Friday, April 17, 2009

Let’s not bring good ol’ Barack into this!

Recession tests companies to the hilt, but following some basic principles can help

If you want to learn the tricks of the trade in recession, the first rule of the game is, understand the economic difference between a recession and a depression. They say a recession is when your neighbour loses his job. And a depression is when you lose yours :-). Actually, the same rule applies for companies too! Till the time your competitors are getting rogered, it’s ‘fair play’; the moment the downfall hits you, it’s ‘Barack Obama must go’! But seriously, the National Bureau of Economic Research defines a recession quite succinctly as the time when business activity (a conglomeration of factors like employment, real income and wholesale retail sales) starts to significantly and regularly fall! Generally, if the fall is more than 10%, economists term the extreme recession as depression! At a time when the IMF has forecast that the total hit due to the subprime crisis could well touch the gut wrenching mark of $1trillion, it’s quite imperative that corporations globally develop strategies not just to survive, but to lead the market and to beat competition! So what do the world’s most excellent CEOs do to tackle recession? The first question is, can you forecast recession itself? Nobel laureate and top-notch economist Paul Samuelson had claimed, “Economists have correctly predicted nine of the last five recessions.” In other words, it’s perhaps better to learn what to do when recession hits, rather than waiting in fearful anticipation year after year for recession to hit. The hilariously famous presenter Jon Stewart had side splittingly commented once, “Bush advisers have long been worried that a lagging economy could hamper the Republican Party’s re-election chances. They hope that the Cabinet shake-up will provide a needed jolt. If that doesn’t work, North Korea has to go!” Tackling recession doesn’t really require literally ‘bombastic’ strategies (as the ones Bush uses regularly, whether in Iraq, or now in Iran) but intelligent and simple tactics!

It was just a few months ago that I met the hallowed Ram Charan (Fortune considers him one of their favourite management gurus), over lunch. And it was only two months ago that he wrote the classic ‘Investor’s Special for the Recession Economy’ in Fortune, where he gives four simple and broad principles for CEOs to crack the recession conundrum, which are: (1) Keep Building: “Do not consider product development, innovation, and brand building optional. Sacrificing your future for a slightly more comfortable present is not worth it.” (2) Communicate Intensively: “It’s counter-intuitive but true that when the economy slows down, the pace of decision-making has to speed up. The companies that are readiest to act on solid information are primed to shoot ahead of the business cycle.” (3) Evaluate Your Customers: “In good times, companies manage the P&L; in bad times, cash and receivables matter more. Therefore, you need to identify your higher-risk, cash-poor customers. You could decide to simply not supply them anymore.” (4) Just Say No To Across-The-Board Cuts: “By all means, cut costs if it makes sense to do so, but make sure there is purpose in how you do it.”

Jay Leno, the king of stand up acts, gave a classic perspective of the US economy in one of his shows: “Some good news for the economy. President Bush went on a month-long vacation.” Companies, like I mentioned before, wouldn’t necessarily find the blame game as easy as Jay wishes it to be. Harvard Business School, in its most recent April 2008 posting, gives a tempered, but well researched, response with its paper, ‘4 Steps to Growth During a Recession’. First, “Invest heavily in research and development” – Your competitors may in general cut R&D investments; ergo, your investment increase would yield a “strong product advantage” in the future. Steve Jobs quoted a few days back, “In the last recession, we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over… And it worked! That’s exactly what we’ll do this time!” Second, “Spend some time learning about the customers of your weakest competitors” – Instead of focusing on bagging your strongest competitors’ largest clients, choose these times to add attractive customers of your weakest competitors, who would not have the wherewithal to withstand your attack. Third, “Identify your most critical suppliers and distributors” – Find out ways you could help them. HBS quotes, “Even the smallest gesture can sometimes build an enduring loyalty that will pay off for years to come.” Prime time TV host Craig Kilborn commented recently, “President Bush’s economic plan will create 2.5 million new jobs. The bad news is, they are all for Iraqi soldiers!” After you’ve recovered from your sarcastic chuckles on this statement, is the fourth, and I think the most important of HBS’ learning philosophies, “Think carefully about your talent needs” – When weaker competitors try to survive, many excellent employees of these companies would find themselves without jobs. Recession is the best time to grab on to these world-class employees and give them jobs and responsibilities that they’ll cherish for a long time with unwavering loyalty!

The most distinguished Professor John Quelch, who is also the Senior Associate Dean at HBS, added his expert views for the marketing heads in his terrific treatise, ‘Marketing Your Way Through Recession’, which came out just around a month back. Some of his key recession mantras for the marketing team are: (a) Research the customer well before deciding on pricing tactics. Price elasticities might not change as dramatically as you might expect. (b) Maintain marketing spending. Recession is surely not the period to cut advertising. Recession creates, as Quelch says, “uncertain customers, who need the reassurance of known brands,” and thus ensure customer loyalty for years. (c) Adjust pricing tactics. In other words, rather than cutting the price of your product (which will immediately send a wrong signal about quality), intelligently play around with newer promotional schemes, give credit to the A-category customers, play around with the quantity of your product in, say, every pack (price it the same, but start giving a non-noticeable less, for example). (d) Ensure employees (and customers) believe in the core values of your oganisation and believe that your organisation will get through tough times! For that, the CEO himself must “spend more time with customers, and employees.” My favourite David Letterman’s classic and ripping statement stays with me forever, “Al Gore says President Bush’s economic plan has zero chance of working. Now, this raises on important question: Bush has an economic plan?!??!” Seriously, look at yourself and ask, do you as a CEO have a plan in place if recession hits you? Chris Zook & Darrel Rigby, noted consultants of the globally renowned consulting firm, Bain & Company, had warned a few years back through their path breaking paper (Strategy For The Re-cession) that CEOs globally today don’t have a ghost of an idea of what their Plan B would be if recession were to hit their economy/company. Think about it again yourself. What is the reason that you don’t currently have a Plan B if the economy crashes? Zook & Rigby recommend that as a CEO, you should most necessarily “build strategic contingency planning into your culture,” even if the economy looks really rosy currently. A fact that was supported fanatically by McKinsey & Co in their quite readable paper in Spring 2007 – Preparing For The Next Downturn.

There was once a millionaire CEO who, while on a lone yachting expedition across the Atlantic, got his yacht smashed up in a thunderstorm, floated for a fortnight living on molasses, till one day, half dead already, he floats ashore on a completely isolated island in the middle of nowhere, when he sees an amazingly seductive supermodel, wearing palm leaves, walk over to him. She smiles at him, tells him how she also is a shipwreck living alone on the island. She then guides him to her awesome tree home, gives him delicious water, new super- fashionable leaves to wear, provides him a top quality animal bone razor to shave his beard, shows him her utopian teakwood bathroom! The CEO’s over the moon! Freshened up, he comes out of the bathroom to see her lying down on her banyan bed, dressed in a very tasteful sarong, when she whispers, “Guess what more I can provide to you!” He thinks for a moment, and he screams in pleasure, “Don’t tell me you have email too!!!”

Dear CEOs, the final learning is, in a recession, in your attempts to read too much in market dynamics, don’t miss the obvious!



  1. This comment has been removed by the author.

  2. In short,recession is the time for companies to remain active. Am I right Sir?

  3. Sandeep Hiiiiiiiii, i am Rani , your old batchmate, gd to read your blog, recession and depression is the gd hai.., if u wanna contact me my mail id is, waiting for your reply.....

  4. but u hv changed too much i couldn't recognise u in Pix? r u still with IIPM,i saw u last there only ... i hv so many questions to ask r u still in touch with anybody of our batch - Rani Suneja