Business Insight Zone

My friend Dave Livingston put me onto the series of “Collateral Damage” reports issued by The Boston Consulting Group over the past few months. Dave’s view — which he’s explained in great detail on his own blog — is that too many companies and their executives have been caught flat-footed by the current economic downturn. Worse, even though things have been bad for many months now, these execs are still not bracing themselves for the ongoing structural problems that Dave thinks will affect the economy for years to come. As for these executives’ ability to take advantage of the downturn so that their companies come out ahead in the long run . . . don’t ask.

Dave’s view is based on his wide reading and his professional consulting work, and it meshes well with the sobering conclusions reported in Part 6 of BCG’s series, “Underestimating the Crisis”:

Our key finding is that too many companies appear to be doing too little, too late.

The BCG writers based the report on a survey of more than 400 big companies across seven countries. After making the observation that “companies that outperform in a recession tend to see it coming and move rapidly to reduce their cost base,” they note with alarm that most of the 65 companies polled in an earlier survey (December 2008) “were assuming that the [economic] crisis would have a very modest impact in 2009.” Worse, the spring 2009 survey confirmed that “companies are still underestimating the size and scope of the economic crisis.”

Taking the easy way out.

This means that too many companies have taken “easy measures” for cost control, like cutting corporate travel and entertainment expenses. And far too few companies are looking for — much less investing in — the strategic opportunities that exist during any downturn.

And it gets still worse. While I’ve argued that many workers should ignore the gloom and doom of the daily economic headlines, the BCG writers point out the damage that arises because “many companies are unable (or unwilling) to consider sufficiently the effects of external economic events on their businesses.” Too many companies, in fact, view the economy primarily or exclusively through their own internal lens:

In analyzing our respondents’ answers, we realized that the external perspectives of many companies tended to be shaped not by external forecasts (or, indeed, the realities) of the macroeconomic environment but rather by what happened to their own business in the preceding year.

Yipes.

Psychology scales from the individual to the firm.

As I was reading the BCG report, with its treatments of the “tendency to wish away the external environment,” the failure of companies to adapt plans or forecasts to gritty realities, “the use of unsupported assumptions in company plans,” and, in general, the disconnect between corporate leadership and the real world, I was reminded once again of the parallels between individual and organizational psychology.

People don’t like to be reminded that their bad habits, like smoking or overeating, will likely shorten their lives. If they haven’t been saving money for retirement, they often don’t permit themselves to think about it . . . until retirement is nearly upon them. Many marriages die years before the partners agree to consider divorce. And so on. The BCG writers aptly quote Chip Heath of the Stanford Business School: “There’s a bias for optimism in humans and in organizations. Individuals don’t ever go looking for bad news, and we don’t like telling it to others. So bad news is unlikely to get to the people who can actually do something about it.” (Source.)

Contrast this to the wisdom of the Godfather, which I’ve cited before:

“Mr. Corleone is a man who insists on hearing bad news immediately.”

After reading the BCG report, I’m even more committed to that approach for myself, and even more approving of it for the companies I study.

What to do?

The BCG authors list many different steps that the best companies are taking to succeed through the downturn. Here are a few:

• “Undertaking more frequent reviews of their budgets and plans, typically every quarter.”
• “Actively exiting underperforming businesses and divesting assets.”
• “[B]uild scenarios explicitly linking the changing macroeconomic and industry environment to business forecasts.”
• “[C]utting short-term costs while preparing the foundations for being a long-term low-cost competitor.”

Along the way, they also give more pointers on what not to do. Among them:

• “[T]oo many companies have not adequately considered the impact of the downturn on their customers and suppliers. . . . How do these dynamics affect your plans for 2009 and 2010?”
• “[C]utting marketing expenditures is a very common response, but it is one that can backfire.”
• “[C]ompanies that were focused on reducing costs (through contracting head count or cutting capacity) tended to pursue this course single-mindedly; only a third of the companies addressing cost reduction were selectively adding employees or capacity in one area while reducing in another.”

Let me pause over that last one and ask you to read it again. That kind of “across-the-board” thinking is poisonous to success — not least because it substitutes an easy rule of thumb for the hard work of judging between the many different activities within a firm. (I’ve railed about this before.)

Opportunity abounds.

Before encouraging you again to read the whole report — or the whole series — I’ll include just two more tidbits:

1. The BCG authors rightly point out that “Many components of the crisis manager’s toolbox amount to sound management techniques under any market circumstances” — but done more briskly. The flat-footedness of many companies makes me wonder whether many business managers haven’t been kidding themselves about their acumen: maybe they’re not as good as they think they are at business — or have simply never been tested by conditions as tough as these?

2. The BCG authors make a point — expanded at length in a separate report [PDF link] — that institutional investors are much more patient with publicly traded companies right now. They’re not asking for immediate, quarter-over-quarter gains, but they do want companies to take advantage of the “once-in-a-lifetime opportunity” that some firms will have thanks to this downturn.

Are YOU taking advantage of the once-in-a-lifetime opportunity presented by current economic conditions?

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Possibly of interest:

• Fast Company, December 2007, “How to Get Bad News to the Top”
• The Happy Path . . . to Perdition.
• Hard times call for an entrepreneurial outlook.
• This blog: “Across the board.”

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Photo by Jay Gorman, used under a Creative Commons license.

Category: Economics, Management