Q. What is the biggest mistake that management can make in a difficult economic environment?
A. A big mistake is acting before thinking. In a difficult environment, the focus of management tends to be short term and decisions may be based on gut feel and emotion driven by all the bad news and earnings pressure. In some cases, if cash flows are “hand-to-mouth”, this type of short term thinking is warranted. In other cases, there is time (i.e., days, maybe a few weeks) for a more thoughtful response to a difficult economy.
In a more thoughtful response, management would
* Consider the real value drivers for the company as they contemplate decisions
* Develop and test (via simulation, customer contact, etc.) response scenarios based on an understanding of the impact of the difficult environment on customers, suppliers, competitors, and the company
* Capture growth opportunities in existing markets where competitors may be weakened
* Exploit unmet needs, vertical and horizontal expansion opportunities, and new markets created by economic dislocation
* Reposition the company for success both during the downturn and when the economy recovers; this may include restructuring the company and its global footprint, making acquisitions while valuations are low, entering joint ventures on more favorable terms, optimizing R&D investments, changing distribution channels, and other initiatives
* Maintain the reliable supply of in-spec products and services to customers worth keeping
* Identify and fund the truly worthwhile SG&A, R&D, and capital investments; stop the less worthy investments
* Implement downsizings, if needed, in a respectful, logical, fair, and timely manner that is clearly communicated
