Managing through the fog
Apr 17th 2001
From The Economist Global Agenda
Many of todays corporate bosses have never run a business in an economic slowdown, never mind a real recession. The prospect of harder times is, understandably, making them nervous. Some will fail. But others may be better-equipped than even they believe
FIRST it was America, then it spread to Europe and Asia. As companies around the world decide how to respond to slowing markets there is one word on everyones lips: visibilityie, top managers no longer know what lies ahead. In the current unstable economic environment, we have limited visibility, Kurt Hellstrom, chief executive of Swedens mobile-telephone giant, Ericsson said recently.
This has been a comment repeated by Tim Koogle, the departing leader of the beleaguered Internet portal, Yahoo!; John Chambers, chief executive of Cisco Systems; Rich Templeton, head of Texas Instruments and Craig Barrett, chief executive of Intel. Other variations on the theme are echoed by Hewlett-Packards boss, Carly Fiorina, who feels as if she is navigating through the fog. In Asia, companies as diverse as Taiwans Advanced Semiconductor Engineering and chinadotcom, a big Internet group, also worry about finding themselves in a pea-souper.
After years of unprecedented growth, many of todays business leaders admit that they have never run a company amid such uncertainty. Will they stumble and crash? Plenty of businessmen, and plenty more of the investors who poured billions of dollars into their companies, had come to believe that downturns had become a thing of the past. Now, following profit warning after profit warning as the American economy slows down, that fantasy is over.
Many tech firms have lost more than three-quarters of their value as their share prices have plunged. Some of the dotcoms, like Yahoo!once, incredibly, worth more than the combined value of General Motors, Heinz and Boeingare now struggling to survive. Other firms acknowledge that, provided they can get through these lean times, they will never grow as fast or will scale such dizzy heights again. In the future, analysts reckon, tech firms will be lucky to grow at around 8-10% a yearhalf the average for the past decade.
Reeling from the shock, Cisco's Mr Chambers reckons: This may be the fastest any industry our size has ever declined. Well, not quite. But for Mr Chambers the news is unquestionably bad. On April 16th, he announced that third-quarter profits would be far below those forecast and that the company would cut 8,500 jobs, about 17% of its workforce. Cisco has only ever known good times and became one of the most valuable companies on the US stockmarket when it was growing at more than 40% a year.
A long time up high
In Asia, however, it is different. Japan has been dropping in and out of recession for a decade. The rest of East Asia is still recovering from the devastating financial crisis of 1997-98. The sharp contraction that followed exposed huge management flaws among Asian firms that had only ever known generations of growth on the back of tiger economies. Too many Asian companies were revealed to be overly centralised, dominated by the founder or his children, and dangerously indifferent to shareholders or the need for financial transparency. When hard times hit, such qualities proved to be big liabilities.
Kim Woo Choong set a striking example of this. In 1997, even as South Korea called in the IMF to help rescue its collapsing economy, Mr Kim took on increasing amounts of debt so that his giant Daewoo group could continue its frantic expansion. Mr Kim stonewalled attempts to discover the real financial health of his empire and fended off demands to restructure. By the time the banks were forced to take over the group in July 1999, Daewoos debts had spiralled to some $80 billion. In March, South Korean prosecutors issued an arrest warrant for Mr Kim, who is believed to be in hiding abroad.
Rather than making general cuts across their organisations, managers would do better if they restructured to prepare their companies to take maximum advantage of the upswing, whenever that comes. This means shrinking or cutting completely those parts of the business which do not create value, and investing in the bits that do. Ericsson, for instance, has decided that, with a shakeout looming in the mobile-phone business, it would be more efficient to subcontract the job of making its handsets to an Asian producer while it concentrates on making other, more higher-margin, telecoms equipment.
Cut, but in the right places
Sacking employees is something which many of the tech companies said they would never do. Nevertheless, most have already had to resort to layoffs. In America, Nortel, Cisco, Lucent, WorldCom, Intel and Motorola have between them announced almost 70,000 job cuts in the past three months. So-called old-economy companies, such as General Electric, DaimlerChrysler and Procter & Gamble, plan to lay off tens of thousands more. The numbers, however, only indicate that cuts are being made, not that the surgery has been in the right places, or if it is too little or too much.
Getting cuts right will be as big a management challenge as investing in the right growth areas. Companies can downsize themselves too much, as Boeing discovered. The aircraft industry has long had to navigate peaks and troughs. During an aviation slump in the early 1990s, Boeing slimmed down drastically. It ditched many of its suppliers and shed around 60,000 jobsone worker in three. But by 1997 orders were booming again and the American company was struggling to cope. At one point it even had to stop production of jumbo jets so that suppliers and workers could catch up. At the time, Boeings blunder handed a huge advantage to its arch-rival, the European Airbus consortium.
But there will still be plenty of pitfalls. Britains Marks and Spencer has found itself in trouble with the French courts and the countrys labour unions for not following a consultation process with its plans to close down 18 stores in France as part of a restructuring by the struggling retailer.
One of the biggest benefits for firms that do survive any shakeout is the flip side of layoffs: it will be easier to recruit and retain key staff. This has been the bane of many fast-growing firms, especially in high technology and finance. Credit Suisse First Boston raised a few smiles when it announced this month that it wanted its investment bankers to limit their post-deal celebrations to $10,000. But it is a small straw in the wind. Firms that can offer a safe port in the storm to skilled staff should find it easier to hold on to them.
And then, of course, there will be opportunities thrown up for survivors by those firms which fail. Some bosses will see a downturn as a time of opportunity. Others will bluster on, feeling their way through the fog as they continue to search for some new-economy Xanadu, until the last of their funding drains away and the creditors circle. They too will provide opportunities for some.
Americas AT&T, for instance, has agreed to pay $135m for the assets of NorthPoint Communications, a San Francisco-based provider of digital subscriber-line Internet services, which has sought bankruptcy-court protection. AT&T, which is itself in the midst of a big restructuring to reduce its dependence on long-distance telephone services, aims to use NorthPoint to get a jump start into selling high-speed Internet connections. Some analysts have valued NorthPoints equipment alone at more than $300m. In every downturn there are always people ready to pick up the pieces from those who got it wrong. The corporate world, red in tooth and claw, rarely wastes anything.