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Business Planning • Business Development

Newsletter: November 11, 2008

By Bob Altabet, Alpha Beta Planning, http://www.alphabetaplan.com, November 2008

Introduction

Tons of ink have been spilled in the last month describing the nature of the financial crisis and how we got to this point. Likewise there has been much discussion of what government actions might mitigate the severity of the economic impact in the short term without presenting long term problems for the economy. I will return to this theme with my own ideas at another point, but right now, my focus is on those of you that must plan for their businesses and in some cases business survival in such an environment. You face some of the same dilemmas as the government in its planning; the requirements of short-term survival may be in conflict with longer term strategic goals for a prosperous business.

The initial reaction is to hunker down in a defensive posture, conserving cash through expense cutting and minimizing investment. While both need attention, we also need to look at the nature of the opportunities presented. “Out of destruction, a new spirit of creativity arises”[1] was popularized by Joseph Schumpeter as “creative destruction,”[2] the process of transformation that accompanies radical innovation. This is an opportunity to transform your business in ways that can strengthen it as we finally leave the recession. Of course, the nature of the innovation will vary based on the drivers of your business. Another opportunity is competitive; as others cut back, sometimes into muscle as well as fat, how can you position yourself to gain market share and new customers, whose value will be multiplied once the recession is over? Unfortunately, there may well be more opportunities than available cash, so understanding the key business drivers for your business is critical for priority setting.

Another concern is human resource management. Work force reductions and layoffs may well become necessary as part of an expense reduction program. This needs be handled with sensitivity not only for those who are let go as we tighten our belts, but more importantly for those who remain. Your treatment of those you let go will affect your business reputation long after the recession is over. Your treatment and communication with those who remain can either leave them dispirited, performing their duties by rote, or invigorated as part of the team that will create the transformed business. It is also easy to cut the high-priced talent, those with experience, for a higher payout, but be cautious, these are employees who have lived through recessions before and learned much about how your business responds.

Let’s explore each of these factors in more detail.

Conserving Cash

Cash conservation tools include expense reduction, and investment reduction in both capital expenditures and in working capital. Intelligent choices here require a business plan with contingency alternatives and the most accurate sales forecast you can achieve. You will need to better understand how broad macro-economic factors affect your business, so you can look for turning points. The upturn will happen, and you don’t want to miss that opportunity.

Capital Investment

Within limits, capital for maintaining equipment can be postponed. Replacement of old lines can frequently be postponed for a year. Capital for expansion needs to be re-evaluated in light of a more realistic medium term sales forecast. Medium term in this context will take you 1 year past whatever your equipment lead times are. For some businesses this may be as much as 2.5 years (1.5 years for equipment and the 1 year past) for others, 1.5 to 2 years may be enough with shorter equipment lead times. Monitor these lead times, a significant part of many equipment lead times is queuing time which will shorten in a recession, but be careful, they will lengthen again prior to the upturn. In fact, lengthening equipment lead times may be one of your earliest lead indicators to the end of recession. Try not to leave yourself with insufficient capacity to quickly capitalize on the increased sales in an upturn. Capital for innovations such as new production methods, improved or even revolutionary products is a more complex discussion which we will pursue further below. If innovation is a key driver for you business, this may provide real value added.

Office equipment and computers are likely postponable. While these investments promote long term efficiencies, if the payout is over 2 years postpone them as long as your order processing and billing system is functioning.

Working Capital

Inventory

This is not the time to skimp on first class inventory planners, manufacturing schedulers and sales forecasters. This team will be invaluable in assuring that your business can manage with the absolute minimum of inventory. Each dollar of inventory reduction is a dollar of cash flow. These 3 groups, typically in different departments, need to function as a team, with weekly review sessions, alerting each other to possible changes and bottlenecks. The sales forecast, in most companies typically on a monthly cycle, may need more frequent revisions, triggered by economic circumstances, changing order flow and new information from the sales force. Communications, always important, becomes absolutely critical.

Understanding of forecast variability and volatility, combined with your response time to make changes in production provides the tools for minimizing inventory without jeopardizing the product availability your customers depend upon. You can’t afford to have excess inventory, but your customers are also trying to manage through a difficult situation. A failure to deliver in this environment creates more problems for the customers than any normal situation and will accordingly have a stronger impact on your relationship for future business.

Spend some time understanding the leading indicators for your business, which may vary from the more general economic indicators. For example, in the battery business, the first indicator of surges or declines was specialty photographic batteries, at least until the digital camera wave of recent years. Scour your business to find the right indicators for you. A good economic forecast is useful, especially if any of the forecasted factors correlate with your business, but keep in mind, many of these forecasts are really designed for investors or financial institutions. The best economic forecast tool for planning is Turning Points (http://www.turningpointsonline.com/). This is the only forecast service specifically designed with company product sales forecasters and business planners as its audience, both in its content and in its release cycle.  I have never seen it highlighted in business press reviews of various economic forecasts, but the track record has been extraordinary and the practical advice for business sales forecasters and planners is invaluable. I still save one particularly interesting article from 1982 that highlighted the performance of various statistical forecast models vs. the real performance of working forecasters. The accuracy of the forecasters was markedly better than any model. Good forecasters draw from multiple models and are prepared with experienced business judgment to modify those models as necessary. By the way, that “Turning Points” title is reminder of how critical is looking for the signs of any turning point, the key contribution of a first class forecaster.

Accounts Receivable

A recession will likely lead to some failures or reorganization for some of your customers. You need to monitor credit worthiness tightly. Some customers seeking to manage their own cash flow may lengthen payments, seeking to use you as their financiers to the extent possible. With lots of small customers you can use statistical models to re-evaluate credit worthiness and nevertheless forecast receivables accurately. However, larger customers are the black swans critical to achieving your sales targets, but disastrous if they fail. You need credit analysts who truly understand the businesses of your key customers for more than merely a financial credit evaluation. These analysts need to understand the customers’ key operating parameters and business drivers; they need to be as good as your own sales forecaster in assessing your customers’ businesses.  They also need empowerment and courage, courage to cut off a large customer when necessary and equally the courage to extend additional credit for a customer with a sound business, suffering from his own credit squeeze. Here your credit analyst needs to be working closely with sales personnel. Extending a lifeline to a key customer under the right circumstances, can cement a relationship for years to come.

Accounts Payable

Accounts payable should be tightly managed, but resist the impulse to stretch your own payments out. While your relative importance to a supplier will affect your priority in a tight market, his knowledge that you will pay promptly will help solidify or enhance your priority. Your purchasing department also needs to “blow your own trumpet.” Maintaining prompt payments is not done just to be nice; make sure your purchasing agents and buyers use this to cement your business relationships. Purchasing may also want to draw on the expertise of your credit analysts in understanding suppliers when alternatives are limited. If one of your suppliers is going under or otherwise in trouble, your credit analysts can help make you aware before the crisis.

Expense Reduction

Fat vs. muscle and bone

We all know there’s fat, and many of your employees understand in detail where it exists; solicit their input. You will not only generate ideas, but make them part of the team. The touchy part here is being sure that those you engage are the ones you want to stay first; see the human resource section below. This is the time to look at how your business has evolved over the last 5 years, how its needs and processes have changed. What are you still doing that perhaps made eminent sense 5 years ago but provides much less value added. Have your customers consolidated leaving a smaller customer base with larger sales per customer? If so, does your order processing and billing system have too much fat? Are you still carrying line-items that used to be important, but could easily be rationalized while not providing adequate support for the new leaders? Are you still running some old systems in parallel, just to be safe? Perhaps now is the time to cut that cord. In the process review, look at the opportunity for tasks at the boundary between you and a supplier to be shifted for cost savings – and total process efficiency, but talk to the supplier about how to share those savings in a fair and equitable manner. Ditto for customers. A classic paradigm is the supermarket shopping cart; the customer does some of the work formerly done by the grocer. They share the savings and improved convenience.

Cut quality slightly – well no one ever quite phrases it that way, but that can frequently be the impact of many cost cutting programs. By all means, look at manufacturing processes, design changes, formulation changes, but measure quality to assure you maintain it. Creeping quality reductions, unnoticeable with market research after several rounds suddenly leave you with much less of a product than you ever planned. Restoring customer or consumer confidence is difficult once you have lost it.

Opportunities

There are multiple possible opportunities from innovation to marketing to customer acquisition and retention. Any of these may be applicable, but you may not have the resources for all, so understanding the real drivers of your business is critical. We also like to think of our strengths as being in the more exciting business areas, so it is easy for conventional wisdom to be pointing to the wrong driver. The driver may also have evolved as the company has evolved and as competition has reacted to your strengths. The company that prides itself on marketing and advertising may, in fact, now be a sales driven company or a merchandising driven company. Marketing is more likely to get tagged as the sexier option, but there is nothing wrong with the others, just make sure you understand your own company. Also make sure you understand how it has changed. A company that is marketing driven as it launches a major product may become merchandising driven once the marketing and product news stabilizes. Consider increased funding for the driver, your strength, especially if it corresponds with a competitive weakness. Assess your competitor’s likely plans; can you take advantage of a hole he is leaving through his cost cutting.

Competitive Evaluation

Understand your competition and think about how they are likely to react to the downturn. This does not require a costly, major competitive intelligence effort, but rather a gathering of all the knowledge and wisdom on your competitor that exists in your shop, including behavior from prior recessions. Also try to ascertain the depth of experience – do they have top managers that were with the company through prior recessions or other industry turning points? How will they react to a crisis? Draw up a comparative list of key factors for each competitor and the industry, for example, marketing advertising, manufacturing, R&D, etc. if appropriate break them down to several sub categories. For yourselves and each competitor, tag them as a strength, weakness, opportunity or threat (a SWOT chart). Look for the factors where you have a strength or at least an opportunity and then narrow that list to the ones where a competitor has a weakness or at least a threat. Your best strategic opportunities will come from playing to your own strengths and these will be real competitive advantages if they also match a competitor weakness. Use the chart in reverse to assess competitors’ likely choices.

Marketing, Advertising, Selling

Many companies look at advertising as an easy place for a cut. You can rarely see an immediate impact of a drop due to the residual effects of the advertising, especially if competition is cutting back as well. Unfortunately, the effect will become all too apparent after in the not too distant future. In fact, I would look at beefing up advertising if you are delivering on your advertising promise. Share gains will be multiplied in a recessionary environment providing a stronger starting point when sales recover. If your business is better driven by other kinds of selling programs, merchandising, sales relationships, whatever, then beef that up instead. Share of Voice advertising models are no longer the most common with the availability of computers and econometric techniques, but in a recessionary environment, look at Jim Peckam’s original 1966 share of advertising vs. share of market model[3] and its 2 year lag time effect. The model is simple to use and won’t cost the bundles currently doled out for fancier models (although if you want those, I can provide them). In multiple media, now including the internet, I would aggregate on dollars as a better equalizer than the various impressions measures, at least for a first pass.

As a market researcher, I hate to provide alternatives, but this is the time to get out in the field yourself. Work with sales personnel for a day a month, listening to them and listening to the customers. Do store checks, not only looking at the quality of the merchandising, but chat with the consumers as they shop. It’s only anecdotal, but the plural of anecdote is data. And the insights gained are invaluable; in fact, this field work is useful even when you can afford a full quantitative study or a more formal focus group.

 Innovation and R&D

This is another perceived easy cut that comes back to bite you; typically, just as you think you are coming out of the recession and there’s nothing in the pipeline. This is a time to review development projects carefully, but be cautious. As consumers become comfortable again about spending, you want to give them a good reason not to feel comfortable with the private label products they have become accustomed to. You need something in the pipeline to talk to them about. While you may want to switch some research money to development for the duration, be cautious about staff cuts. In many business functions, when the recession is over, new hires are readily available. This is not usually the case in R&D, especially at the middle levels where experience really counts. Beyond the greater difficulty in transferring skills, there is loss of what I call institutional memory. Don’t lose the people who, next time around, can tell you that “we tried this before,” and these were the reasons it failed. While that conventional wisdom needs to be challenged on occasion, not having any conventional wisdom is a recipe for disaster. Note that I have focused here on product innovation; in many businesses, service operations for example, process innovation is key, but the same rubrics apply, look at your opportunities.

Human Resource Considerations

Have you considered across the board staff reductions or hiring freezes? Well don’t! Tempting as that may be to get lean fast, it cuts out muscle and bone at the same time. You need the process review to cut the right people. While some of these will be people that should have been let go long ago, most of them will be good employees, making this necessary task that much harder. You need to first zero in on the managerial and supervisory staff that will stay – and, no way around it – this is a top management job. Once these decisions have been made, this is your cadre to help in the decision process further downstream. As the first step was no fun for you, this will be no fun for them, so make sure that every step of the way that they know how much you appreciate their contribution. By the way, successive rounds of bad news fester, whatever choices you make, get it over and done with quickly and assure your remaining employees that this is it – to the best of your ability to predict.

Once you have trimmed staff to the right size, communicate or better coach. This is a team that has seen a string of losses. They need to understand that the player trading has finished, and they need to be motivated for the efforts to follow. They need assurance that you will provide them with the necessary tools to do their jobs and that you will appreciate every extra ounce of effort. Provide a regular status bulletin on the business – much easier with today’s IT tools. This should combine the facts and fact based prognosis with a sensitive understanding of their hopes and fears, in the words of Dale Carnegie (still the best business book ever written), "When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bristling with prejudices and motivated by pride and vanity." Appeal to that pride and vanity to motivate them to prove that they (not you) can make this the most successful business possible. Look for ways to share the rewards of success with them as you recover.

For those that were let go, the task is harder. Ideally, a severance package to ease the transition is helpful, but not always practical in many businesses. If you had that kind of cash to spare, force reductions might have been unnecessary. Nevertheless look for ways to ease the transition. Make it clear that you will provide references and recommendations – making these very personal when possible. Let other local businesses know you have a list of good people in key categories that they might want to look at to fill their needs – there won’t be a lot, the recession hits them as well, but every employee that can find another slot through your efforts will appreciate your compassion. The way you treat these employees will affect your reputation as an employer for years to come. Your good reputation will make it easier to hire first class employees in the future. Further, don’t lose sight of the inevitable resurgence in your business when hiring picks up. Experience hands that remember you fondly will be immediately more productive than any other option.

Conclusion

A recession is a scary time in the progress of any business – even more so, if you have not personally been through one before. Plans put in place for a different environment need changing. But while you go through the inevitable belt tightening, be careful how you mange the people who will make or break your business. Identify the most critical areas where you need the best people even if they seem a bit expensive. And look for the opportunities. When everyone else is thinking about survival, lay the foundation for improved share through customer retention and acquisition or market share gains. Look at the opportunities for creative reorganization for permanent efficiencies. Look at development projects that will strengthen your product offering. Then pick one of these to focus on – unfortunately it is hard enough to focus on too much in the best of times and harder in a recession.

“The world of achievement has always belonged to the optimist.” — J. Harold Wilkins

Newsletter Archive in PDF Format (click on the links below):

• Business Planning in a Recessionary Environment
• How Good is Market Research?

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Last modified: 07/19/06