These may be times of uncertainty but we are also living in times when great ideas come of age and long-delayed reforms are finally carried out. The downturn creates a sense of urgency for business leaders to consider the big questions facing their organizations, prompting them to identify opportunities and prepare for sustainable long-term success.
IESE alumni have an ally in this task. Formulating answers to the big management questions is one of IESE faculty’s principal functions.
In this issue of IESE Alumni Magazine we present pragmatic advice from our professors on how to respond to the recession in each of the major functions.
Faculty provides signposts on what business leaders should do to survive today and then drive their company forward to sustainable long-term success – toward 2020 and beyond.
Consumers’ wallets snap shut in a recession as the climate of insecurity leads them to postpone purchases, multiplying the risk of commercial failure. But as José L. Nueno, IESE professor of Marketing notes, many firms have seized the advantages offered by economic downturns to take risks and gain market share.
One example is Leopoldo Fernández Pujals, founder of the pizza home-delivery company, Telepizza, that is market leader in Spain with restaurants in Portugal, Poland and Latin America. Fernández opened the first Telepizza in Madrid in 1987. When the recession hit in 1992, he astounded competitors by opening his first factory and expanding overseas to Mexico, Poland, Portugal and Chile.
The Cuba-born business leader took advantage of the economic downturn to snap up new restaurant sites at lower rents. Fernández also exploited others’ indecision and cut-priced advertising rates to launch an unprecedented advertising campaign that obliterated consumers’ recall of competitor brands, Nueno said.
The entrepreneur’s hyperactivity left his competitors floundering to respond to his full-scale attack on the fast-food home delivery sector. A price war and a blizzard of new product launches also helped create a huge market base. Telepizza emerged from the recession in the early 1990s as market leader, after a meteoric race to the top that would not have been possible in times of prosperity.
Another of the lessons learnt from earlier recessions is the importance of having a war chest of cash going into a downturn, a situation that is aggravated this time round by the credit crisis. “Cash is king in recessions,” Prof. Nueno said. “If your company is not cash rich, the sensible thing to do is wait and see,” he added.
According to a study of the recession’s impact on consumer goods in 2009 by Nueno and the market research firm, IRI, firms that have invested aggressively in periods of prosperity are those most likely to flourish in the downturn. Major advertisers, companies that frequently launch new products successfully, and those with solid and efficient distribution networks are also among those that could emerge stronger from the recession.
Major advertisers with deep pockets can take advantage of hungry communications agencies that are likely to offer highly attentive services at lower rates. On top of that, advertisers can monopolize consumers’ attention, as media channels become decongested. “All of this helps increase the brand’s notoriety and consumers’ preference for the product,” Nueno said.
And a cash-rich company with a strong track record in new product launches could introduce innovations to the market while cash-strapped competitors are unable to respond with rival offers. These firms will be able to communicate with their target audience more easily for the reasons mentioned above. In addition, distributors and retail outlets may be more inclined to offer shelf space for new products to stimulate consumption.
The well-prepared company can exploit two further resources that have become increasingly expensive over the last 15 years: real estate and high-caliber talent.
Prime sites may become vacant as others go bust or reduce operations, and talented staff is forced to rejoin the job market. “Recessions create opportunities to reinforce management teams,” Nueno said. Besides seeking organic growth, companies with a war chest can build up market share during recessions through cut-price takeovers of weaker competitors.
The IESE professor had a word of warning to those who cut costs by reducing headcount or slash R&D investment, customer services or advertising budgets, though. “These measures could improve efficiency in the short term, but they can have an irreversible negative effect on the company’s ability to compete once it emerges from the downturn,” he said.
Since there is little sign of recovery on the macroeconomic stage, business leaders need to examine what can be done in-house to combat the crisis. Marc Sachon and Jaume Ribera, IESE professors of Production, Technology and Operations, will explain how in one of the special series of Short Focused Programs that IESE is offering in response to the downturn.
The program, “Excellence in Production: the Best Response to the Crisis,” will be held at the school’s Barcelona campus on April 27. Production processes gain prominence during a downturn because as Sachon comments, “In a crisis, you can’t increase sales. The only thing you can do is decrease costs.”
Sachon and Ribera will draw learnings from companies that flourished following downturns, such as Hewlett Packard – a start up launched by two Stanford University graduates, Bill Hewlett and Dave Packard, in the harsh years following the Great Depression. “All crises generate opportunities, but you have to be ready and know how to recognize them,” Prof. Ribera said.
Porsche’s turnaround following the 1992 recession is also under the microscope. Just like today, demand for cars was low but more specifically, three quarters of the cars in the German manufacturers’ U.S. dealerships – Porsche’s biggest market – were a year old. Porsche’s complaints that a U.S. luxury tax was dissuading consumers rang hollow since Japanese high-end carmakers such as Lexus were enjoying healthy sales.
It was clear that unfavorable external factors were affecting Porsche’s operations – for example the recession or unfavorable DM/$ exchange rates. But there was also a wide range of internal factors at play: engineers were fixing defects as the vehicles came off the line; there were few common parts and no new products in the pipeline.
In short, as Sachon noted, “Porsche in 1992 was a car crash.” Its savior came in the form of Dr. Wendelin Wiedeking, a hard-nosed engineer with a deep belief in lean production techniques. Wiedeking took the audacious step of hiring a Japanese ex-Toyota lean production consultant to sort out Porsche, a company that many insiders believed to be the doyen of German engineering excellence.
Drawing further parallels, Sachon indicated that Toyota’s genesis held lessons for today’s ailing car manufacturers. The Japanese firm originally formulated its lean production techniques out of necessity as it was operating in an adverse environment. Back then, demand was low and resources scarce so Toyota only produced what the customer demanded without wasting anything.
Referring to the current situation, Sachon pointed out that demand often outstripped capacity in the first eight years of the decade: capacity was the bottleneck. But from 2009 to 2010, demand will trail capacity. “That requires a change of mindset… but keep spare capacity for flexibility,” he said.
Back at Porsche’s headquarters in 1992, the luxury car manufacturers’ proud German engineers were subjected to an equally brutal shift in mindset. The Japanese lean production consultants, Mr. Iwata and Mr. Nakao, were not impressed by the plant and immediately got to work.
Porsche’s new CEO Wiedeking demonstrated his support for this switch in philosophy by personally implementing Nakao’s instruction to cut all the storage shelves in the factory to a maximum height of 1.3 meters with a chainsaw. For Sachon, this is the single most effective action in converting an organization to lean practices: for the CEO to lead the improvement processes him or herself. “Sometimes, you have to go down to the shop floor and get your hands dirty.”
One of the challenges facing Porsche in 1992 was that there was not a lot of money in the till. But having its financial back against the wall worked in its favor. The lean production methods freed up cash trapped in inventory.
A further important aspect is to understand the value-chain process. “You need to get the processes right and cut out all the fat – everything must add value and all waste, or muda, must be eliminated,” Sachon said.
“It’s like when a person wants to lose weight: you need to understand the company’s physical makeup before you decide where to cut,” Ribera added.
And all of this has to be done in tight collaboration with the marketing and finance departments. “Unless you ‘get’ this message, there is no point making abrupt changes,” Ribera stated.
In Porsche’s case, the company took a lot of dead money out of production and put it into the development of the Boxter, the new roadster model launched in 1996. The Boxter hit the highway as demand began picking up speed, presenting a further comparison for business leaders in today’s challenging environment.
“Keep spare capacity for flexibility and get ready for the upswing,” Sachon said. Porsche did so, and a few later years bought Volkswagen – the company that was ready to buy Porsche in 1992.
As Prof. Ribera pointed out, a company’s production department does not operate in a vacuum. If a firm opts for lean production, all its functions need to collaborate to carry this or any other strategy out. And in a global downturn triggered by a severe credit crisis, the finance department comes to the fore since cash, more than ever, is king.
IESE Profs. José L. Suárez and Javier Santomá will zero in on this topic in “Financial Management in Times of Crisis,” one of the special series of Short Focused Programs that IESE is offering in response to the downturn.
It was also one of the topics discussed at “Leading Out of the Crisis,” a 1-day workshop organized by IESE’s Executive Education team. The seminar outlining how top-level managers can respond to the global economic downturn was held at the school’s Barcelona campus on Jan. 30.
Ahmad Rahnema, IESE professor of Financial Management, gave the example of PRG-Schultz International, a leading recovery audit firm operating across the manufacturing, healthcare, services and government sectors.
First of all, Rahnema highlighted the importance of identifying whether the causes of a company’s malaise are internal or external. The professor explained that it’s an internal crisis if your assets are not generating sufficient operating cash flows; it’s an external crisis if the company is well-run but market demand has disappeared.
In the PRG-Schultz case study, internal factors such as a lack of cost control and a flawed incentive system were amplified by external economic factors, such as falling sales due to clients taking on more in-house auditing or technology leading to fewer errors. “But this is across the board,” the professor pointed out. “It is affecting everyone in the auditing industry. ”
Rahnema highlighted the role of James McCurry, who took over as CEO as the company tottered on the edge in 2005. Besides its “internal” problems, PRG added another layer when it merged with Schultz in 2001.
The company acquired non-core assets that were losing money. When the company failed to sell them, it issued convertible bonds. “The company borrowed to cover this expense [of the non-performing non-core assets] by issuing bonds that matured in 2006. They were convertible at $7.74/share but the value of the shares is $3.00/share, so investors will want the cash,” the professor said.
On top of that, the company had run up losses of $230 million in the two years preceding 2005. McCurry took immediate steps to stop the hemorrhaging by cutting perks such as corporate jets, country club memberships and a luxury office building. The new CEO then communicated this to all staff and asked field managers to identify where cost savings could be made, getting everyone involved.
“You have to be an example,” Rahnema said of managing in a downturn. “This is no time to hide in the bunker: be visible, upbeat and energetic.” The professor said that CFOs should put their heads over the parapet too. “CFOs need to raise their profile in the company: developing and maintaining a robust financial forecast is key, as is aggressively managing costs,” he suggested.
He also recommended extensively stress testing the business. “Take your worst-case scenario and stress test it at even more pessimistic levels,” he said. “Identify key forecast risks and plan for the worst, even while you are hoping for the best,” he added.
In conclusion, Rahnema identified persistence as key in managing in the downturn. “Take a pay cut, freeze all new hires, grant unpaid holiday, just keep the show on the road.” For PRG-Schultz’s McCurry, for example, Chapter 11 was a very real prospect. But he managed to reach an agreement with the firm’s debtors. “There are many ways to keep bankers from the door,” Rahnema said.
Even with lean production processes, prudent financial management and responsive marketing, many employers cannot retain pre-recession staffing levels. In fact, companies were knocking each other off the front page with news of drastic job cut programs early this year.
Javier Quintanilla, IESE professor of Managing People in Organizations, emphasized that, behind the headlines, there are thousands of affected people and families. “There are no magic formulas, but what is crucial is that people are treated with respect and that firms make their priorities clear to all stakeholders.”
Quintanilla led a Short Focused Program, “Managing People in Times of Uncertainty,” with Prof. José R. Pin, at the school’s Madrid campus on March 12.
The rash of job cut announcements earlier this year suggests that many firms see lay offs as a principal tactic to counteract the downturn. Paddy Miller, fellow IESE professor of Managing People in Organizations, offered an alternative view, though.
Instead, the professor believes business leaders would do well to tap into key talent and build morale, rather than blindly reducing headcount. But first, managers need to review their attitudes toward staff.
He highlighted the divide between business leaders and employees by discussing their responses to one of the most successful management books of all time. Who Moved My Cheese? is a parable by Dr. Spencer Johnson describing how two mice and two “little people” respond to changes in life and their workplace. In reviewing readers’ comments on Amazon.com, Prof. Miller found they were in two distinct camps – people who loved the book and people who thought it was mindless drivel.
The “pro-Cheese” people tended to be executives who commented that their employees could learn a lot from it, not themselves. On the other hand, the “anti-Cheese” people tended to be employees who felt like the mouse trapped in a maze while managers moved the cheese about.
Miller believes that this dumbing down of the relationship between managers and their staff creates a gulf between them and very different perceptions of the same business.
Another example is Scott Adam’s Dilbert comic strip. The professor joked that everyone identifies with the eponymous hero, Dilbert – the guy at the bottom of the management hierarchy who is constantly put upon by his pointy-headed boss.
The message, said Miller, is that business leaders have to start thinking differently about the people in their organizations. Instead of automatically tossing staff overboard like ballast, “the solution might be in the people we have dumbed down.”
Prof. Miller stressed that the people at the “bottom” of a company’s hierarchy are often the most innovative. On top of that, they often hold valuable knowledge about how customers use the firm’s products and services since often they are operating at the firm’s frontline. New internet-based technologies can help unlock this group’s potential, which many bosses are blind to, Miller said.
Internet-based polling tapping the wisdom of many is one example of this. Instead of decisions made by managers or committees, these alternative voting systems have proven successful at plucking out the “experts” regardless of where they are in the firm’s ecosystem.
One advantage of Internet polling over traditional meetings is that people may be more inclined to be honest. All the Dilberts in a firm may be reluctant to tell their pointy-headed boss that a new product is lousy in a public forum. But their insider knowledge on customers’ perception of the product may influence their web-based vote.
In this time of uncertainty, Prof. Miller challenged leaders to become architects in this new revolution and tap into the wisdom of many to keep the ship afloat.“Are you going to be the pointy-headed boss? Or can you engage and involve Dilbert?”
How many of us, in sunnier times, gave internal memos a cursory glance before moving onto the next item in our inboxes? Not any more: in today’s turbulent times corporate communications are quickly scanned for terms such as “restructuring” or “redundancy” then scrutinized for indications of the company’s direction and solvency.
This means that, in today’s climate, a business leader’s excellent execution of the communication plan is vital, since signs of uncertainty and indecision can undermine the company’s reputation. At the same time, providing limited or incomplete information can put wind in the sails of the rumor mill, which can also corrode the firm’s credibility. The company must provide all its stakeholders immediate access to accurate, relevant information.
Profs. Karen Sanders and Brian O’Connor Leggett showed how to achieve this in “Managing Crises Communications.” The Short Focused Program, one of the special series of that IESE is offering in response to the downturn, was held at the school’s Barcelona campus on March 10.
“Crises can happen anywhere and at any time,” Prof. Sanders pointed out. They can inflict real damage to the firm and its reputation and tend to unfold rapidly, leaving little time for planning, so advance preparation is essential.
“Senior managers should develop a communication management plan dealing with six key factors,” Sanders said. These factors are:
1. Crisis anticipation. Think worst-case scenarios and carry out a crisis risk assessment.
2. Crisis preparation. Nominate a communication crisis team that meets before crises occur; prepare fully updated contact details for key officials, identify command center; assemble a communication toolkit (maps, media list, fact-sheets, biographies, crisis scripts).
3. Crisis identification. Is it a sudden unexpected crisis? A long-running issue that needs to be monitored?
4. Crisis handling. Have action and communication plans in place including processes for accurate fact gathering, message development, identification of key audiences, tracking and responding to media and attending to stakeholders.
5. Getting it right. Set appropriate policy and confront tough issues. Be aware that the media develop simple story lines of villains, victims and heroes.
6. Crisis evaluation. Test plans, evaluate media coverage and be proactive in learning lessons.
Prof. Leggett pointed out that who delivers the message to stakeholders such as employees, the media or shareholders, is also important. “We expect crisis communications to project a strong vision and future direction with seriousness of intent … the most appreciated managers in a crisis are those who communicate this with a perception of ‘personal gravitas.’
“Think of Morgan Freeman whose languid southern baritone helps his characters in movies such as Shawshank Redemption or Million Dollar Baby give the perception that he knows and understands the situation people find themselves in. He and others possess a gravitas that spells authenticity,” he said.
But business leaders do not have to be an accomplished thespian to cultivate this quality, according to the professor. “Gravitas is built on reflection of our experience in everyday life, professional as much as social, supported by good listening habits and a thoughtful manner of speaking,” he stated.
The global financial crisis in the second half of 2008 was the catalyst that tipped the world into a severe recession. And at the heart of the financial crisis was feverish trading in financial instruments of dubious commercial provenance, the predominance of risk-transfer and an incentive system that rewarded bankers for the volume of business over a good use of credit.
Policymakers, regulators and the financial sector are locked in protracted mea culpas and debates over what must change to avoid a recurrence. One could argue that the financial crisis is an example of history repeating itself already though, a case of the corporate scandals symbolized by Enron writ large.
The toxic mortgage-backed securities of the current crisis were underwritten by nothing more than an anticipation of future real estate price rises. At Enron, the company tabulated anticipated future earnings as though they were money in the bank. And just as banks took its dodgy assets off their balance sheets, Enron stashed millions of dollars of losses “offshore.”
The scandals of 2001 led to a period of introspection among companies and a rush to embrace the concept of corporate responsibility. But as IESE professor of Business Ethics Joan Fontrodona pointed out, “Seven years on, we were in an even bigger mess than before.”
Just as the rash of corporate scandals early this decade led to the Sarbanes-Oxley Act, regulators are discussing changes in the wake of the financial crisis. For example, José M. Campa, IESE professor of Financial Management, argues that risks and financial instruments should be regulated, not just banks overall.
For Pascual Berrone, IESE professor of Strategic Management, the financial sector’s fondness for bonuses also needs scrutiny. “It would appear that the corporate incentive schemes designed to boost the performance of managers for the benefit of the company have, in fact, become at best a hindrance and at worst a serious liability to the company.”
While these are necessary steps, Fontrodona urges us to look beyond penal codes and regulations. “We had just come out of a period of economic growth and cheap credit that led us to believe that everything is easy. We were building a society lacking in values such as hard work and effort.”
Ratings agencies, bankers and regulators now find themselves in the dock but as Prof. Videla notes, (see page 41), we all enjoyed the benefits of economic growth. “We all need to reflect and ask ourselves if we allowed ourselves to be carried away by the euphoria of fast credit and consumerism,” Fontrodona said.
The professor of business ethics suggested we might find ourselves lacking in moderation or perseverance: the realization that we have to work hard to achieve what is important. For Fontrodona, another layer of legislation is not enough to paper over the cracks of this crisis in values that has been brewing for some years.
“At the end of the day, it is the wisdom and integrity of a business leader’s decisions on a daily basis that counts, not penal codes.”
