Adapted by me from marketing to the overall gamut of the company’s operations
I came through a very interesting article on the kind of mistakes that companies make while facing a downturn which ultimately ends up hurting them in the long run. This was part of an overall article on strategies being propounded by Philips Kotler. It is specifically interesting given the context through which the global economy is facing today and managements given the quarterly culture of results and also given the fact that today’s bonus is based on the latest results rather than a long term strategic perspective taken to grow the business across business cycles.
First Mistake – Fire Talent- Typically in economic upturns and also in bull markets talent comes at a premium as finally exceptional talent in any field is limited. As such the worst mistake that business owners or managements can do is to fire the best talent as it is the most expensive and they need to show cost cutting in the downturn. Typically in a country like the US where the hire and fire culture is well established this might be an acceptable strategy, however in countries like India such actions are taken very negatively and typically will dissuade other strong talent from joining such a company once the downturn ends. This is the problem facing a large number of companies today as the downturn in
Second Mistake – Reduce Risk- As it goes “No risk, no reward”, companies that cut risk taking and go into a shell during downturns typically “lose it” as the upturn unfolds. I have seen this specifically in the fund management industry where a large number of fund managers who did well in the 2000 stock market boom got so bogged down and impacted by the downturn that followed that they lost the ability to take risk and as such underperformed in the entire upturn that followed. Similarly lots of Fund Managers have got similarly impacted after the 2008 crash, which was obviously a nerve shattering one. In a similar manner companies that stopped innovating and taking risk will not be able to leverage the upturn as it unfolds.
Third Mistake – Replace growth oriented senior managements by cost cutting ones – This in my view is the biggest mistake that a company can make in a downturn as eventually it is growth that delivers returns for various stakeholders like shareholders, employees etc. in the long run. An inordinate focus on cost cutting will lead to a loss in strategic vision and typically such cost cutting managements will focus on reducing the costs that are easiest to cut which are those that ultimately hurt the long term growth prospects of the company. It is not that cost cutting is not important but it has to be done in a proper perspective. I faced this issue in one of my previous jobs where I was under pressure to cut costs with a short term perspective with the view that resources can be rehired as and when things improve. Here my perspective was that it takes lot of time to get together a team that can work well together and understands the needs of each other. As such firing now and hoping to hire after three to six months was never a good idea for me. This was because I could see that the downturn was unlikely to last for long and as such one had to ride the storm. As I put a comment by Peter Lynch in one of my previous articles “The only people who lose money in the markets are those who get scared out of them”. The same logic works here too.
Mistake four – Change performance metrics – This is an often faced problem with lot of CEO’s and top managements where when they were hired or briefed at the time of forming long term strategies the focus was on growth and specific budgets were set up for the same. However even with a slight change in market scenario leads to the owners or the Board taking a different view. This is especially true of relatively smaller companies who make aggressive expansion plans when times are good and then retreat into a walled castle when things turn adverse. Lot of talented professionals are willing to take risks for higher payoffs in economic upturns and a lot of time such calls turn out to be wrong ones. It is important for professionals to be very clear of what they are getting into so that they do not get trapped into adverse selection. Personally I see lot of professionals in the financial services space facing these issues and wanting to go back to the comfort of larger organizations.
Fifth mistake – Focusing on shareholder value rather than stakeholder value –Again this apparent focus on shareholder value is more short term in nature as it boosts profits in the short run while hurting the long term prospects. As such companies that are focused more on stakeholder value do better in the long run. This is specially true of family run businesses (which are many in India) where they look at their short term profit outlook more than focusing on long term prospects that are beneficial for all stakeholders.
I believe that these are also very important facets which investors like us have to keep in mind while investing in companies so as to properly evaluate them with the view of long term value creation.
Markets are looking to form new highs over the next few weeks. I wonder what is going to happen to range investors. Global stock markets look like rising 8-10% over the next 6-8 weeks.