Strategies During an Economic Downturn
By John L. Daly
MBA, CPA, CMA, CPIM
Executive Education, Inc.

Economic downturns happen periodically. Sometimes they affect the entire economy and sometimes they affect single industries. Only time will tell if the current economic downturn will be relatively brief or will rival the twelve-year Great Depression of 1929-1941. During a downturn, weak companies will cease to exist but strong companies can gain market share and get stronger.

A company does not have to be good at everything to be successful. No company gets everything 100% right. Even successful companies make mistakes. In fact, in the management classic In Search of Excellence, Tom Peters expresses the belief that successful companies actually make more mistakes than their less successful peers do. The reason is excellent companies try a lot more things. They experiment and constantly try to improve. Because these companies make small evolutionary changes all the time, their environment rarely forces them to make huge revolutionary adjustments. Failure of a small experiment is no big deal. Failure of a major restructuring can be catastrophic.

Companies that become distressed during a downturn may be failing at only one critical function or perform poorly in many different areas. Unfortunately, companies that wait to address their problems often lack the resources to make a meaningful change to their situation during a downturn. By this time, it is often too late.

Most people involved in the turnaround business can quickly construct a list of a dozen or more characteristics of companies that will struggle during a downturn. Each characteristic could make a long article or, in some cases, an entire book by themselves. Before a company can work to correct its problems, it must recognize and acknowledge that those problems exist. Companies that struggle during difficult times usually have more than one of the following characteristics:

1) Company culture is the root of the problem:
a) Continuous improvement is not part of the culture.
b) Team members spend significant amounts of their time on company politics.
c) The company is bureaucratic.
d) The culture does not empower people to make decisions in their own areas of responsibility.
e) The CEO is a weak leader relying on his or her positional authority rather than allowing their people to challenge them intellectually and debate the best course of action.
2) The company has never given strategy much thought and wastes resources pursuing opportunities where it has no competitive advantage.
3) The company has inadequate financial resources.
4) The company’s equipment is not modern or well maintained.
5) The company’s facilities are not well laid out and organized.
6) The company has weak financial management:
a) Financial reporting to middle managers is either non-existent, difficult to interpret or of limited scope.
b) Budgeting is either primitive or non-existent.
c) Cost accounting information is weak and uses “traditional” arbitrary allocation methods.
d) The financial system has not been set up to answer “what if” questions easily.
e) Finance uses spreadsheets to create many reports.
7) The company has weak information systems:
a) Many business records reside in electronic spreadsheets or on paper.
b) The company has poorly installed or integrated software.
c) Computer training is ad hoc or non-existent.
8) Sales, operations or finance drives the company, which is weak in the other two areas.

Unfortunately, many struggling companies are unable to acknowledge they need help. They blame their condition on the economy rather than anything under their own control. Owners and managers are often too close to the everyday operations to recognize where they need to improve. In addition, the organization may be too political for anyone to risk mentioning aloud the needed changes that are obvious to everyone. A sure sign of an organization that is going nowhere desirable is the lack of a list of active improvement projects to manage the effort of improving known weaknesses.

Organizations that will do well in this economy are those that have built a culture of continuous improvement. Company owners and managers can get a more realistic assessment of company performance by frequently benchmarking their processes against outside standards and asking for feedback.

• Seek many forms of feedback, both internal and external.
• Benchmark your company’s processes against other companies both inside and outside your industry.
• Ask employees; “How am I doing as a boss and what suggestions can you give for improving the company?”

A reporter once asked industrialist Andrew Carnegie whether the most important function of business was sales, manufacturing or finance. Carnegie replied; “What is the most important leg of a three-legged stool?” Companies whose skills are unbalanced are vulnerable to better-rounded competitors.

Many companies, even those that are very large, suffer from a lack of financial sophistication. A company may be strong in financial accounting, but have a weak or non-existent cost accounting function. Unfortunately, many companies do not even understand why they need to understand cost accounting. Traditional cost information tends to allocate too little cost to difficult, low-volume dog products and allocate too much cost to easy, high-volume gravy jobs. A company that has strong cost accounting has the ability to give the dogs to their competitors and keep the gravy for themselves.

Getting an outsider to give you feedback in difficult times can mean the difference between survival and Chapter 11. If your company is struggling, get a consultant or your CPA to come for a visit and assess your situation. Even if you decide to implement the changes that you need without assistance, an assessment by an outside third party can point your company in the direction that it needs to go.

In tough times, politically well-connected managers are able to get more resources than they need. In good times, politically weak managers still cannot get enough resources. Thus, across-the-board cuts are incompetent measures during tough times. A better approach is to seek an honest appraisal of where your company is competitive and uncompetitive through benchmarking, outside feedback and an honest self-evaluation.

It is not possible to make a profit by eliminating all of your expenses. Remember that business maxim that everyone knows, but we often seem to forget; “you have to spend money to make money.” Focus on how to provide value to your customers efficiently. For survive until good times return, making the commitment to improve, and improve continuously, is the only route.
JOHN L. DALY, MBA, CPA, CMA, CPIM, is a Chelsea, Michigan based management consultant specializing in pricing, costing and business turnarounds. Earlier in his career, John was Chief Financial Officer for a medium-sized Tier 1 automotive parts supplier. He has also been CFO for a large restaurant chain and COO for a manufacturer of window treatments. He began his career with five years working for the management consulting divisions of two large public accounting firms. John is the author of Pricing for Profitability, published by Wiley & Sons and co-author of Executive Education’s one-day Profit Improvement seminar. Forty North American associations present Executive Education’s seminars.