Managing through the fog
Apr 17th 2001
From The Economist Global Agenda

Many of today’s 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 everyone’s lips: “visibility”—ie, top managers no longer know what lies ahead. “In the current unstable economic environment, we have limited visibility,” Kurt Hellstrom, chief executive of Sweden’s 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-Packard’s boss, Carly Fiorina, who feels as if she is “navigating through the fog.” In Asia, companies as diverse as Taiwan’s 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 today’s 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 Boeing—are 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 year—half 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

Those profits warnings have now spread from America and are being repeated by firms in Europe and Asia. If experience counts for anything, then American and European corporate leaders, in particular, would seem to be the most ill-equipped to cope. It has been some 20 years since the United States suffered a severe recession, and a decade since Europeans faced a serious downturn. This means many of the bosses of western companies have no direct experience of managing in a downturn: they were still clawing their way up the corporate ladder or, in the case of some of the dotcoms, not yet in high school.

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, Daewoo’s 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.

Few American or European companies could expect to blithely sail on in the face of a downturn like Daewoo did. Yet they still risk doing what many other Asian firms tried to do when crisis struck: batten down the hatches all round and hope their problems will go away. If past recessions are any guide, this is not enough.

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 jobs—one 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, Boeing’s blunder handed a huge advantage to its arch-rival, the European Airbus consortium.

Despite the fact that they lack much experience of managing in a downturn, today’s bosses may nevertheless enjoy some big advantages over their predecessors. For one thing, if they do have to cut jobs, it should be much less painful for both them and their workers. Expectations among employees have changed. Most no longer assume that large firms can offer them jobs-for-life. Many expect to work for a number of different employers during their careers, and some will have already lost jobs during corporate shake-ups in the 1990s. It is the ability of people to be flexible enough to get another job, or to strike out with their own business, which nowadays matters more.

But there will still be plenty of pitfalls. Britain’s Marks and Spencer has found itself in trouble with the French courts and the country’s 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.

Rocket science

Today’s managers themselves are also more accustomed to the need for flexibility. Growing economies, booming markets and rapid technological change may have cocooned them from hard times, but they also have demanded great skill in running businesses which have to be rethought, and remade, frequently. Some have piloted firms which have soared like rockets: from a pizza-strewn student’s room to Nasdaq in half-a-dozen years. Michael Dell of Dell Computer, who has made such a journey, thinks a slowdown might even make his job easier, producing “a more normal business environment.”

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.

America’s 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 NorthPoint’s 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.