By Dale F. Elliott
President & CEO, FCM Advisory Group, Ltd.
Why would anyone want to know how to prolong a recession? The answer is that very few would, aside from the short sellers out there, but if you are not careful how you operate your business in a recessionary environment you can make the situation worse and delay your recovery. Many times this is a result of doing what conventional wisdom says you must do. Let’s explore this in a bit more detail.
So how do most business people react to a recession? It really depends on how prepared you are for that eventuality. Some firms have a robust planning process that recognizes market downturns, while others do not. It is always much easier and faster to modify an existing plan to address the reality of the situation than it is to start from scratch under mounting pressure for action. But it appears that many have not prepared well for this eventuality and early action can spell the difference between success and failure. Not having a plan before the downturn is the first contributor to prolonging a recession.
It has been my experience that the role of strategic planning in general and contingency planning in particular does not carry the priority in organizations today as it once did. Perhaps this is due to what we call the “90 Day Rule”, which forces organizations to focus only on the short term at the expense of all else. Looking at the growth profile of the last few years one can possibly understand this omission, but it does not reduce the negative impact poor preparation can have, especially when faced with as rapid deterioration as we have just witnessed.
Unfortunately, having a plan does not preclude making mistakes that can postpone the recovery for your business. Elements that can define a good plan are many, but a few critical ones are:
- Knowing what value you add to your customer, what is critical to them
- Understanding the growth profile of the market and your competitive position
- Your level of financial strength and flexibility going into the period
- Detailed cost profile for critical operating processes
- Contingency action plans ready for implementation
Let’s look at these points individually. A common mistake is that many times managers do not really understand the value they provide to the customer. If you do not understand the value you add, the normal reaction to difficult times is to do what you have always done, but faster. This does not work when volume begins to drop. Why is this important? Because if what adds value is not clear to an organization, then how are you to allocate resources? Lacking this understanding, many organizations fall prey to the conventional wisdom of across-the-board cuts in spending. This is one of the largest contributors to extending the after effects of a recession. Why? Because in many cases you leave in place processes or programs that are not adding value at the expense of those that are. In effect, a double mistake.
This can have even more impact when you do not have a clear understanding of your competitive position. Say one of the across-the-board cutbacks is in new product development and you have been lagging in that area. When the market recovers and customers are looking for something new and exciting, what will you have to sell? The key here is knowing your cost structure and what is really important to the business, the must haves vs. the nice to haves. Reallocating resources to what adds value separates those who emerge from difficult periods ready to grow again and those who continue to suffer. These and the other factors unique to your business must go into the equation in order to understand, plan, and prepare for an economic downturn. For example, whether your business is publically traded or privately held can have a great bearing on how you work through a downturn.
The last area that can prolong a recovery is the implementation of the plan itself. Many times people fall prey to the approach where planning is an exercise and not a living document. This is even more critical in a recession. Key managers, and eventually everyone in the organization, need to understand and be a part of the development and execution of the plan. While this is not an easy process, it is critical to ensure that you are maximizing input and buy-in to the plan. This may entail pain for many who must give up or modify their priorities, but without being fully engaged in the process, efficiency and effectiveness of action will suffer. This takes time, all the more reason to start early and keep the process fresh and relevant.
Once developed, you must communicate the plan to the entire organization in a manner that ensures understanding of the rationale behind any changes and their role in the execution of the individual action plans. In most cases, you cannot over-communicate and every manager must know and be able to explain what the plan is to their people. It is a time to pull the organization together and focus on what is important to the customer, while taking the often difficult steps to maintain a viable business for the future. Lastly, do not forget the importance of follow-up in any plan. Things change and a good plan is one that is flexible enough to follow uncertain market conditions.
So how do you prolong a recession? By not having a robust planning process that recognizes the need for a recessionary contingency. By not knowing the value drivers of your business and what it costs to support them. And by not executing your plans in a timely fashion with each and every employee aware of their role in executing them. As the saying goes, “These are the times that test men’s souls”, but the journey can be made easier to bear with a solid plan and a strong focus on execution.