Watching the Economy by Clint Burdett CMC® FIMC

For October 2008

Caution is the Word

By Clint Burdett CMC

The recent volatility in the equity markets, the tightening of credit, and the caution in the banking community all increase the uncertainty we face about the near term. Strategic thinkers must be very cautious. A recession affects first a few and then many sectors in an economy. On a personal level severe economic hardship in your sector with your business in trouble is devastating.

Recessions have lasted up to forty-three months during the depression in the early 1930s to a brief six-month recession in 1980. Typically, a recession lasts from 10 to 18 months as the businesses affected by the downturn reduce inventory, clean house and proceed very cautiously. Economists will probably mark the beginning of the housing recession as November or December 2007. What makes this economic downturn so dangerous is the uncertainty about the sub-prime and Alt-A loan resets to come. Treasury Secretary Paulson's proposal to buy up this toxic debt may be the method to loosen up the credit market but it will take 4 to 5 months to see if this is effective or not.

Thinking Strategically in 2008 - 2009

I have observed three types of strategic thinkers: positioners, adapters and aligners. The coming months are going to be very difficult for the leaders who are trying to reposition for the recovery. It's our nature to try to move early into growth strategies to beat competitors. That is the wrong approach!

The tensions between the firm's leaders will be that the adapters will try to adjust product offerings to their customer’s ability to pay and will pressure the firm to move slowly and deliberately. The aligners will want to improve efficiency and effectiveness and will pressure to get the best employees to work harder or layoff the weak ones rather than teach them to improve. So, leaders who are trying to reposition for the future may feel the need to overstate the importance of moving first and not allow the firm the time to clean house as sales slow down.

Consumer confidence is strained and in mid-September 2008 leading indicator analysis from the Conference Board anticipating a recovery is not promising. Everyone is going to be careful. Caution is the word for the day.

The Positioners View

If your firm has to borrow money or sell equity positions in the firm to raise cash, this is not the time to embark on an aggressive growth program. It would be better to wait until there's a clear sign that your customers will have additional funds with you to spend and your bank is willing to lend before rolling out an aggressive new approach. The tactic here is to build up cash and move just after the market leader.

On the other hand, if you're sustainable business has a lot of free cash flow (cash leftover after dividends are paid), then you're in a position to acquire competitors to buy market share. The downturn is a time to integrate businesses into your firm. This is especially true if you can increase your expertise. The tactic here is to get better at what you do by hiring the best people in the marketplace during the downturn and inviting them into your culture.

The Adapters View

A downturn is a time to build relationships and to understand your customers’ core concerns. Adapters should seek out the leadership of their customer base, especially those who have been through serious downturns in the early 1980s or early 1990s. As people hunker down and focus on core, there is an opportunity to cooperate, e.g., share advertising cost, combines market research, manage inventory management and work accounts receivable. The adapters tactic is to move into their customers’ value chain, which means become very important to your customer. The tactic here is to understand your customers’ fundamental needs.

The Aligners View

The downturn is the time to clean house and use budget restrictions to get people to change. The “external threat” gets people's attention and the risk of losing one's job is a powerful motivator to get people to change. Most economists say that recession is necessary to purge the excesses from the economy. At the business level recession is an opportunity to purge the excesses from the business. But, the aligners need to be careful that they don't sacrifice the capacity to scale – to surge – as the recession ends. Today with very good metrics, it's easy to try to optimize employees’ productivity in the business’s processes to the “third zero after the decimal point.” That would be a mistake because during a recession the entire system is stressed. The aligner has to be careful not to cut too much, to increase the pace too much for the best employees who will not be able to surge as business eventually picks up. The tactic here is to clean house, but do not wear out the foundation.

I advise that we all treat this economic volatility respectfully and not get cocky about timing the end of the recession. There are too many forces at play and it's a very complex issue to see the light at the end of the tunnel. Make many smart small bets incrementally and cautiously.