Watching the Economy by Clint Burdett CMC® FIMC

For November 2008

The Damage Has Been Done

By Clint Burdett CMC

Human nature plays an important part when businesses grow or fade away. With confidence about business conditions and predictability about our ability to find customers, businesses can grow. But the prevailing news in early November is not good: the Institute of Supply Management (ISM) Report on Manufacturing Business is the worst since December 2001 and the National Federation of Independent Businesses (NFIB) September report is gloomy with evidence of contraction across many sectors, but with hints of the sunrise.

Visualize a large metal wrecking ball at the end of its chain slamming into the foundation walls of the economy and the operator has been aggressive early breaking some walls on the first floor, but not the support columns. The structure of our economy, our Governments and soon our Banks will resist and begin to restore confidence and predictability about where the future is going. But the damage has already been done.

Recessions, shallow or deep, the notched or saucer shaped, are periods of economic consolidation. Business conditions test our sustainability strategies and many will fade away. For those of you whose businesses are sustainable, and know what it is needed to make it through the next months, you should concentrate on your business design and maintain the loyalty of your customers. Trying to grow fast would be a mistake!

Typically a recession last about six to nine months, at least that is the experience since 1947. As I read the economists perspectives about this recession, the consensus is the downturn is an outlier, in the 33% of deep recessions, not in the 66% of the “routine” shallow end to an economic growth period. Don’t plan on a quick recovery as the most likely scenario. Pay close attention to the Senior Loan Officer Opinion Survey on Bank Lending Practices to see when Banks are beginning to offer better credit terms. Until then, your cash flow is your ammunition.

When I advise leaders on strategic critical thinking, I stress three generic approaches strategists take: positioners, adapters and aligners.

Your timing to position the firm for the recovery may have already run out at this point. If your business earnings are sustainable, if you can see your cash flow for the next 6 to10 months and have confidence in that cash flow, then you have already done your job. If you are responsible for positioning the firm for the future, you must now guard against overly optimistic, catch up moves that would eat cash in the near-term. Pay very close attention to liquidity and your customer's liquidity. Expect surprises – be circumspect. The most likely description of this recession is the saucer where the deterioration was a long, bleeding out of housing and the recovery will be slow and deliberate as other sectors and regions are pulled in with those surprises.

A recession is a very productive time for leaders of a firm to adapt the business model – consolidation means focusing on core. The weak players leave the market, and there is abundance of high-quality talent and experience available. Your customers will be very specific about their expectations for your products and services since they, like you, are under pressure to get their job done in a cost-effective way. Now is the time to test new product ideas but in the worst of a recession, test your ideas in careful, incremental steps.

Recessions are times to clean house and simplify your business, and those of you responsible for aligning an organization to its vision are going to clean up your processes and lay off your ineffective employees. A word of warning, unemployment peaks well after the recovery has begun. Unemployment rates are lagging indicators, which tells me businesses feel the pressure to get smaller too long. The tactics for those of you aligning the business must include retaining those critical employees that make the business run.

Aligners also have to bring new product information to those who adapt the business; your best intelligence is your customer's perspective about their hard times in your day to contacts. This is the time that the aligners step back and reflect about how the market is going to change as the positioners, the financial folks, need to sustain the business and watch liquidity. Now is the time for aligners to start long-range strategic planning again.

That wrecking ball isn't as powerful today as it was several months back, probably from November 2007 to March 2008 when the last foolish moves were made in the financial industry. We are in the trough and should start getting better in the late winter or early spring of 2009 with a very slow recovery.