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Managing in a Downturn: Don't Overreact

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Post 4 in the series: Managing in a Downturn.

We’ve seen that recessions are opportunities for those who refuse to obsess on the constraints of the external environment (post 2) and that one corollary of this is that you shouldn’t retreat (post 3).

Another corollary is that you shouldn’t overreact. Baveja, Ellis, and Rigby’s article continues:

Companies that fared poorly during the last recession exhibited a common response: they overreacted, then “stayed the course” even when rougher seas lay ahead.

The lesson? If your strategy isn’t showing results, reevaluate it. don’t expect it to start paying dividends just because the economy is recovering. Winning firms react to trouble early, scrapping ideas that aren’t working and turbocharging those that are. Firms that hunker down can miss opportunities and create even bigger problems down the road.

So don’t overreact, but if you do, make sure to course correct in a timely manner.

Perhaps the primary and most important example of over-reacting is excessive cost-cutting. That will be the subject of the next post.

Posts in This Series

  1. Managing in a Downturn: An Introduction
  2. Managing in a Downturn: The Good News
  3. Managing in a Downturn: Don’t Retreat
  4. Managing in a Downturn: Don’t Overreact
  5. Managing in a Downturn: Be Careful of Cost-Cutting Campaigns
  6. Managing in a Downturn: Keep Making Meaning
  7. Managing in a Downturn: It’s Time to Hire

Managing in a Downturn: The Good News

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Post 2 in the series: Managing in a Downturn

Here’s the good news about recessions:

Recessions are famous for breaking companies. But what few people realize is that recessions are in fact more likely to make a company’s reputation.

A recent study by Bain & Company found that twice as many companies made the leap from laggards to leaders during the last recession as during surrounding periods of economic calm.[1]

So recessions are an opportunity. This doesn’t make them any easier, of course. And part of the opportunity lies precisely in the fact that they “shuffle the deck more than boom times do.” Thus, the study also indicated that more than a fifth of all leadership companies–those in the top 25% of their industry–fell to the bottom 25%.

So there is a big risk of falling in a recession. But it is through this that they provide the opportunity to advance and improve. The article continues:

These findings show that recessions are not so much “slowdowns” as they are intense crucibles of opportunity. Why is this so? Good times can cushion the hard truths of company performance, whereas tough times reveal true strengths and weaknesses.

Then, too, the number of strategic opportunities to make deals or to take advantage of weaker players increases during a recession. Many companies either hunker down or stray outside their core business in a desperate bid for growth, creating openings for companies willing to pursue thoughtful and balanced recession strategies. Judging from the experiences of the best performers of the last recession, the key is to stay focused.

So good times can cushion things, but hard times can reveal true strengths and weaknesses.

This means that a challenging economic environment is not ultimately about the factors beyond your control, but is actually about what is in your control — the nature of your company.

Thus, whatever has happened in your organization, the only way to advance through a recession (or turn things around if you’ve gone backwards) and seize the opportunity is to resist the temptation to blame external factors.

That can be hard to do, because conditions in a recession (and this one especially) are very tough.

But I am reminded of the point that Jim Collins makes at the end of Good to Great and the Social Sectors. He mentions that many people in the social sectors can “obsess on systemic constraints.” But, he points out in response, “every institution has a unique set of irrational and difficult constraints, yet some make the leap while others facing the same environmental challenges do not.”

In the for-profit world, for example, the company that generated the greatest return to investors on a dollar-for-dollar basis of all publicly traded companies from 1972 to 2002 was in the airline industry. It was Southwest Airlines.

“You cannot imagine a worse industry than airlines over this 30-year period,” notes Collins. The industry endured “fuel shocks, deregulation, brutal competition, labor strife, 9/11, huge fixed costs, bankruptcy after bankruptcy after bankruptcy.” Yet Southwest Airlines came out number one of all companies in all industries.

The point is: you cannot blame circumstances, as hard as they are. Great companies are able to succeed despite a challenging environment. One reason is that they live out “the Stockdale Paradox.” The Stockdale Paradox means that “you must retain the faith that you can prevail to greatness in the end, while retaining the discipline to confront the brutal facts of your current reality.”

This applies at all times and it applies in this current recession. Do not blame circumstances, as hard as they are. Own the difficulties and take responsibility to do what you can to “create a pocket of greatness, despite the brutal facts of your environment.”

For, as Collins points out at the end of the monograph, the most important point in all of his research for Good to Great was this:

Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice, and discipline.

Notes

1. “Taking Advantage in a Downturn,” by Sarabjit Singh Bevaja, Steve Ellis, and Darrell Rigby in Executing Strategy for Business Results, published by Harvard Business School Press.

Posts in This Series

  1. Managing in a Downturn: An Introduction
  2. Managing in a Downturn: The Good News
  3. Managing in a Downturn: Don’t Retreat
  4. Managing in a Downturn: Don’t Overreact
  5. Managing in a Downturn: Be Careful of Cost-Cutting Campaigns
  6. Managing in a Downturn: Keep Making Meaning
  7. Managing in a Downturn: It’s Time to Hire

Managing in a Downturn: An Introduction

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Post 1 in the series: Managing in a Downturn

Posts in This Series

  1. Managing in a Downturn: An Introduction
  2. Managing in a Downturn: The Good News
  3. Managing in a Downturn: Don’t Retreat
  4. Managing in a Downturn: Don’t Overreact
  5. Managing in a Downturn: Be Careful of Cost-Cutting Campaigns
  6. Managing in a Downturn: Keep Making Meaning
  7. Managing in a Downturn: It’s Time to Hire

This week we are going to do a series on managing in a downturn.

This leads us to two questions right away. First, why now? Isn’t the recession just about over? And second, if I’m not a manager, how does this relate to me?

Why Now?

Why do this series now, when it looks like the recession may be nearing its end?

First, the recession might not be over. Second, even if the economic contraction is over, it may be the case (especially if government policy doesn’t change) that an actual recovery could be a decent way off. So even if the downturn ends soon, there may be much managing in a down economy left to do.

Third, looking at how to manage in a downturn provides good lessons about management in general. The lessons you learn in a downturn are still relevant in ordinary times. Fourth, these lessons will be useful for future recessions, although after this one I don’t relish the thought that there are more to come down the road.

Why This is Relevant to Everyone

This series is relevant to everyone, even if you are not in senior leadership, because productivity isn’t just about how to be more personally productive, but also about how to be more productive as a society. Society as a whole is better off when everyone, not just senior executives, understands the things that make organizations effective.

It is also relevant in many other specific ways to people at all levels in an organization.

If you are a manager, it is relevant because you can apply these things as much as possible in your specific area. And it can hopefully give you a grid for understanding what the overall leadership of your organization is doing or is not doing. This, in turn, can help you contribute ideas and prepare for the next level of leadership.

If you are an individual contributor, it is relevant because you can fulfill your role more effectively when you understand the big picture in more detail. Further, the decisions made by the leadership in your organization affect you, so it will only be to your advantage to develop and refine your point of view on the matter more fully.

Last of all, this series is relevant even for those who are not employed by organizations, such as stay-at-home-moms, because all of society is better off when everyone, not just the specific people at the helm of an organization, understand the principles of management.

The more people throughout society who understand organizational management, the better.

When Tactics Drown Out Strategy

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Seth Godin had an excellent post a few days ago on tactics drowning out strategy. I find it especially relevant because (1) my role is “director of strategy” and (2) I’m spending the entire day today on strategy (which, at this point at least, I try to do every Thursday — and as a result have to say no to a lot of good tactical stuff.)

New media creates a blizzard of tactical opportunities for marketers, and many of them cost nothing but time, which means you don’t need as much approval and support to launch them.

As a result, marketers are like kids at Rita’s candy shoppe, gazing at all the pretty opportunities.

Most of us are afraid of strategy, because we don’t feel confident outlining one unless we’re sure it’s going to work. And the ‘work’ part is all tactical, so we focus on that. (Tactics are easy to outline, because we say, “I’m going to post this.” If we post it, we succeed. Strategy is scary to outline, because we describe results, not actions, and that means opportunity for failure.)

“Building a permission asset so we can grow our influence with our best customers over time” is a strategy. Using email, twitter or RSS along with newsletters, contests and a human voice are all tactics. In my experience, people get obsessed about tactical detail before they embrace a strategy… and as a result, when a tactic fails, they begin to question the strategy that they never really embraced in the first place.

The next time you find yourself spending 8 hours on tactics and five minutes refining your strategy, you’ll understand what’s going on.

A lot of people don’t get this. The pressure is to simply “perform,” and time spent on strategy is looked at as slowing you down and wasting your time.

Others think that strategy just comes naturally if there are smart people on your team, so it should never take more than a few minutes of thought. Whenever someone says “why can’t you see that? It’s obvious!” it’s often an indication that, no matter how smart they are, they don’t have a clue. There’s always a twist. Almost always, that is.

Perhaps most significantly, there is the false idea out there that thinking you should have a strategy somehow implies that you also think you can somehow know the future. But it doesn’t imply that. In large measure, you are strategizing for the unknown. Strategizing because of the unknown.

The Best Investment for Your Organization During a Recession: Organizational Health

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Patrick Lencioni has written many wise and sensible books on leading organizations, such as The Five Dysfunctions of a Team. His main focus is “organizational health.”

“Organizational health” is a low-cost, high-impact investment to make in your organization. It should be a priority during all times, not just during a recession. But during a recession, when there are possibly less opportunities pulling you in so many directions, you (perhaps) have a unique opportunity to give it more undivided attention.

Lencioni makes this point in his latest newsletter, “The ‘Down Economy’ Bandwagon“:

… use this time to invest in your organization’s future, especially when the investment is not a financial one.

The best place for an investment right now is in the general health of an organization. I’m talking mostly about improving the functioning of the executive team, and their clarification of and recommitment to the organization’s values and purpose. Doing this will require a little time and energy, but very little money. And it will yield significant returns now, and even more when the economy rebounds.

I got into Lencioni’s books about a year ago and have found his thinking to be among the most wise and useful out there on how to manage an organization well. He doesn’t give mainly “business thinking.” His thinking is useful to businesses, but it stems from broader principles that pertain to things like working well in working well in teams, managing people humanely, making jobs menaingful, and creating healthy organizations. In other words, his thinking is useful across all types of organizations — including families.

To flesh out the meaning of organizational health, I recently took notes over his book The Four Obsessions of an Extraordinary Executive, which focuses most directly on this topic.

He points out that organizational health is perhaps the key competitive advantage for any organization:

Organizational health is one competitive advantage that is available to any company that wants it, yet it is largely ignored. And, it is highly sustainable because it is not based on information or intellectual property. It should occupy a lot of time and attention of extraordinary executives (139).

What is a healthy organization?

A healthy organization is one that has less politics and confusion, higher morale and productivity, lower unwanted turnover, and lower recruiting costs than an unhealthy one (140).

How do you create a healthy organization?

The first step in making it happen is to realize that, like so many other aspects of success, it is simple in theory but difficult to put into practice. Requires high levels of commitment, courage, and consistency. Does not require complex thinking and analysis—and that is crucial. The second step is to master the fundamental disciplines and put them into practice on a daily basis. That’s what the rest of the book is about (140).

The fundamental disciplines or organizational health that Lencioni mentions are:

  1. Build and maintain a cohesive leadership team
  2. Create organizational clarity
  3. Over-communicate organizational clarity
  4. Reinforce organizational clarity through human systems

I hope to do more posts on organizational health in the future. Also, for more on this I would highly recommend The Four Obsessions of an Extraordinary Executive.

On Layoffs

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Tim Sanders has a great post from the other day called Layoffs: Unless Required for Survival, a Horrible Act.

I chickened out in titling my post here, opting for the ultra-safe “On Layoffs” because I have some more thinking to finalize in my mind on this subject. But Sander’s post is excellent. Here is the bulk of it:

I think it’s socially irresponsible to hire too many people during good times, only to lay them off when the business cycle goes South.  It happens all the time, I’ve seen it firsthand.  Today, many firms use layoffs as a way of telling Wall Street that they are being responsible – and frequently they get a short lived bounce in the stock price.  Note the phrase ‘short lived’.

In my view, socially responsible companies don’t need layoffs when they are still viable or making money. It is not an expense reduction strategy with an upside.  It should be a strategy of last resort, recognizing the pain and suffering that layoffs bring to its victims.

I would only want to add that lay-offs may also be necessary if a business legitimately needs to “prune” because of an intentional, well-conceived change in strategy and the way they are doing business.

But the fundamental point remains: It is really, really bad practice to hire too many people simply because “times are good.” You shouldn’t let your hiring — or spending — be dictated simply by the fact that resources are abundant.

This point is worth emphasizing in relation to expenditures especially: If something is a wasteful expenditure in bad times, it is probably also a wasteful expenditure in good times. Good times do not make wasteful expenditures less wasteful. There are no times for wasteful expenditures. This is not only right in itself, but if this were implemented more, there would be less need to cut expenses and lay people off when times get rough.

But the corollary of this is just as important to me (more important): If an expense or program is strategic, it is worth continuing in lean times just as much as in abundant times. Some things that are often viewed as “nice but not necessary if times get tough” are often in fact critical to long-term growth and success. Lean times should not be a justification for short-sighted cost-cutting. The book Profitable Growth Is Everyone’s Business: 10 Tools You Can Use Monday Morning does an excellent job making this point, especially in relation to marketing and promotion.

But there is a nuance here to my above comments. There are many more good and important things to do than there are resources. So sometimes good ideas cannot implemented because of real financial constraints. But then when the economy is doing well, the opportunity is created to do some of those things that could not have been afforded in leaner times. If those things can’t gain sustainable traction before a recession hits, sometimes there is no choice but to scale them back (unfortunately).

So I do believe that there are expenses that should be undertaken in good times that wouldn’t have been undertaken in leaner times. But the ultimate principle remains: Wasteful spending, or unnecessary hiring, is not justified simply because times are good. Likewise, don’t cut strategic, effective spending and strategic positions because times are tough.

The initiatives that are right to do are usually right in lean times as well as good times (see above paragraph for the nuances), and the initiatives and expenses that are ineffective to do are the wrong thing to do whether times are lean or abundant.

In good times, make decisions that can withstand the bad times; in bad times, don’t make decisions that you will regret when things recover — they will, in fact, likely delay your recovery and position you poorly when things do turn.

Update: Also see my post “Employees Are Not Overhead.”