Switch Tracks - Practical Ideas for Business Leaders

October, 2011

A Research Summary
By Craig Britton

Beating The Extended Recession

The Big Ideas
Businesses that survive a recession, and outpace competitors, consistently employ these eight practices. 1. Focus on the core business, actively eliminating distractions. 2. Improve agility, especially decision making and ability to change rapidly and successfully. But agility alone is no longer enough anticipation is required. 3. Brutally challenge the status quo, using objective internal and external benchmarking and measurement. 4. Balance cost reduction with added investment in selling, general and administrative expenses, research & development, and assets, plant and equipment that build customer value in the core business. 5. Invest in marketing and promotion. 6. Focus on productivity through process improvement, minimizing employee reductions as much as possible to avoid the loss of key talent and better maintain engagement. 7. Contingency plan - thinking through possible alternatives and scenarios when heads are clearer and stress is less likely to create an over-reaction. 8. Keep employees engaged.

Why are some companies weathering the recession well, while others are not? Is there an opportunity for companies to take action in the middle of a major economic downturn to weather the recession better? Ninety percent of businesses shared the same primary objective in 2011: Growth. In stagnant markets, this makes for an incredibly competitive environment, with stronger companies exploiting every weakness of their competitors. This issue of SwitchTracks summarizes major independent research on beating recessions and suggests the critical first step in building resilience.

The final lesson of companies that weather downturns well is that it is never too late to begin. An important success factor is maintaining organizational confidence through constant, objective analysis, thoughtful action and disciplined persistence.

Craig Britton

SwitchTracks | September 2011

The Source Studies

Roaring Out of Recession (March 2010) A study of 4,700 companies of all sizes. Changing the Game: Recession Survival Strategies (March 2009) A study of 13 companies that survived multiple recessions. Profit Impact Market Strategy, Linking Strategy to Performance (1987) A study of 450 companies and 3,000 business units. Organization Agility: How Business Can Survive and Thrive in Turbulent Times (March 2009) Survey of 349 executives. The Secrets to Successful Strategy Execution (June 2008) A survey of over 26,000 people in 31 companies. Survival of the Smallest (2009) Study of 6,141 small and mid-size independent businesses. Companies Can Survive, Even Thrive, During a Recession (June, 2009) Recap of best marketing practices during a recession. The Financial Crisis: What You Need to Know to Survive a Recession (2009) A review of industry sensitivity to economic cycles. Business Strategies and Performance During Difficult Economic Times (June 2009) A review, commissioned by the government of the United Kingdom, of 194 research papers on business strategies employed successfully during a recession.

It is October 25th, 2011. The Conference Board report of consumer sentiment in the U.S., the driver of any economic recovery, has just been released. After dropping in August and September, it is at 39.7, the lowest level since March 2009 the middle of the 2008-2010 super-recession. The Dow Jones Industrial Average continues to be volatile, around the same level it was at just before the dramatic drop of 40 percent in 2008-09. There is a very good chance that the U.S. could experience another recession even when it feels as though the last one has not yet ended. Large businesses have stockpiled cash, their insurance policy. The question is: What can mid-size and smaller businesses do to strengthen their position now? Four Broad Success Strategies Progressives, Pragmatists, Promoters and Preventers Gulati and Hohria from Harvard Business School with Wohlgezogen from the Kellogg School of Management conducted a review of 4,700 public companies before, during and after multiple recessions1. These researchers benchmarked expenditures in a variety of areas relative to competitors.

The key categories of expenditures were:

# of employees Cost of goods sold (COGS) Research & Development Sales, general and admin. Expenses (SG&A) Capital expenditures Plant, property and equipment expenditures. (PPE)

Using a benchmark of at least 10% growth higher than competitors in revenue and profit after the recession (breakaway performance), each strategy had positive impact, but some dramatically more than others.

Progressives 29

37

Pragmatists

Promoters 21 0 20

26

Preventers

40

Exhibit 1: Percent of companies that generated breakaway performance over competitors, by strategy

Progressives The best performers, Progressives, increased focus on their core business, driving down the cost of goods more than their

Craig Britton

SwitchTracks | September 2011

Craig Britton is founder and president of SwitchTrack, a thought leader in helping mid-size and smaller businesses out-think rather than outspend competitors, especially in difficult economic times and highly competitive markets. As a business leader, Craig has led multiple businesses in several industries, driving over $1.5 billion in new growth, with considerable success in poor economies. He is also an expert in the rapid assessment of a companys ability to perform well in the future, enabling management teams to focus precisely on building strength in the most productive areas.

competitors while keeping as much employee talent intact as possible. These companies also invested selectively more than competition in marketing & sales, innovation and quality improvement, acquisition related to their core business, and upgrading plant and/or equipment for better quality and lower cost. Pragmatists Adopted both preventer and promoter strategies, focusing on reducing employees and/or COGS more than competitors, while allocating more resources to at least one of the other categories than their competitors. Promoters These companies focused on increasing expenditures in at least one of the six and did not decrease expenditures in any category more than competitors. Preventers These companies focused on cutting back more than their competitors in at least one of the six key expenditure categories: Focus On and Support the Core Business In 2009, the New Zealand Trade and Enterprise Group commissioned a study of 13 global companies2 that consistently emerged stronger after major economic downturns, including:

The great depression (1929-1939) The oil crisis recession (1973-1975) The early 80s recession (19801982) Stock market crash (1987) Asian financial crisis (1997-1998) Dotcom crash (2001-2003)

This study provided more specific insight into how to balance cost reduction and investment the progressive and pragmatic strategies. The companies studied were 3M, Arrow Electronics, Cisco, Coca Cola, Emerson Electric, GE, IBM, Johnson & Johnson, P&G, Royal Dutch Shell, Toyota, Walmart and Xerox. Focus on strengthening the core business hunkering down and diversification create opportunities for competitors. Strategically get out of noncore or under-performing businesses and activities, to reduce cost and generate cash. Build agility and flexibility Improve process, efficiency and fast action capability. Find things that are wrong quickly and correct them. Plan contingencies and explore scenarios. Either before a crisis hits (or rapidly when it hits) explore and determine different courses of action based on how the challenges might unfold.
SwitchTracks | September 2011

Craig Britton

Impact of Recession by Industry7

Each industry is impacted differently by an economic downturn. If the average volatility is 1.0 for all businesses, the relative volatility of different industries is shown in the table below for typical economic cycles. An index of 2.O indicates volatility is twice that of the average. This recession has been more severe than most, so total volatility has been much larger than typical. All industries 1.0 Goods Producing Industries 2.0 Durable Goods Lumber/wood products Furniture/fixtures Stone, clay, glass prods. Primary metal industry Fabricated metal prods. Machinery (not electrical) Electric/electronic equip. Transportation equip. Instruments Miscellaneous mfctrg. Nondurable Goods Food & related products Tobacco products Textile mill products Apparel/other textiles Paper & related products Printing and publishing Chemicals & allied prods. Petroleum and coal prods. Rubber & misc. plastic Leather & related prods. 2.6 3.0 3.2 2.2 3.7 2.6 3.2 3.1 3.6 2.4 2.1 1.5 0.8 3.2 2.8 2.2 1.7 1.1 1.2 3.6 3.1 2.7

Seek objective internal and external diagnostics. Crisis brings more emotion, which negatively impacts decision making. In Jim Collins book Good to Great, great companies aggressively seek facts, good or bad. Without an objective fact base to work from, managers are consistently optimistic and inaccurate in judging the strength of a business and its systems. Use acquisitions and alliances to build a larger customer base, acquire technology and talent, access new markets. Increase advertising/ marketing. The world renowned Profit Impact Market Strategies3 (PIMS) study found that companies that increased marketing spending during a recession gained market share after recovery three times as fast as those who cut marketing during the recession. Companies that cut marketing spending during a recession more than competitors, take 34 years to return to prerecession levels. They also spend far more than competitors after the recession in order to recover lost market share. Invest in Research and Development. Nearly all recession winners increase

R&D spending during recessions, focusing on new products, improving speed-tomarket and better, faster screening of good ideas from poorer ones. Building Agility In March 2009, The Economist Intelligence Unit, the research arm of The Economist magazine, published results of a survey of 349 executives around the world in small, midsize and large companies4. Ninety percent of executives surveyed believe agility is critical for business success in todays turbulent and rapidly changing business environment, and is a key competitive differentiator.
100% 80% 60% 40% 20% 0%
10%

90%

Agility Agility Not Important Important

Exhibit 2: Percent of executives who believe agility is critical to future success

Service Producing Industries 0.5 Transportation/utilities Wholesale trade Retail trade Finance, insur., real est. Services Mining Construction 4 1.2 0.8 0.7 0.7 0.5 3.9 2.7 Craig Britton

Five important characteristics emerged from the research. Each of these was reported as an agility trait by at least 30% of the survey respondents.

SwitchTracks | September 2011

Rapid decision making/execution

High performance culture Accountability/ credibility Access to right info at right time

61%

44% 34% 34% 31%

Beyond Agility
It is certain that the rate of change is increasing, and will continue to increase. The best companies are approaching change with a new discipline anticipation. Agility will always be important. However, the new winners are building stronger skills in prediction. Often those that are best at seeing into the future of an industry are outsiders. Amazon is an example. Borders lacked both prediction and agility, and the company is now defunct. Barnes & Noble proved almost as bad at predicting industry trends, but somewhat better at agility. They may survive, but will never be what they once were to the book industry.
Flexible mgmt. of teams & resources

Exhibit 3: Percent of executives reporting these broad factors are critical to agility.

Rapid decision making and execution (61%). In fact, in a study by Booz Allen5, the most important factor in strong execution of a companys strategy is clarity, at the individual employee level, about what decisions they can and are expected to make. A high performance culture (44%). While there are a number of factors that drive a high performance culture, two aspects are consistently important. First, employees are given freedom to choose how to get things done within a strong framework of accountability for results. Second, goals and priorities are formally aligned throughout the organization.

Accountability and credibility (34%). Agile organizations focus on accountability for results, not activity. Performance management and rewards are also strongly aligned to results. The benefit is that the practice is objective, building credibility of managers throughout the organization. Leaders must be accountable for setting this powerful and visible example for all other employees. Access to the right information at the right time (34%). Agile organizations develop systems of leading indicators, both internally and externally. These provide early warning of problems and opportunities. Flexible management of teams and human resources (31%). Agile organizations create teams, often cross-functional,

Craig Britton

SwitchTracks | September 2011

around core business processes or problems. Functional silos are avoided. Individuals are encouraged to develop broader teaming and problem solving skills, not just functional expertise. These are deployed quickly and flexibly based on the companys priorities. In addition to these agility traits, several other key lessons were identified in this study. Organizations tend to overcompensate during a crisis. It is important to have the right management disciplines in place as a matter of course. Do not let communication and teamwork lapse. Employees, and managers, tend to withdraw during times of stress. Communication and collaboration help to maintain confidence in the company and find more ideas and solutions. Be leery of the status quo. Managers tend to miss signals of problems until it is too late. Good results that do not have a well defined and managed cause can mislead the organization as to its real strength and create complacency and blind spots. Strengthen Growth and Customer Orientation Virtually all of the research pointed to strengthening a customer orientation and
6 Craig Britton

maintaining or increasing investment in value building and creating customer awareness of that value. Research conducted by the Canadian Federation of Independent Business6 in 2009, through a survey of 6,141 small- and medium-sized independent business owners, found that the current performance of growth oriented businesses (GOBs) businesses that maintained a growth orientation rather than a hunker down mind set improved much more than other companies: 63% of GOBs are somewhat or much stronger now compared to 38% of non-GOBs).

0% 20% 40% 60% 80%

Growth Oriented Businesses

63%

"Hunker Down" Oriented Businesses

38%

Exhibit 4: Percent of businesses that report being stronger now compared to mid-recession

Growth oriented businesses, during the recession, focused on very specific market-centric activities.

SwitchTracks | September 2011

An article by Mary Paulsell in the Columbia Business Times7 summarized concisely what this means: o Expand the customer base. o Develop new products/ services. o Increase advertising and promotion. o Expand on-line presence. o Increase the number of employees, especially in customer facing jobs. o Improve information about customer preferences. o Avoid temptation to become a price brand. o Measure marketing effectiveness. o Plan contingencies. It Is Never Too Late to Start The final lesson: Even in a downturn, strengthening these practices improves your odds of success.

It is critical to maintain a sense of confidence that you can improve your business, no matter the starting point. The First Step Challenge the status quo. Successful organizations broadly, quantitatively and brutally assess their strength in critical areas, incorporating insights from multiple, important points of view: employees, leaders and customers. They use a clear, proven framework of what drives success, and measure their performance. In the best framework, developed by Bill Howe of Growth Engine Group10, these success factors are grouped into three key areas. Leadership is the ability to get employees to follow your lead. Strategy is the ability to compete effectively and drive
Attract/Retain Talent Set a Powerful Example Freedom with Accountability

Clear goals, plans, metrics Collaboration, communication & decision making Systems & Processes

Execution

Leadership

Customer focus
Engagement of Employees

High performance management

Leading Indicators

Strategy
Strong, Long Term Foundation Competitive Differentiation Go-to-Market Effectiveness Understanding of Organization Bridge to Execution

Exhibit 5: The 15 specific, measurable, actionable success drivers

Craig Britton

SwitchTracks | September 2011

revenue. Execution is the ability to get results and drive profitability. Each of these broad drivers is built on specific, measurable skill sets, shown in Exhibit 5. Drawing from both internal and external sources, regular objective measurement of these success factors is a best practice of companies that weather recessions well. Starting with a rigorous, quantitative assessment has several tangible benefits: A good assessment will almost always bring new insights and better results. The conversation moves from we think to we know. The depth and rigor of the management discussion improves dramatically, as does alignment around priorities and action plans. All leaders make assumptions. Unconscious ones that support unrealistic optimism in decision making are brought to light. Leadership credibility and employee engagement go up when employees are asked to solve specific, concrete problems, rather than vague guesses at whats wrong. Effectiveness improves with focus on specific issues, as do results.

Management Team Discussion As a management team, discuss what you have done in each of the eight practices, particularly defining where your practice level is relative to competitors. Is there disagreement among your management team? Are there a lot of unknowns? Is there uncertainty or significant disagreement on what next steps to take? If yes, these are signals it may be time to step back and more thoroughly plan how to get ahead of your competitors.

This research summary is provided by SwitchTrack.

For further information on this research, or our proven, rapid and affordable methods to measure and challenge your performance on the 15 success drivers and build growth despite the recession, please contact us at: www.SwitchTrackGroup.com 612-599-9402 craig@SwitchTrackGroup.com

Craig Britton

SwitchTracks | September 2011

1.

Roaring Out of Recession Harvard Business Review (March 2010) Ranjay Gulati, Nitin Hohria and Franz Wohlgezogen Changing the Game: Recession Survival Strategies New Zealand Trade and Enterprise (March 2009) John Fletcher, John Clarke, Nick Watkins, Rob Cameron and Frank Olsson The PIMS Principles Linking Strategy to Performance The Free Press (1987) Robert D. Buzzell and Bradley T. Gale Organization Agility: How Business Can Survive and Thrive in Turbulent Times The Economist (March, 2009) The Economist Intelligence Unit, sponsored by EMC. The Secrets to Successful Strategy Execution Neilson, Martin & Powers (Booz Allen), Harvard Business Review (June, 2008) - Drawn from a survey of over 26,000 people in 31 companies. Survival of the Smallest Canadian Federation of Independent Business (2009) Celal Gulluce and LouisMartin Parent.

Columbia Business Times (June 2, 2009) Mary Paulsell 8. The Financial Crisis: What You Need to Know to Survive a Recession RSM McGladry (2009) Sergio Rebelo, Northwestern University Kellogg School of Management Business Strategies and Performance During Difficult Economic Conditions United Kingdom (June, 2009) John Kitching, Robert Blackburn, David Smallbone, Sarah Dixon

2.

9.

3.

4.

10. Line-of-Sight Success System Bill Howe, Strategic Marketing Group, (2005)

5.

6.

The Research

7.

Companies Can Survive, Even Thrive, During a Recession

SwitchTracks | September 2011

Craig Britton