Anand Sharma: The decisions you make over the next several years will determine how well your company reacts when the next recession hits.
Economic recessions kill complacency. They kill inefficiency. They kill wasteful activities that proliferate as a company grows. The fight for solvency and survival will see to that.
The recent recession was the deepest in decades. But as wrenching as it was for manufacturers that had to shutter their factories, to the people who lost their jobs, and to homeowners who saw thousands of dollars of equity vanish, I fear that it was not long enough or deep enough to remain a permanent part of management consciousness.
This recession paled in comparison to the 20% plus unemployment levels of the Great Depression, and the food shortages, material rationing and other deprivations of World War II. Those events had an enduring impact on how several generations of British and Americans thought, lived their lives and ran their businesses. Today, quarterly sales for many corporations are already showing signs of returning to where they were just two or three years ago, and projections for British manufacturing output recently hit a 15-year high.
After every recession that I’ve been through— which is a few more than I’d care to admit—when sales begin to bounce back it isn’t long before the trend lines on sales forecasts all start pointing upward again. Companies will soon jump back into the cycle of borrowing and spending and construction and hiring and spending more, laying the groundwork for restructuring when the next downturn hits. Such bloat and growth don’t have to go together.
Recessions force executives to make decisions that they should be making on a continual basis: decisions about which product lines to keep and which ones to discontinue; decisions about which projects to keep funding and those to cut off; decisions about fixed costs and assets that must be restructured; decisions about which people to keep and who must be let go.
Creativity before capital
Making such decisions requires business owners and executives to always be looking, not just during a crisis, at what matters most to the survival and vitality and growth of their businesses and, by extension, at what matters most to their customers. Cash flow, of course, is at the top of the list. Companies with superior cash flows will always outlast and out-earn their competitors. When markets began to turn downward in 2008, the companies that were most in sync with market demand were able to react and adjust their cost structures accordingly.
Over subsequent months such companies had the financial leverage to snap up struggling competitors at bargain prices. They could also invest in developing new products—which are just beginning to come to market—and many even took the slowdown as an opportunity to train and boost employee knowledge in order to enhance overall customer service.
Employees are another critical element of business vitality. In recent years I’ve seen some of the most creative ideas for improvement in more departments and areas of many businesses than I’ve ever seen in my career. Like a forest fire, the recession cleared out accumulated undergrowth and dead wood, releasing employee ideas like the seeds that only germinate following such a fire. In lean manufacturing circles we frequently talk about putting “creativity before capital.” With capital unavailable from internal or external sources, companies had no choice but to be innovative, and in many cases their employees rose to the challenge.
There are many other lessons from 2008 and 2009 and the moves that managers made to streamline their businesses and survive that are equally valid and effective during periods of market expansion. In the best cases those decisions about how to manage suppliers, serve customers and treat employees reflected the core values of the organization. Hopefully, when the next recession rolls around, you’ll be ready.
Anand Sharma, Chairman and CEO, TBM Consulting Group