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Preparing For Recovery
Jim Champy (Chairman of Consulting, Perot Systems & co-founder of Business Process Reengineering) tells companies to brace for recovery by facing hard truths and acting early
It may seem counterintuitive to suggest that companies focus on economic recovery in the midst of a severe global recession. But it is time to begin thinking about the future, not to focus on the past. When the economist, Paul Samuelson, was once asked about the impact of an impending monetary crisis, he replied, “The sun will rise tomorrow, and the bridges will continue to bear traffic.” Likewise, most businesses will survive the current crisis and, if they are smart, can emerge stronger than when the downturn began.

The current world recession was predictable – even without the imminent global credit crisis. In Darwinian terms, businesses had once again outgrown their customers, as they cyclically do from time to time. Fuelled by loose credit and voracious consumer appetites, overcapacity had crept into many industries. Now, as many consumers recognise that they do not need or cannot afford three flat screen TVs, or similar discretionary products, retail and manufacturing companies alike find themselves with unproductive capacity.

Debate and speculation ensue about how long the current recession will last. I believe that it will take three to five years before companies adjust to real demand and for industries to restructure. That does not mean that business will not improve by late 2009 or that the financial markets will not return to some form of normalcy this year. But companies must now make some painful adjustments to prepare for the coming recovery. If you have not begun yet, it is time to take action. Here are four principles that can act as guides.

Get real: The great management thinker, Peter Drucker, defined strategy as knowing where you are today, where you want to be tomorrow, and how to get there. Likewise, the first step in any business change programme is to understand where you are and to face the reality of what lies ahead. Companies often underestimate the trouble they are in and the actions required to improve their competitiveness.

The US-based, Detroit automakers are a classic example. For years, the managements of car companies have failed to face the reality that their business models were severely flawed, supported only by consumers’ willingness to buy oversized, grossly inefficient vehicles. These companies were on the edge of collapse even before the recession; many of their vehicles were of poor quality; costs were too high; relationships with suppliers were contentious and unproductive. But these companies did not want to face reality.

You cannot fix a business that is not working or attempt a recovery without understanding the depth and breadth of the challenge – even if you did not create the problem. So face the hard truth of what your company will need in order to compete during the next several years and to emerge from this recession as a strong competitor.

Act early; get profitable: In good times, companies live with bad investments for long periods, spending money on lines of business with poor or negative returns. This can go on for years, until the pain of profit loss becomes severe. The sooner a company acts to fix problems and adjust capacity – whether in physical assets or the painful act of staff reductions – the more prepared it will be to compete and grow through recovery. Companies can still be profitable, even as their top line (income) decreases. Restructuring and reengineering will be required, and the faster this happens, the more cash will be preserved. And cash will be required to fund the innovations that customers and markets will demand.

Do not spread the pain evenly: The easiest action for a company to take in a recession is to order an across-the-board freeze or cut in spending. It seems democratic and avoids having to make hard decisions. But if restructuring or capacity reductions are on the table, make them carefully and surgically – identifying those parts of the business that will contribute to future growth and that need to be nourished. The decisions may appear to be hard to make. But, if there is a benefit to a recession, it is that it gives managers a license – in fact, an imperative – to make important decisions that are more likely to be understood and supported by the organisation.

Protect your IP; keep innovation going: A well-run company is a masterful combination of the right people, processes, and technology. It is important to recognise the value of each of these components and protect and develop those that will contribute to innovation. As the recession continues, customers will look for more than just products and services at lower prices; they will also want more value for what they spend. Creating more value in a product or service is not easy. It requires the innovative skills of an enterprise.

One of the best examples of product innovation is the mobile phone industry. I have been impressed with what it has been able to do. Each version of a new phone offers more and more functionality, more capability – all at a lower price. The process of innovation has not stopped. With the right people, processes, and technology, companies can do the same. So be sure not to kill your innovative engine; be sure to feed it.

As you consider the next few years, keep in mind Samuelson’s optimism. The sun will rise tomorrow; there will be customers for the right products and services; and smart companies can use a time of challenge to leverage their way to better performance.
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