ Global Chief Executive Samuel DiPiazza, Jr, whose firm has just completed a survey into the top concerns for business managers. The results are compelling – if unsurprising. “CEOs are most concerned about the immediate survival of their companies,” he continues. “Even in once rapidly emerging economies, companies are now coping with issues like unavailable credit, sluggish capital markets and collapsing demand. In addition, the severity and duration of the recession are difficult to predict and CEOs are balancing the challenges of successfully managing through the downturn while also remaining prepared for economic turnaround. Their prospects for recovery are truly connected.”

Striking that balance between hunkering down and riding out the storm on the one hand, and exploring opportunities that could give you the jump on the competition when the good times return on the other, is one of the most challenging problems facing business managers in such times – a fact borne out by the results of the PricewaterhouseCoopers report. Nearly 70 percent of CEOs said their companies will be affected by the credit crisis, and of those, nearly 80 percent said they faced higher financing costs with 70 percent saying they would delay planned investments as a result. Worldwide, just 21 percent of CEOs said they were very confident of revenue growth in the next 12 months, down from 50 percent in last year’s survey, and more than a quarter of CEOs said they were pessimistic about prospects for the coming year. CEOs worldwide were also gloomier about longer-term growth, predicting a slow recovery.

Nevertheless, it’s the hand we’ve been dealt. The recession isn’t going to disappear overnight – although without the right management strategies in place, your business might. Survival won’t be easy, but it’s far from impossible. So what are the business essentials for managing through the current recession?

Assume the worst – and if you must freak out, do it quickly It’s often said that the first rule in a downturn is ‘don’t panic’; the second is that if you are going to panic, panic fast. Fear is a natural reaction to the challenges posed by a recession, but the quicker you can formulate a plan to get you and your company through whatever lies ahead, the better your chances of survival. Tomorrow may be too late to put in place key deals or partnerships that could contribute to your continued existence and long-term health, so don’t wait for your competitors to get the jump on you.

Reevaluating your business priorities is a must (that expensive office refurb will have to wait, for sure), and recalibrating your sights on what’s important is a vital first step. What was previously ‘business as usual’ may no longer apply, so decide what you have to do to stay relevant in the new operating environment – and act fast. “Acknowledge the problems, and deal with them head on,” advises Ray Davis, President and CEO of Umpqua Bank. “There is no ‘normal’ in an economic downturn like this. These issues won’t dissipate or just go away, so it’s critical to address them straight on.”

Alongside your immediate concerns, consider how these short-term issues affect your long-term strategy. Check that this is still valid, and still delivers your corporate goals. This will help you focus on what is really core in the short term, and ensure your employees focus on securing these objectives in the long-term. “The world is changing so fast, you cannot think in terms of what you want to do 10 years from now; instead, you have to think on a rolling basis in terms of three-to-five year time spans,” suggests Mukesh Ambani, Chairman and Managing Director at India’s Reliance Industries Ltd. “The world fundamentally becomes a new place every three to five years. At Reliance, our longest planning cycle is five years. We pride ourselves on our ability to adjust quickly to external situations. We are clear about things that are in our control and those that are not.”

JP Morgan Chase CEO Jamie Dimon is even more forthright, and recently instructed a group at the Harvard Business School to put crisis management at the top of their list of priorities. “I am shocked at the number of people who are watching that train coming down the track and still worrying about their strategic plan for 2009,” he told them. “We canceled all that stuff – all of it, meetings, travel, you name it – to focus on the fact that we’re in the middle of a real crisis.”

Work on the basics; recessions don’t last forever The next step on the road to recovery is to consider some business fundamentals – in other words, distinguish between your costs and investments, and manage each accordingly. Research shows that winners in recessions tend to brake quickly heading into a downturn by controlling costs carefully and consistently. Bain & Company partner Darrell Rigby says it’s like downshifting to a lower gear to slow momentum and increase responsiveness. “Winners focus on what the company does best, reinforcing the core business and spending to gain share,” he says. “They aggressively monitor the competition to ensure they have the best possible line through the curve. That sets them up to accelerate at the apex of the curve when the economy starts to improve.”

The idea is that the farther ahead you can see and the quicker you can turn, the faster you can safely corner – an analogy that’s not lost on Johan de Nysschen, President of Audi of America. His company is determined to maintain the positive momentum it has built up over the last few years, and is looking to cost-containment as a means of achieving this. “At Audi we are doing everything we can to maintain the solid product impetus we’ve built up over the past few years, and we will continue to roll out new models throughout 2009. This is part of our long-term strategy to offer unsurpassed progressive engineering across our line up,” he asserts. “At the same time, however, we are very aware of the need to conserve as much capital as possible. We are examining every corner of our budget to find expenses we can rein in now so we don’t have to cut back on products, marketing initiatives, dealership activities or staffing later this year.”

For Audi, marketing, products and people are all seen as strategic elements that are key to the long-term health of the company. Others are following suit, reducing wastage, eliminating duplication and focusing on how to do the basics effectively and efficiently rather than cutting investments in core initiatives. “Of course, this is something you should do on a routine basis, but a recession brings the lesson home,” says Duke Energy’s President and CEO James Rogers. “It also reminds you of the importance of reducing capital expenditures. We’ve minimized our need to go to the market for capital in 2009, not knowing exactly what kind of market we’d find. We can always turn the spigot back on if the capital is there. It’s about protecting your balance sheet. It’s about reducing your cost structure. And it’s also about being prepared when the recession begins to lift.”

And it will lift. It may take a while, but the fact remains that sooner or later all recessions end. The trick lies in positioning yourself to take advantage when they do. The most successful companies never stop funding their most critical competencies, whether they be product quality, customer service or brand sophistication.

Invest in innovation: new problems mean new solutions One of those key areas is innovation – although this doesn’t necessarily mean you need to come up with the next iPod. Remember that the recession will mean new challenges for your customers as well as for you, and that responding in sophisticated ways can be a critical competitive differentiator. No matter what business you’re in, providing value for clients and giving them a reason to continue using you is what separates the successful companies from the also-rans.

It’s a lesson those involved in the tech sector know only too well. “If you’re in the internet world, your customers face zero barriers to exit,” says John Donahoe, eBay CEO. “You’re always one click away from losing a customer. So saying that change is constant is not just a conceptual thing. For us, it’s absolutely an everyday reality. And being in a young industry means that the industry structure is not yet established, so new business models are constantly emerging and challenging the status quo.” It means companies like eBay have to remain fiercely committed to offering the customer the most positive experience possible, and precludes them from taking loyalty for granted. As a result, thinking outside the box is a core requirement for Donahoe, and other companies would do well to take a similar approach.

Such times also provide an opportunity to re-examine traditional ways of doing business to see whether alternative approaches could provide an advantage. Fred Hassan, Chairman and CEO of Schering-Plough Corporation, thinks that the economic downturn might provide an extra stimulus to innovate. “For example, take energy,” he says. “The US is currently looking at a $700 billion bill for energy that we’re paying to overseas suppliers. If we truly are going to have a robust, long-term economy we’re going to have to deal with this and make some tough decisions. If we keep thinking short-term, we will not be able to deal with some of the structural challenges that need to be dealt with. In other words, tough times can make one innovate harder and faster.”

A key point is to ensure you make the most of your company’s inherent innovative potential. Great ideas can come from the most obvious of places, and quite often simply adopting best practices from particular areas of the business across the whole enterprise can reap significant rewards. Robert Willett, CIO at Best Buy and head of the firm’s international operations, says his firm has benefited from its global footprint – in more ways than one. “One of the great benefits of going international is that you create a balanced portfolio over time – a four-piston engine in which three pistons are usually working well. But geographic diversification also provides depth in terms of new, innovative ideas,” he argues. “We’ve had some wonderful innovations from Canada that have been adopted by US operations. Our China and US operations have also traded innovations, and vice versa. I don’t know how you quantify that; all I know is that we need innovation across the enterprise to continue our growth, and by operating on three continents we really increase the volume of ideas available to us.”

Identify your talent, keep hold of it – and then steal some more Finding and retaining top talent remains a major priority for CEOs even when times are good, but is particularly pertinent during a downturn. A shortage of candidates with essential skills was cited as a key challenge by nearly 70 percent of respondents in the PricewaterhouseCoopers survey, while other human resource concerns included recruiting and integrating younger employees, providing attractive career paths, and competition for talent within their sector. Throw the twin specters of layoffs and cutbacks into the mix and it’s clear that we’re looking at a busy 12 months for people professionals.

“The ability to attract people – to motivate them while they’re with you and motivate them to stay with you – is going to be a challenge,” believes Duke Energy’s Rogers. “We’re in a period when the demand for people is going to be greater than it’s ever been before.” At such times, identifying and keeping hold of your best employees should be an absolute priority – especially given that almost half of the employers surveyed in a recent KPMG study indicated individual staff workloads have gone up as a result of the credit crisis, with a similar number witnessing an associated increase in employee stress levels. Keeping your top talent feeling happy, rewarded and motivated to continue doing their best work for your company has never been so important.

Ebay’s Donahoe sees this as a critical area. “I think the first thing is having clarity about who the top talent is, and second, ensuring that you reward them both financially and with expanding opportunity as well as with personal acknowledgement,” he says. “At the same time, it’s counterproductive to lavish acknowledgement on your top talent if it’s done at the expense of everyone else in your company. But the worst-case scenario is that you over-invest in your weakest people and under-invest in your strongest people. If I can make my strongest performers five percent more effective through good feedback and coaching, that has a much greater impact than getting a five percent improvement from my bottom performers. It’s not sufficient simply to say to your top performers, ‘Good job, keep it up’. Instead, you want to be saying, ‘You’re doing great, but here’s how you could do even better’.”

Knowing who the best people are in your organization is obviously a crucial first step – as is your ability to keep tabs on top performers at rival firms. Those companies that fail to provide the best people with the right incentives and motivation to stay will quickly find themselves embroiled in a fight to hang on to their talent – leaving you poised to capitalize.

Be open, upfront and honest; good communication is key Successfully communicating in a downturn has two important elements: building or maintaining confidence in the brand on the one hand, and motivating staff and alleviating their fears on the other.

External communication is key. During recessions, companies of almost every size are tempted to rein in their spending, especially in marketing. They withdraw from the market, decreasing their presence and their visibility. But while it may seem counterintuitive given the nature of a recession, the fact that so many firms retreat from the market actually presents a great opportunity for a company to expand its presence – which means the last thing a company should do is decrease its marketing efforts. Once the economy recovers, the company that ramped up its marketing efforts during the recession will have already gained share or will be positioned to do so quickly as the economy grows.

The other element is internal communication. Good managers respond by communicating even more than usual, and having all the answers is less important than maintaining an honest, open dialog with employees and stakeholders. The recession was barely under way when The Wall Street Journal ran an article headlined “Allaying Workers’ Fears During Uncertain Times” that advised management to “communicate often”. It makes sense. One lesson learned from the previous recession is that those companies who are able to maintain employee engagement – and thus benefit from extra effort from their staff – have a much better chance of surviving and flourishing during the tough times and beyond than those who don’t.

The right tone has to come from the top. “Leadership is always important, but particularly critical during tough economic times,” says Umpqua Bank’s Davis. “Leaders have many roles, which include driving the company’s success externally. But more importantly, leaders must support and empower the people within their organization.” Davis’ firm provides the training and tools to support associates so they’re comfortable and confident handling the situations they face. “This empowers people to have their own answers, and also holds them accountable,” he says.

For public companies it’s important that the CEO or president doesn’t disappear in challenging times, but is visible and available. That openness and accountability helps build trust and confidence in your company’s strategy and leadership – both internally and externally. “It’s no surprise that organizations are reining back on non-essential spending and scrutinizing policies carefully. What is important is that changes are made sensitively and in a way that preserves goodwill,” says Tim Payne, Head of HR at KPMG. “Firms don’t want to alienate staff at a time when employee goodwill is a vital commodity. Employees understand companies need to manage their costs – but they still expect leaders to communicate clearly with them when changes are made.”

In times of economic weakness, the strong get stronger General Electric CEO Jeff Immelt recently called the current downturn “the opportunity of a lifetime” in a letter to shareholders, and there are plenty of others who feel that whilst operationally challenging, periods of recession actually give them the chance to prove their mettle. As business journalists everywhere are fond of telling us, the Chinese symbol for opportunity is the same as the one for crisis – a cliché, to be sure, but only because it contains an essential truth.

According to the results of an eight-year study by Bain & Company that analyzed the net profit margins and sales growth of more than 2500 companies, around 24 percent more firms moved from the back of the pack to the front in the 2001 downturn compared with the subsequent period of economic calm. Take Southwest Airlines, for example. With a clean balance sheet, a clear cost advantage and adroitly hedged fuel costs, the discount carrier was able to grow during the last recession at the expense of its older, more established rivals. As others eliminated capacity and jobs, Southwest lowered fares to gain market share, boosted advertising to trumpet its price advantage and built solid relations with labor by avoiding layoffs. The bottom line? Its fleet grew 51 percent in the six years ended December 31, 2007, and it is the only airline to make a profit every year since it was founded.

Audi’s Nysschen is in no doubt as to the potential offered by such periods to those companies with the courage of their convictions. “Times like these can be an opportunity,” he says. “While other manufacturers are pulling back, there is a real opportunity to gain market share – which is why we are planning to increase our 2009 marketing spending 15 percent from 2008. While paying due attention to the implications a challenging operational environment’s demands, one should remain focused on long-term objectives. You must plan for success. Keep the team motivated and focused on the long-term vision of the organization, and celebrate every success.”

Others concur. “We’re not standing still, particularly in these economic times,” says Umpqua’s Davis. “There are certainly challenges when operating a business in difficult economic times – for example, sustaining company culture and positioning a business for growth. But when crisis hits, there is also great opportunity to gain market share and hire great talent if you stay nimble and open to opportunity. We’re continuing to look for opportunities to grow and to support growth in our communities. When our communities thrive, we do too.”

As with anything, striking the right balance for your particular circumstances is paramount. The final word goes to eBay’s Donahoe, who points out that being successful in a downturn is not about battening down the hatches and waiting for the storm to pass; nor is it about betting big in the vague hope your hunches will come off. Instead, it’s about executing what you do well better than ever before; about making incremental improvements across the board; about seeing the potential in opportunities as they arise; and most importantly, about having the vision to see beyond the immediate situation. “There is more marketshare shift in turbulent times than there is in good times – more of an opportunity for a strong company to gain ground,” he asserts. “We’ll do it by being a little more customer-focused. We’ll execute a little bit better. We’ll be more prudent about our costs, and invest in a few, right things. I view the next 18 months or so as a period of opportunity first and foremost. It’s not fun, but it’s a period of opportunity.” Top concerns for CEOs Anxieties cited by executives in PricewaterhouseCoopers’ Global CEO Survey The impact of the recession 85 percent Disruption in the capital markets 72 percent Over-regulation 55 percent Energy costs 50 percent Availability of talent 46 percent Five top tips Too busy saving the business to stop and listen to advice? Here’s all you need to know about managing through a recession in five simple steps. 1| Don’t panic – and if you must panic, do it quickly. The quicker you formulate a plan for getting through the downturn, the better your chances of survival 2| Recessions don’t last forever, so plan for the upturn. Find a balance between short-term survival and long-term growth; things won’t always be this bad 3| New problems mean new solutions. Continue doing what you’re good at, but look for how you can better serve your customers’ changing needs 4| Identify your talent, keep hold of it – and then headhunt. If you can motivate and incentivize your best people, you’ll be in the best shape to survive and thrive 5| Don’t underestimate the value of good communication. Set the tone from the top; leaders should be visible and accessible, and above all honest

John Donahoe’s recession playbook At the recent World Economic Forum in Davos, the eBay Chief Executive outlined his four-part plan for dealing with the downturn. Stay externally focused. At times like this, it is so easy for an organization to turn inward. You read the newspaper and you watch the stock price and you become obsessed with your own situation. We’ve got to stay customer-focused because we now have to scratch and claw for each customer’s dollar. You’ve got to be really realistic about your costs and get them in line early so you don’t have to be reactive and surprised down the road. You can’t stop investing, but you’ve got to invest selectively. You’ve got to be very targeted in what you invest in, the things that will make a difference – which often turn out to be opportunistic investments. I would view our Bill Me Later acquisition as an opportunistic investment in our future at a counterintuitive and tough time. Work on teamwork and execution. During a downturn it’s natural for organizations to get distracted and have one part of the business start accusing another of getting more time and attention: “How come we’re being cut back more than they are?” Tensions build inside and people get sidetracked. So good execution and teamwork during turbulent times can provide a company with a degree of competitive advantage.

Inside business Mike Monahan, CFO at mailstream technology company Pitney Bowes, offers his thoughts on how to manage through a recession.

How are you approaching the current downturn?  We take a very balanced approach to this type of market. First and foremost, we need to understand the risks inherent in the marketplace, and we have a fairly comprehensive enterprise risk management program in place. We have taken the opportunity to create greater efficiency around our organization in the downturn, but have also focused on investment. In fact, as we went into this economic downturn in 2008, we actually increased our investment in R&D by 11 percent. What we’ve seen in the past is companies that invest through these types of economic downturns generally accelerate faster out of them, so we realigned some of our resources into investment in both our traditional mailing business as well as our newer software businesses.

Have you seen much impact in terms of your own operations?  We do have a high degree of recurring revenue, which provides a certain degree of stability, but economic downturns affect all businesses. We have focused on maintaining a strong capital structure, very strong credit ratings and good access to the commercial paper markets – as well as the long-term debt markets, because we do financing as well. More and more of our customers are looking for ways to finance their business operations, and we’re able to provide that. And like many other companies, we’ve also looked at ways of streamlining our organization, increasing the span and control of our management team and reducing the resources necessary to manage the business.

To what extent do you think it is important to have a really good risk management policy in place? We think it’s critical. We’ve had a program in place now for a few years and it’s well understood across the organization. We have 16 key risk categories that we’ve identified, and we’ve assigned ownership across the organization for developing mitigation plans against those risks. We also have a regular meeting process that allows us to look at current business environment issues and factor those into our planning process, and it’s a process that rolls right up to our board of directors.

Do you think this has been a problem area for companies in the last year or so? I think you see it every day in the way that companies are challenged in terms of access to the capital markets. In many cases, some of the very serious steps that companies have had to take may be related to the fact that they hadn’t anticipated certain risks or exposures to their businesses. I don’t think any company could claim to have full visibility into what’s occurring today, but the key is to have the mechanisms in place to respond to it. What is the most important thing for executives to keep in mind when managing through a recession? Well, I think first and foremost is to keep the customer front and center. That’s where our revenue is generated, and so making sure that you continue to invest in relationships with customers, giving them the right kinds of products and services, is key. Good customer service is going to be critical. And the other side of the equation is how you interact with your vendors. Make sure that 1) you have a viable set of vendors, and 2) that you’re managing relationships with them for the long-term.

What value do you put on open communication? I think there’s two sides to communication – external and internal. From an external standpoint, transparency is very important for customers and investors to understand the value proposition of the company, what you’re doing to be successful and how the business is performing. On the internal side, we have a strong philosophy around communicating with our employee base, engaging them in the actions that need to be taken, and in this downturn we’ve seen a very strong reaction from our employees to that.

How is this recession different to ones we’ve witnessed previously?   I think the speed at which it came on and the breadth of the industries and geographies that it’s impacted have marked it as different. It’s truly global, and thanks to technology we’re all interconnected much more closely than in previous recessions – but this isn’t necessarily a bad thing. Modern technologies really allow you to communicate more broadly and more consistently. In fact, we’ve introduced something we call IdeaNet, which allows our entire employee community to be involved in generating innovative ideas. I think it’s very empowering to employees. It gives them an outlet to put their ideas forward and to communicate with others across the organization. It’s a very important piece of technology, but also very important in terms of engaging employees in the business every day.

How do you ensure you’ve got the right talent in place to take the company forward? We have a pretty robust people development process that allows us to identify the skills we need for the future, and identify talent that can be developed to take on senior roles.  Our succession planning program requires us to identify at least two candidates that would be appropriate for a position within 12 months and then additional candidates that could be ready for the position out from there. It allows us to create a development program for each person that helps them move towards their career goals; and for the organization, it provides us clear visibility to the people who are going to be the future leaders of the business. In an environment like today, the ability to engage those people in problem solving is a great way to help them develop quicker, and it gives us a lot of insight into how we can manage going forward.