>> MIM Speaks
PROFITING FROM A DOWNTURN
APRIL 06, 2003 -
THE STAR
BY MICHAEL E. PORTER
MANY companies were already facing bad prospects before the
events of Sept 11 exacerbated the downturn. In most industries,
market conditions have deteriorated and uncertainty about future
prospects has risen.
In such periods, however, the greatest risk is often not the
marketplace itself, but how companies react to it. Companies are
prone to make mistakes, and to unwittingly erode their
competitive positions in the process of addressing the slowdown.
Here are four things companies should do to avoid the most
common mistakes:
* CREATE a positive agenda. Don't just deal with current
problems. In a downturn such as this one, it's easy to see the
problems and tempting to cut back and weather the storm. it's
harder, and far more important, to see the opportunities created
both in the industry and within the company, and to use such a
period to gain competitive strength. Downturns and uncertainty
unfreeze market positions and create opportunities to acquire
cheap assets. They also allow, internal changes that would be
unthinkable during better times.
A clear, positive agenda will be a huge advantage at a time when
rivals may be timid or hesitating. It is also the best antidote
to fears and uncertainty among employees. A sense of purpose and
direction, articulated and communicated widely throughout the
organisation, is extremely important to rebuilding morale,
instilling confidence, and getting the organisation moving
again.
* REFOCUS on strategy. Periods of robust economic growth, such
as the one we experienced in the 1990s, tend to work against
strategy. Companies lose focus and chase trends (for example,
the Internet), and become preoccupied with top- line revenue
growth. Growing markets mask poor choices and encourage wishful
thinking. The result is me too competition and the introduction
of many products and services where companies have no real
competitive advantage and which generate no profits.
A good example is the telecommunications equipment industry,
where demand was so strong over the 1998-2000 period that
companies such as Alcatel, Cisco, Lucent, Nortel and Others
Could and did enter numerous segments with imitative products
and no real competitive advantage. The dire consequences are now
being felt.
Financial markets have also worked against Sound strategy.
Markets were fixated oil growth and ignored profitability, a
recipe for intemperate expansion and diversification. Analysts
were captivated by the trends of the moment, and browbeat
companies into emulating whatever rival was perceived as the
current winner.
This is the moment to rediscover strategy, and an opportunity to
scrape off the barnacles acquired during the last expansion. The
essence of strategy is defining how a company is unique and how
it will deliver a distinctive mix of value. Strategy is about
aligning every activity to create an offering that cannot easily
be emulated by competitors. Now is the time for companies to be
honest about where they have, or could have, real competitive
advantages, and reallocate resources accordingly.
Intel is using the downturn this way, getting out of peripheral
areas while making huge R&D and plant investments in its core
microprocessor business, even while sales and profits are
sharply down. Merrill Lynch is also showing unmistakable signs
of rethinking its strategy from the ground Lip, including tile
scope of its investment banking and international operations.
* DO NOT overreact to current industry conditions. In a period
of contraction and severe financial pressures, there is a
tendency to misinterpret a cyclical change as a structural
change. With demand down, companies are fearful that the bases
of competition are changing and can misinterpret current market
conditions as reflecting new rules of the game. This tendency
has been exacerbated in recent years by popular management
literature filled with phrases such as "transformation,"
"revolution points," and "disruptive technologies," which has
misled managers into thinking that periods of true structural
change are common.
In economic downturns, companies also can receive garbled
signals from the Customers still in the market, who are often
bottom feeders that make heavy demands and beat tip vendors on
price. The challenge is to have the confidence to look to the
next upturn and position the company accordingly. John Deere did
this in the last downturn. It was the only company in its
industry not to change ownership or close plants, pouring money
instead into productivity enhancements and new product
development it profited hugely in the mid-1990s upturn.
While some industries today are undergoing structural change,
most are not. This is mostly a period of softer demand. It is a
mistake to make choices to deal with a cyclical downturn that
will compromise the company's competitive approach in the longer
run. Severe cuts to hold profit levels to those of growth
periods are unwise, and will go un-rewarded.
* RESTORE the integrity of financial goals and reporting. This
period of poor financial results and low expectations creates a
final, crucial priority. We have been through an era in which
many companies have defined their goals in terms of stock price,
adopted dubious financial metrics such as pro-forma operating
income (which omits amortisation of good will and other non-cash
charges), and employed accounting adjustments such as
restructuring charges, restatements, and merger-related
write-offs to substantially modify reported profitability.
These practices, initially adopted to justify high stock prices,
have now begun to confuse managers and distort corporate
decisions. Financial reporting considerations have come to drive
strategy, while obscuring true profitability and the actual
amount of capital invested in the business.
With financial results in the tank, it is time for companies
(together with securities analysts) to restore the integrity of
corporate goals and financial reporting. Shareholder value, if
it is measured by current stock price, is a dangerous goal for a
company. The proper goal is to earn a superior, long-term return
on the capital actually invested in the business (including that
spent on acquisitions). Superior profitability will lead to
increasing shareholder value over the longer run.
Pro-forma measures, which omit real costs, are wishful thinking.
Write-offs and charges do not, and should not, absolve
management from responsibility for actual investments and poor
competitive choices. One of the consequences of misleading
financial reporting is that the true profits for many companies
are a good deal lower than they have seemed.
This economic downturn is the opportunity to clean the slate and
get back to economic reality. In telecom equipment, for example,
let us hope that we have seen the last of the popular practice
of Cisco and others of making, acquisitions for stock, writing
down the assets, and then reporting a good "return on capital"
by comparing profits excluding non-cash charges to the reduced
capital base.
There is no doubt that this is a difficult time for every
manager, especially the generation schooled during the recent
economic expansion. But growth will resume, and sound choices
during these testing times will prepare companies to prosper in
the coming upturn.
Michael Porter, a professor at Harvard Business School, is the
author of 'Competitive Strategy and Competitive Advantage,'
among other books. He is scheduled to speak in Kuala Lumpur on
May 6 at the Palace of the Golden Horses. For details and
registration, call 0321654611, email: enquiries@mim.edu or visit
www.mim.edu
|
