The UPside of the Downturn - Geoff Colvin

The UPside of the Downturn

The Opportunity

10 Management Strategies to prevail in the recession and thrive in the aftermath

Geoff Colvin

About the Book

Never waste A Crisis

The current recession is a turning point into a new economic world, a world full of opportunity for those who understand what's happening, why it's happening, and what it means for them.

Some businesses - and some people - will emerge from this downturn stronger and more dominant than when it started. Others will weaken and fade. It all depends on the critical choices they make right now.

Geoff Colvin, one of the world's most respected business journalists, says even the scariest recession has an upside. The best managers know that conventional thinking won't help them win in these tough times. They're taking smart, practical steps that will not only keep them strong, but will also distance them from the pack for years to come.

The dozens of top-performing leaders Colvin interviewed reject the common view that slashing costs and firing employees are all that matters. They see the recession as a rich opportunity to restructure, reinvent and reimagine their businesses and lay the groundwork for future growth.

Written in Colvin's characteristic reader-friendly style, The Upside of the Downturn shows how anyone - from small business owner to global conglomerate CEO - can benefit from his ten solidly grounded strategies. he shows how to find opportunities that will increase your company's competitiveness and build its long-term value.

For example:

- Reset priorities - Easy to say, harder to do. Pursuing the lofty goals set in good times can be disastrous now.

- Reevaluate people and steal some good ones - Mass layoffs are a tempting way to cut costs, but great companies often find smarter alternatives. And if your competitors are unwise enough to fire their best people, grab them.

- Keep investing in the core - Trim the fat from your budgets but not the muscle. The best companies actually increase some spending in a recession, funding the areas that make them unique and valuable.

- Price with courage - Many companies assume they must - yet the long-term damage often outweighs the short-term boost.

Colvin shows how these strategies really work, using examples of major companies that have applied them with inspiring results and discovered hidden gems of opportunity.

10 Management Strategies to prevail in the recession and thrive in the aftermath

Reset Priorities

The critical first response to a radically new reality

Protect Your Most Valuable Asset

It's your people - yet they're often valued the least

Engage the Outside World

All your relationships are changing - so take control of the process

Reexamine Your Strategy and Business Model

The importance of knowing what you must change - and what you must not

Manage for Value

Most companies don't - an error that can be fatal in this recession

Create New Solutions for Customers' New Problems

You can do it in more ways than you may realize

Price with Courage

Don't assume you have to mark down - it's riskier that you may think

Get Fitter Faster

The right kind of operational discipline pays off powerfully in a recession

Understand All Your Risks

Seize this moment to take a broader view of what might go wrong in your business

Don't Forget to Grow Yourself

Why this downturn is a unique opportunity for self-development

About the Author

Geoff Colvin is Fortune's senior editor-at-large and has written hundreds of articles for the magazine, including its popular column "Value Driven". He lectures widely and is the regular lead moderator for the Fortune Global Forum.

Colvin graduated Harvard cum laude with a B.A. in economics, and received his M.B.A. from New York University's Stern School. His first book, Talent is Overrated, earned global acclaim and was a Wall Street Journal, BusinessWeek, and New York Times business bestseller.

www.GeoffColvin.com

A Brief Outline


The world's largest economy until 1890 was China. That's why the economist Angus Maddison says he expects China to "resume its natural role as the world's largest economy by 2015". America may close out a 125-year run as the world's number one economy. It appears Americans were just arrivistes who managed to elbow their way into the top spot for what seems like an eyeblink in China's four thousand years as a continuous culture.

Face the new reality and reset priorities. Jack Welch was fond of saying, "confront reality- not as you wish it were, and not as it used to be, but as it is."

The most influential factor in the success of any company today is its people - their knowledge, abilities, relationships and development.

Trane, the big maker of heating, ventilation, and air-conditioning equipment, reported that rather than cut training in this downturn, it was redirecting it to help sales and marketing people sell more services and cross-sell equipment.

Toyota's policy of keeping employees on staff during recessions and giving them extra training means that when the economy turns up, those employees are in the plant, ready to go, and probably far better prepared than the employees of any competitor.

The managers of a company called Varity Corporation had to make decisions in the recession of 1990-91. They were in the business of manufacturing farm equipment - an awful business even before the recession . It was awful because farms were consolidating and becoming more efficient, so they could squeeze more use out of each piece of equipment, and with farms increasingly owned by large corporations, they brought more buying power to the price negotiation. At the same time, the quality revolution of the 1980s had vastly extended the life of farm equipment - wonderful news for farmers and consumers, but another problem for Varity as it tried to increase sales. Then the recession landed on top of that. The company's whole future was at stake. They abandoned the conventional strategy of managing strictly for cash flow. Instead, they would gauge every activity in the company by tracking how much capital it required, how much that capital cost and whether the activity was earning more or less than the cost of the capital. Traditional income statements and balance sheet do not tell you any of this but the managers found ways to uncover and follow their key metrics.

Price cuts rarely pay for themselves. They may even reduce profit more than holding prices steady would do. The math is simple if you cut prices by 20%, you have to sell 25% more units just to maintain revenue. In most businesses that is asking a lot is your market really full of customers who will buy that much more in response to a price cut, especially during this recession?

If competitions match your price cuts, will it generate any additional sales at all? And remember such a blow out increase in sales would be necessary just to achieve steady revenues; to maintain profits would require and even greater sales jump.

Price cuts can destroy brand equity that took years to build and that may take years to restore – markets of luxury products spend enormous energy and resources creating the perception that they are worth what they cost – that a combination of superior design, quality materials exquisite workmanship, rarity and a carefully crafted aura of desirability. It sort of a magic spell that maintains its power as long as enough people believe in it.

The problem with price cuts that they break the spell.

Price cuts train customers to behave badly – buyers of all kinds have a tendency to remember the lowest price they ever paid for your product or service. In pricing theory that’s known as the “reference price” because customers compare all future prices against it.

Customer hate price increases more than they like price cuts –

This is one of the principal findings of behavioural finance what the researchers call “loss aversion”. When you cut a price from $1000 to $800 i.e. a 20% cut. But when you return the price to $1000 i.e. a 25% increase. You are only getting back to where you started but a 25% increase sounds like a lot. The greater the original discount, the bigger the problem. Recovering a 10% price cut takes only an 11% increase but recovering a 40% discount requires a 67% increase. Recovering a 70% price cut will mean imposing a 23% price increase, and you can imagine how customers will respond to that. Thus in addition to all other problems the price cutting can cause, it also creates a trap that is terribly difficult to escape.

How much Pricing Power do you really have?

On one axis is how differentiated the customer considers the product or service to be, ranging from an undifferentiated commodity at one extreme to an utterly unique offering at the opposite end. On the other axis is how strongly the customer feels a need for the product or service, from considering it must have at one end to seeing it as totally discretionary at the other. Where do various products and services – including yours – land on this matrix?

The best spot is the corner representing a unique necessity; the customer has got to have it and no close substitutes exist.

Consumer packaged goods companies have being able to raise price in this recession. An excellent example of a product in this favoured corner of the matrix is Colgate toothpaste. Few people will stop brushing their teeth, no matter how bad the recession gets, and personal care brand preferences are deeply ingrained, that is why Colgate has been able to raise prices and it is an important part of why the companies profits rose in 2008 and where forecast to increase smartly in 2009.

Many other products sold by Colgate, P&G and Unilever share those traits, they satisfy basic needs, they carry strong brands, they involve personal care and thus connect deeply with the consumer and they perform at least as any competitor. It helps that many of them are not purchased very often; you probably don’t remember the last time you bought toothpaste or what it cost. The combination leads to pricing paradise.

Conversely the worst locale on the matrix is opposite corner, where we find discretionary commodities. One competitor is much like another, and at any given moment most people don’t really need any of them. In this miserable spot sit many major airlines. Much travel can be postponed and customers find little reason to choose one carrier over another on heavily travelled routes. The contrast with the consumer package good company is striking. Both industries raise price in May 2008 as oil rose to $145 barrel. But the Colgate of the world was able to maintain their new price. When oil came down, while airlines, caught in the opposite corner of pricing matrix, had to drop their prices in lockstep. By 2009 they were offering some of the lowest fares seen in years. Its an old story with essentially no pricing power, airlines frequently get into price wars in which everyone loses. That is exactly what happened to them in the last recession and they have done it again this time.

U.S. carmakers occupy the same corner, you can probably use your current car for another year, and if you do decide to buy a new one, the brand strength of the U.S. makers is generally much weaker than the imports.

The other two corners of the matrix represent in-between cases. Must-have commodities are items like lightbulbs and toilet paper; no one will stop buying them, but the brands don’t carry much power. Highly differentiated discretionary purchases are products like a Rolls-Royce; it’s unique, but nobody actually needs one. Neither category commands much pricing power in a recession.

The most important insight into pricing is that smart companies use tools like this matrix not to analyse product and services, but to analyse customers. The matrix is based entirely on customer perceptions, which vary widely, so for any product or service that you sell, you must consider not one matrix but several – one for each of your customer segments. For example, you and I might consider that Rolls-Royce entirely unnecessary, but there may exist a segment of customers who feel they cannot exist without one. Failing to differentiate that segment from others would be missing a giant opportunity. In general knowing where your product or service falls on the matrices of various customer segments – and how its location has changed as a result of the recession – enables you to create different value propositions in which price will play a greater or lesser role. The principle applies to any kind of offering, not just high – end products. Mckinsey reports, for example that a beverage company found price sensitivity varied by a factor of three just across zip codes within Jacksonville, Florida. Offering all of them the same price would not make much sense.

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Building scenarios can help managers see important possible events they would not have imagined, because it's all about thinking through possible sequences. Shell company is one of the examples which follows this. An extensive outline of the firm's current scenarios is available at www.shell.com/scenarios

Another set of deeply developed scenarios that will stimulate your mind comes from the U.S. National Intelligence Council (www.cia.gov/in), picturing five possible futures for 2020.